THE PEOPLE´S POLICE / THE FINANCIAL TIMES ( RECOMMENDED READING )

The people’s police

By Sundeep Tucker in Hong Kong and Patti Waldmeir in Shanghai

Published: November 29 2009 19:42

Panasonic did not become one of the world’s largest 100 companies by taking instructions from Chinese bureaucrats. Yet the Japanese electronic goods maker, founded as Matsushita in 1918, finds itself in the uncomfortable position of having to do just that, following a landmark ruling by China’s commerce ministry.

Beijing this month fired a warning to acquisition-hungry chief executives across the globe when it demanded that Panasonic divest several coveted assets in Japan, in return for granting local antitrust approval for its proposed $9bn takeover of Sanyo Electric, a domestic rival. The ruling marks the first time that China has used powers introduced in August 2008 to compel disposals outside the mainland as part of an anti-monopoly review. And the message was clear: operating in the world’s hottest market can come at considerable cost.

Certainly, China is hardly alone in taking such actions. The US and European Union are among jurisdictions that have used the lure of access to their vast consumer markets to impose conditions on outside companies. US groups including General Electric and Microsoft can testify to several bruising battles with EU competition authorities.

But judging by the increasingly muscular rulings issued in recent months, Beijing has quickly emerged as a rival power centre and is using new laws to stamp its own idiosyncratic brand of capitalism on global companies engaged in high-profile mergers and acquisitions. As in other areas, China is slowly imposing its will on world commerce.

Beijing has used the anti-monopoly laws to force global companies engaged in mergers and acquisitions to sell mainland assets or, in the case of Coca-Cola, to block an acquisition of a local company. This increasingly robust approach towards global M&A that might affect its domestic market is raising concerns among international dealmakers, who fear it could constrain takeover activity.

A year of rulings

Nov 08 China clears InBev’s $52bn takeover of Anheuser-Busch but imposes restrictions to stop the Belgian brewer acquiring interests in four Chinese companies

Mar 09 Blocks Coca-Cola’s $2.4bn bid for China Huiyuan Juice on competition grounds, thwarting the country’s largest foreign takeover bid

Apr 09 Approves Mitsubishi Rayon’s $1.6bn acquisition of Lucite International of the UK but forces the combination to divest half of Lucite’s local production capacity

Sep 09 Clears General Motors’ acquisition of some units of Delphi but bans the parties from exchanging trade secrets on Chinese customers

Sep 09 Approves Pfizer takeover of Wyeth but insists that the merged drugs group divest specified animal vaccine brands in China

Oct 09 Clears Panasonic’s $9bn takeover of Sanyo but orders production plant divestments in Japan and the halving of a 40 per cent Panasonic stake in a coveted battery joint venture with Toyota

“Without question, merger clearance in China is a major issue for global companies considering M&A,” says Nicholas French, co-head of Freshfields’ China competition practice. “There is concern among dealmakers that they could encounter additional hurdles in China, compared to, say, the EU,” he adds.

China’s anti-monopoly laws are largely based on the EU model. As well as merger control, they cover the abuse of dominant market positions and anti-competitive agreements. Indeed, just days before the Panasonic ruling, state-owned China Mobile, the world’s largest mobile phone group with 500m subscribers, agreed to pay Rmb1,000 ($145, £90, €100) to settle a lawsuit filed by a customer who alleged it used its monopoly position to extract unfair revenue from users.

The court-mediated settlement was the first of its kind and, in spite of the small sum, is significant because it has the potential to open vast floodgates. Several other blue-chip mainland companies face monopoly-related legal action, as does Microsoft.

It does not take much for global companies embarking on M&A to find themselves having to deal with China’s merger authorities. Companies have to file for local antitrust approval where each has turnover of Rmb400m in China as well as total global turnover of Rmb10bn, or combined turnover in China of Rmb2bn.

Multinationals speak privately of their frustration at the slow pace and opacity of the country’s merger review process. Some believe it is being used as a tool to protect domestic rivals from competition and suspect that – unlike in the US, EU and Japan – merger reviews are open to industrial policy considerations.

In Panasonic’s case, China’s anti-monopoly bureau, which sits within the commerce ministry, accepted the company’s filing four months after it first lodged its paperwork. The review was also the first to proceed to “stage three”, meaning case officers had six further months to deliberate. The bureau eventually ruled that the Panasonic/Sanyo combination would have a market share in China of 46 per cent or more in three battery segments, ordering it to divest several production facilities in Japan and halve its stake in a non-Chinese joint venture with Toyota.

While authorities in the US and EU also asked Panasonic to sell overseas units, they did not seek action on the joint venture. “Extraterritorial divestments such as those specified in the Panasonic ruling are not routine in other antitrust jurisdictions such as the US or EU,” says Michael Han, also of Freshfields in Beijing. “Enforcement in China has been relatively more aggressive than expected.”

In another case, Beijing in September ruled that General Motors’ acquisition of some units of Delphi, the bankrupt US car parts maker, would restrict competition on the mainland. It slapped on several conditions, including a ban on exchanging trade secrets on Delphi’s other Chinese customers. Authorities in the US and Europe blessed the same deal without conditions.

Companies always have the option to divest their Chinese operations rather than accept onerous conditions from Beijing. But that is an approach likely to shut them out from China’s market for generations to come.

Not only is China’s sheer size giving it a big sway in global antitrust regulation. Global dealmakers are also finding themselves beholden to a handful of young technocrats at its anti-monopoly bureau.

Those involved with merger filings in Beijing say a typical case team is made up of three bureaucrats; a director in his mid-30s and two younger assistants. “The lead member will typically be razor-sharp and have a sound knowledge of competition law – but lack experience of global business,” says a Beijing-based lawyer who has worked on several filings.

