Telescopes dispute brings US-China trade war into sharp focus with Chinese firms accused of ‘cartel-like behaviour’
- Orion Telescope & Binoculars, the last major American telescope brand and distributor, is seeking US$180 million in damages from Chinese manufacturers
- Documents provided to the South China Morning Post suggest collusion in the purchase of Meade Instruments
In a legal dispute that focuses on some of the driving issues behind the US-China trade war, the last major American telescope brand and distributor is seeking US$180 million in damages from Chinese manufacturers that it alleges acted as a cartel.
The antitrust case, which will proceed to trial in the Northern District of California, sees Chinese companies accused of colluding to “coordinate the manufacture, marketing and distribution of telescopes in the US” in a way that has squeezed the profits of an employee-owned American firm.
Orion Telescope & Binoculars claims it has been the victim of “a conspiracy” cooked up by companies that were rivals on paper, but which it alleges were in cahoots in the build up to an acquisition that allowed them to act with “cartel-like behaviour”.
Orion claims that documents, provided to the South China Morning Post, show that executives at Sunny Optics, a subsidiary of Ningbo Sunny Electronics, and the Chinese subsidiary of Synta Technology Corporation, a Taiwanese company, corresponded in the lead up to Sunny’s purchase of Meade Instruments.
Meade was, at the time of the purchase in 2013, described by industry press as “the leading designer and manufacturer of telescopes and optical accessories for professional and amateur astronomy enthusiasts worldwide”.
Synta, meanwhile, was already the owner of Celestron, Meade’s biggest US rival and a producer of popular telescope products.
Email exchanges between the CEO of Sunny Ningbo, Ni Wen Jun, and then CEO of Celestron, Dave Anderson, appear to show discussions about the acquisition, as well as an agreement for Celestron to assist financially in the purchase of its erstwhile competitor.
Another document suggests that the founder of Synta was present during Sunny’s budget meetings, while in another, Celestron’s Anderson appeared to be directing Sunny’s lawyers in the run up to the acquisition.
One of our contentions upheld by the court is that when Sunny Ningbo colluded with the co-conspirator to acquire Meade, it was to block us from competing in the market.
The deal blocked Orion off from purchasing Meade, the company alleges, which in turn would have allowed it to take control of Meade’s manufacturing plant in Tijuana, Mexico.
“One of our contentions upheld by the court is that when Sunny Ningbo colluded with the co-conspirator to acquire Meade, it was to block us from competing in the market,” said Orion president Peter Moreo.
Moreo said that rather than competing for market share, Meade and Celestron are now cordoning off sections of the telescope sector for themselves, with Meade dominant in the low and medium-end market, and Celestron controlling the high-end market.
Market allocation is a common feature of cartels, where companies siphon off geographic areas or market sectors to be the dominant player, thereby fixing the prices and controlling supply.
The result is that Orion, as a distributor, cannot negotiate better terms, since there is no competition, it alleges.
When Orion tried to purchase the web domain telescopes.com, the company was served with identical letters from the alleged competitors removing the credit terms on their manufacturing agreement.
Noah Hagey, the managing partner of BraunHagey & Borden, the San Francisco law firm representing Orion, said that these letters even contained the same mistakes.
“These manufacturers are not competing in the market and Orion paid more for product than we should have and our margins were squeezed and thus our profits were squeezed, which prevented us from doing other kinds of capital investment, acquisitions etc,” Moreo added.
Sunny Optics did not respond to requests for comment. However, a court order shows that the company defended its right to be in touch with a competitor prior to the purchase of Meade, because it was “poaching employees”.
Jonathan Tepper, the co-author of the recent book The Myth of Capitalism: Monopolies and the Death of Competition, said that “price and output collusion or coordination is far more common than people think”.
The book states that “from 1996 to 2010 the US Department of Justice convicted 128 corporations in criminal price fixing in global cartels in everything from computer screens to generic drugs to transportation contracts”.
It estimates the global cost of cartels to be worth US$600 billion a year, due to price fixing and overcharging.
Furthermore, at a time when trade tensions between the United States and China are running high, the case is illustrative of some of the long-standing grievances US firms and officials have had with China’s industrial economy.
As China became the low-cost hub of global manufacturing, many Western companies abandoned their domestic production facilities in favour of cheaper options in China.
However, as the Chinese economy has evolved, it is no longer happy to be the low-end factory to the world.
The natural evolutionary path for its companies is horizontal or vertical integration, where companies acquire more than one part of the supply chain, or larger shares of the production base, said Greg Hutchins, the founder of Quality Plus Engineering and author of more than 30 books on supply chain issues.
“Vertical integration is the current analogue for disrupting the supply chain. Supplier comes in with low cost, low quality products. Over time, the supplier moves up the supply chain to produce bundled, proprietary, high quality, competitive priced products, thus disrupting or displacing the original equipment manufacturer,” Hutchins said.
Essentially, Chinese companies want to move up the food chain and, for many US companies, this has created an existential threat, since they may be acquired, or subjected to a more concentrated supplier base.
“Chinese companies are moving up from the lower end to the upper end, and we see this everywhere from cellphones to shoes, everyone is moving upmarket in China, but they need to as their costs are increasing as consumers become more wealthy,” said Adrian Emch, antitrust partner at law firm Hogan Lovells’ Beijing practice.
Chinese companies are moving up from the lower end to the upper end, and we see this everywhere from cellphones to shoes, everyone is moving upmarket in China, but they need to as their costs are increasing as consumers become more wealthy.
“We see that with Chinese e-commerce platforms buying some Southeast Asian platforms, but I don’t see that as systematic. I think after the trade war they will push abroad,” he added, saying that as tensions between Beijing and Washington lessen, Chinese firms may be more welcome in the US, with the exception of certain hi-tech industries deemed important to national security.
This trend has been apparent in the optical industry, Moreo said, in recent years.
"[20 years ago] there were more manufacturers, more distributors and a lot more retailers. We allege that the industry has been under significant profitability pressures, because profits have been held by this cartel of manufacturers, consequently there’s been a lot of consolidation because of a lack of competition in the industry,” he said.
Many of the conditions of removing tariffs levied on Chinese exports relate to the creation of a level playing field for US companies in China, however, the trade war has also hit many American companies, including those in the optical industry.
A range of optical products are covered by US tariffs on China, meaning that the dominance of Chinese companies of the manufacturing process means companies such as Orion are forced to pay 25 per cent tariffs on certain products, such as microscopes and eyepieces.
Should Trump decide to roll out more tariffs, there could be further bad news for the sector.
This case will proceed to a trial-setting conference on May 2.
