China Briefing

Level the field but keep FDI in play

Antitrust regulators must be more open about their probes and wary of sending the wrong message that foreign investment is not welcome

PUBLISHED : Monday, 25 August, 2014, 5:37am
UPDATED : Monday, 29 February, 2016, 12:19pm

It is a summer of discontent for multinational companies on the mainland as regulators use the country's six-year-old antitrust law to go after foreign car and tech companies for alleged anti-competitive behaviour.

The authorities are investigating Audi, BMW and Mercedes-Benz - which together account for about 80 per cent of the mainland's luxury car sales - over the cost of spare parts, while agents have also raided offices of US tech firms such as Qualcomm and Microsoft.

Last week, one regulator, the National Development and Reform Commission, levied a record 1.24 billion yuan (HK$1.56 billion) combined fine against 10 Japanese car parts and bearings makers for antitrust activities. Now some state media are touting even bigger fines for companies like Audi.

All firms under the spotlight have said they are cooperating with investigators. Audi, BMW and Mercedes-Benz have also announced sharp cuts in the prices of spare parts.

But the unprecedented application of the antitrust law has raised concerns that multinational companies are being unfairly targeted to help local businesses. Some cynical analysts have gone so far as to say that the effort is yet more proof of the government's change in attitude towards foreign direct investment (FDI), which helped make the country the world's second-largest economy.

Mainland officials have said they enforce the law equally and that domestic companies were also fined. For example, state-owned alcohol companies Kweichow Moutai and Wuliangye Yibin were found guilty of requiring retailers to charge a minimum price for their premium liquors.

But the fact remains that multinationals have borne the brunt of the antitrust push. It is a long way from just a few years ago when top international executives were courted by mainland officials with promises of cheaper land, easier access to bank loans and tax breaks in hopes of investment and transfers of technology and skills. Their attitude has understandably changed since those multinationals have come to dominate many industries such as cars and consumer goods.

Some foreign executives have said the latest investigations against the car companies and spare parts makers were sudden and unexpected. If that were the case, they certainly missed many obvious signs. In the past few years, mainland media have been full of reports lashing out at the premium that Chinese buyers, who make up the world's biggest car market, must pay for imported luxury vehicles. In some cases, prices in China are more than double those elsewhere, even after taking import tariffs and other costs into account.

Mainland consumers have very much welcomed the antitrust investigations against foreign car companies, expecting vehicle prices to fall in the coming months.

Against that backdrop, it is difficult to see how the latest investigation will benefit domestic manufacturers, as some foreign executives have claimed. In China's car and spare parts industry, foreign companies are dominant players. When they lower prices, their products become even more competitive up against those of domestic makers. Add to that the long-standing belief among mainland buyers that foreign cars are much better than domestic ones in terms of quality, among other things.

In a much bigger context, the latest investigation is part of the new leadership's grand vision to promote social justice and to try to create a level playing field by cracking down on corruption and monopolies.

It is plain to see that the bloated and grossly inefficient state sector is the biggest violator of the antitrust law because state-controlled companies have monopolies or near monopolies over lucrative industries such as energy, telecoms and transport.

But these powerful firms have proved much more difficult to take on than the easy prey of some multinationals.

Last week, however, the authorities sent a strong signal that state companies are also in their crosshairs by passing a plan to regulate the pay packages of top state executives. That was followed by Xinhua reports taking those executives to task over their extravagant lifestyles, a source of deep public discontent. It was a signal that the leaders are prepared to use remuneration as a launch pad for confronting state monopolies.

While there is nothing wrong with the authorities using the law to investigate anti-competitive market behaviour by foreign or domestic companies, the officials should make law enforcement more transparent and conduct investigations in line with international standards.

The European Union Chamber of Commerce has complained that the authorities have warned foreign firms not to challenge the investigations, bring lawyers to hearings, or ask for help from their governments.

While the latest moves against overseas companies may look like a concerted effort, mainland analysts have said they were initiated by different antitrust regulators without much coordination.

The mainland's antitrust regulatory regime is very fragmented, with three departments armed with the power to examine different aspects of anti-competitive behaviour. The Ministry of Commerce is responsible for mergers and acquisitions while the NDRC and the State Administration for Industry and Commerce are responsible for pricing and market behaviour. And, in the end, the regulator that moves first has the major say.

A lack of transparency and information disclosure in the latest round of investigations has given the impression that foreign firms have been unfairly targeted. More ominously, it has sent the wrong message that FDI is not as welcome as in the past because China is richer.

The mainland authorities should do much more to dispel that impression as FDI is still one of the key drivers for moving the mainland economy forward.