Case teams make their recommendations to Shang Ming, the director-general of the anti-monopoly bureau, before final sign-off by Ma Xiuhong, a vice-minister of commerce. But given the technical nature of the work and lack of expertise higher up the chain of command, recommendations are rarely revised.

This is contrary to China’s more typical top-down approach to decision-making and is frustrating investment bankers and corporate executives who are used to lobbying senior government ministers for their preferred outcomes. “Rarely in Chinese history has so much power been in the hands of such young bureaucrats,” laments one veteran investment banker based in Beijing.

Chinese antitrust officials are aware that some of their decisions have generated disparaging global comment, which they see as largely unfair. The belief in Beijing is that officers are diligently applying pro-consumer laws that are common in the west.

Still, one change in recent months has been that Chinese merger review rulings are being accompanied by longer explanations, in an attempt to justify decisions. The first few rulings came with just two or three pages of explanation on crucial areas such as the definition of market share, compared with weighty tomes often issued by the US and EU authorities.

By contrast to merger control, the new laws proscribing anti-competitive agreements are less developed and aggressively applied. Laws relating to pricing and anti-competitive behaviour are the responsibility of the State Administration of Industry and Commerce and the National Development and Reform Commission, which are soon expected to announce detailed implementation guidelines. These two entities will also come to wield huge powers in their respective niches.

Nevertheless, recent events have provided encouragement to campaigners hoping to use fresh legal powers to tackle what they allege is a rampant abuse of dominant positions by many of China’s leading companies. As well as the China Mobile lawsuit, about 10 cases have been filed alleging anti-consumer behaviour. These include suits against China Netcom, Baidu and Sinopec, which await settlement. Plaintiffs are seeking compensation for alleged antitrust abuses such as telephone bills that are too high – a common target for litigation in the west.

Zhou Ze, the Beijing civil rights lawyer who secured the settlement with China Mobile, predicts that other Chinese consumer companies will become subject to complaints. “They all have a history as state-owned monopolists and that is where their mindset comes from,” he says. “Consumers will stand up to that.”
However, state-owned enterprises deliver enormous profits to the government and employ tens of millions. The possibility that these important arms of the state could be deluged with court cases from aggrieved consumers has forced the authorities to move more cautiously on this aspect of the anti-monopoly laws.

Dong Zhengwei, a lawyer who filed the case against Microsoft, says a Beijing court recently rejected his complaint over telecoms fees and the restructuring of the country’s state-owned telecoms industry. Mr Dong recalls: “They said, ‘What does the restructuring of the telecom sector or state-owned monopolies have to do with you as an individual?’ I said I am a consumer. They said, ‘China has 1.3bn consumers. If they all come suing, what should we do?’”

Foreign companies are also in the frame. Many law firms that represent them in China say their clients have been threatened with litigation under the new law, though none of these suits has yet been decided. But the coming guidelines could specify the level of damages or whether consumer associations can sue on behalf of individuals, which would allow lawyers to bring more lucrative suits.

In the meantime, foreign companies are scrambling to reduce potential risks by auditing whether their Chinese business complies with the new laws. “If 2009 was the year for the emergence of merger control, then next year is likely to see the emergence of those ministries responsible for policing monopolistic pricing and behaviour,” says Freshfields’ Mr Han.

Additional reporting by Kathrin Hille, Kerry Ma and Shirley Chen

National regimes have widely varying enforcement power

Historians trace today’s competition regimes back to the Roman empire, writes Nikki Tait. A law dating from the time of Julius Caesar and related to the corn trade imposed heavy fines on anyone who tried artificially to boost the price of the grain. Sanctions against corn monopolies were later extended to other goods and provisions.

A couple of millennia later, competition law has developed into a sophisticated tool that aims to give market-based dynamics a helping hand. The basic underlying principle is simple (even if the real-life economics are often more complex): if you make it easier for companies to compete fairly, there will be benefits for customers both in terms of price and innovation.

Accordingly, most competition regimes comprise three or four main features. They typically ban agreements that prevent groups from competing (such as cartels, where members jointly agree prices or market share). They oversee mergers, to prevent monopolies or oligopolies developing. And they ban abusive behaviour – such as predatory pricing – by companies that do have dominant market positions in their markets.

In the European Union, where a central objective is a level playing field among member states, there is also a state aid regime. This tries to ensure that national governments do not distort competition and trade within the bloc by doling out subsidies on a selective basis.

The age of national competition regimes varies considerably. The US Federal Trade Commission was established in 1914 as part of the battle to “bust the trusts”. Germany’s Bundeskartellamt, or federal cartel office, dates from the 1950s and the UK’s competition regime also developed significantly in the postwar decades. The collapse of communist regimes and the move to more market-based economies have brought an increasing number of competition watchdogs on to the global scene. This year, the International Competition Network – designed to facilitate convergence among antitrust enforcement agencies – comprised 104 agencies in 94 jurisdictions.

Their scale and resources vary hugely: the Zambian Competition Commission has fewer than 20 staff and an annual budget equivalent to about $600,000 (£365,000, €400,000), according to one 2009 industry handbook, while the FTC has more than 1,000 employees and a 2008 budget (for both competition and consumer protection work) of $244m.

Lawyers are paying increasing attention to agencies which have been less prominent in the past. Japan’s Fair Trade Commission, for example, has been noticeably more active in recent years. Along with counterparts in Spain, South Africa, the Czech Republic and Hungary, it ranked well in a survey of users conducted this year by Global Competition Review, a UK-based industry publication.

Copyright The Financial Times Limited 2009