China’s National Development and Reform Commission (NDRC) has renewed its pledge to step up antimonopoly and price-fixing efforts in a year that has already seen an unprecedented number of price-related investigations. Between 2008—when the Antimonopoly Law (AML) was passed—and 2012, the NDRC conducted just over 20 price related investigations. In 2013 alone, the agency has investigated more than 80 companies, mainly concentrated in the pharmaceutical, infant formula, and Chinese liquor industries. Analysts believe that NDRC investigative activity has increased now that the agency has greater capacity to enforce prices, and that this spike may signal an NDRC shift towards more proactive price enforcement.
Some international observers have expressed concern that multinational companies (MNCs) are being singled out by NDRC and other agencies. Several high-profile investigations of MNCs in the infant formula and pharmaceutical industries have reinforced this assumption. A US-China Business Council (USCBC) review of NDRC investigations in 2013, however, shows that the agency has conducted investigations of both foreign and domestic companies, mostly in the aforementioned politically-sensitive industries. Limited media coverage of domestic company investigations has made it difficult to gauge the quantity and the nature of investigations that have actually taken place.
Meanwhile, several Chinese media editorials have noted that pricing investigations alone may not address the key causes of price-fixing behavior. Instead, structural changes are needed in state-led monopoly sectors to bring about real progress in eliminating price fixing.
NDRC indicates that price-fixing enforcement will increase
Price-related AML investigations by NDRC are relatively new, though the agency’s concern with rising prices is not. NDRC has favored price controls in industries such as pharmaceuticals and energy sectors as a way of allowing citizens access to goods and services at what the government considers “reasonable” prices. NDRC’s goal with such policies is to promote economic stability while also avoiding public frustration with rising prices for necessary goods, such as medicine or electricity.
Price control policies have often been criticized as ignoring market forces and making it more difficult for companies operating in affected sectors to conduct business effectively. Chinese regulators passed the AML in 2008, with NDRC also creating a Price Supervision Bureau to investigate monopolistic pricing. Over the last four years, investigations have been limited as NDRC made institutional adjustments to prepare for proper enforcement. According to leading officials, now that NDRC’s systems are in place, pricing-related investigations are on the rise.
NDRC Price Supervision and Antimonopoly Bureau Deputy Inspector Lu Yanchun revealed at the end of November that his agency will focus on price fixing in six major industries, including aviation, cosmetics, automotive, telecommunications, pharmaceuticals, and household appliances. Lu said that the central government is paying greater attention to price-fixing and has “essentially” established central and provincial systems for antimonopoly enforcement. It is also increasing its antimonopoly efforts under China’s major antitrust laws and regulations, including the AML, the Regulations on Price Monopoly, and the Provisions on Procedures in Price Monopoly Administrative Enforcement.
China has three ministries in charge of antimonopoly enforcement: NDRC, the State Administration of Industry and Commerce (SAIC), and the Ministry of Commerce (MOFCOM). All three are preparing AML-related implementation regulations. MOFCOM in particular is speeding up its work on drafting the Implementation Regulations of Antimonopoly Review of Operator Concentration. According to MOFCOM researcher Ma Yu, unregulated billing behaviors in the banking industry will be another focus of investigation.
“Golden year” investigations are sector-focused
NDRC has increased the number of its price-related investigations in 2013, to the point that some domestic media have referred to 2013 as a “golden year” for antimonopoly investigations. Given the intense, high-profile media scrutiny received by some investigations of MNCs, some in the international business community have feared that pricing policies might be used as a tool for protectionist influences. A closed-door meeting between the NDRC and foreign industry representatives in July added weight to these concerns. At the meeting, NDRC Division Chief Xu Xinyu reportedly threatened more than 30 foreign companies with increased fines if they did not cooperate with investigations by lowering prices. Chinese government regulators have consistently said that many Chinese companies are also being investigated, and that all companies must practice business in line with Chinese law.
USCBC reviewed major pricing investigations conducted by the NDRC in 2013 to evaluate the subjects and outcomes of the investigations. A few clear trends emerged in reviewing publically available information regarding the cases:
- While many companies have been probed, investigations have been concentrated in three major industries this year: pharmaceuticals, infant formula, and Chinese liquor. A full review of timing and companies involved in these investigations is included below.
- Each of these industries is considered politically sensitive due to recent safety or corruption scandals. In addition, the widespread use of their products among Chinese consumers means they are more prominent targets for investigation.
- While it is clear that both foreign and domestic companies are being investigated, media coverage has been very uneven, naming many international companies while leaving most Chinese companies unnamed. This lack of transparency makes it difficult to evaluate if the investigation of domestic companies is being administered in proportion with their activity in sensitive industries.
- The infant formula investigation, occurring in the wake of serious safety issues that weakened the position of domestic formula producers, has the largest discrepancy between domestic and international firms.
Domestic media sources have noted an important structural component affecting price-fixing in China. The privileged position of certain domestic firms with close ties to the government creates a position of outright or “administrative” monopoly in certain capital-intensive sectors such as telecom and finance. Administrative monopolies allow dominant actors in certain sectors to suppress competition, putting them in a position in which price fixing is possible.
The clearest example of this phenomenon is in the telecom sector, where state-owned giants hold a privileged position. NDRC-led investigations of China Telecom and China Unicom in 2011 resulted in public apologies from each firm, as well as a pledge from China Telecom to drop prices by 35 percent over the next five years on broadband fees. NDRC assessed no fines in the case. Nevertheless, the structure of the telecom sector leaves it wide open for future price fixing, given the dominant positions of the major carriers.
Investigations likely to continue
Investigations of Chinese liquor giants Maotai and Wuliangye were noted for being the first time that the NDRC has actively enforced the AML. The surge in price-related investigations, combined with recent NDRC statements, indicates that NDRC will continue to focus its investigations on politically-sensitive sectors in which high prices are common. The recent investigation of Qualcomm is the most recent example of the agency’s continued focus on pricing investigations.
Companies within the six industries announced in November should prepare for increased scrutiny in months to come. Companies in sectors outside these six industries may be less likely to fall under investigation, but any company that has a dominant market share may also be scrutinized. It is important for companies to keep in mind that definitions of what products and sectors should be investigated are highly subjective and, in light of concerns about inflation and consumer purchasing ability, may be broadened unexpectedly per agency discretion.
[author] Sue Hao ([email protected]) is the government affairs manager at USCBC’s Beijing office. John Lenhart ([email protected]) is the acting director of USCBC’s Beijing office. USCBC is the publisher of the China Business Review. [/author]