China’s Anti-Monopoly Law takes hold of western companies

By Kerry Brown

China’s Anti-Monopoly Law can snare any foreign company with a Chinese interest. Some say it protects Chinese companies and markets too aggressively. Approvals can take months and include problematic media coverage.

The Chinese Anti-Monopoly Law brought onto the books in China in August 2008 was the result of more than 10 years of internal and external consultation.

China’s Anti-Monopoly Law was seen as continuing the process of implementing and deepening the `rule of law’ over the `rule of man’ that had been dominant in China until the 1980s. It came into effect only a few months after the equally significant Chinese Contract Law which spelled out specific and comprehensive rights for employees in China — for the first time.

It would have been assumed that improvements and clarification of China’s legal structure would have been a welcome sign for foreign companies working there. After all, today there are more than 500,000 wholly or jointly owned ventures in China, with an accumulated capital of $700 billion.

Such ventures in China would not be in China in such numbers without having at least some faith in Chinese legal safeguards provided to their investments on a local or regional level.

Even so, both the Contract Law and the Anti-Monopoly Law were problematic, and have each raised issues with major foreign investors.

The former, because it demanded recognition of state supported unions, which companies like Wal-Mart with huge interests in China initially opposed, and the latter, because it was interpreted as protectionism.

The first real test of China’s Anti-Monopoly Law came when Coca Cola, one of the longest established and largest foreign investors in China, submitted an application to acquire Beijing soft drinks and fruit juice manufacturer Huiyuan for $2.4 billion in September 2008.

After almost six months of consideration, the central Anti-Monopoly Bureau within China’s Ministry of Commerce turned down the application this past April on the grounds that it would, in theory, hand Coca Cola 70% of the local soft drink market.

This proposed deal, which was consensual between the Chinese and foreign parties and seen to be beneficial for all, was turned down and subsequently started warning bells.

China’s Anti-Monopoly Law clearly relates to any foreign company in the world with a Chinese interest. This has been illustrated by two other cases, one which has been resolved, the other which is still ongoing.

In the first instance, let’s look at Belgian’s InBev S.A. (which makes Stella Artois lager) and the United State’s Anheuser Busch (think Budweiser). Because each company held minority interests in Chinese breweries, both needed to seek approval for the InBev acquisition of Anheuser Busch from the Chinese government.

The application was approved in November 2008, but only on condition that their interests in the Chinese breweries, once merged, did not, in the future, exceed 33%.

The second instance involves synthetic fiber manufacturer Lucite International’s $1.6 billion bid to take over Japan’s Mitsubishi Rayon Co., Ltd., which was filed with the Chinese in November, also needed Chinese approval.

This time, it was not because these two companies had interests in Chinese companies directly, but because both had large sales and manufacturing interests and assets located in China.

At the time of writing this article, the outcome of the Lucite-Mitsubishi case has not determined.

While 30 applications have been considered up through May 2009, with all but Coca Cola’s being accepted, the broad remit of China’s Anti-Monopoly Law means that foreign companies with any interests in China seriously considering mergers and acquisitions need to be aware of the potential impact of this law both inside and outside of China.

Article 1 of China’s Anti-Monopoly Law states the broad thrust of the legislation: that it is for “preventing and prohibiting monopolistic activities, protecting fair market competition, promoting efficiency of economic operation, protecting the legitimate rights and interests of consumer and social public interests, and promoting the healthy development of socialist market economy.”

Other articles of China’s Anti-Monopoly Law deal with abusing a dominant position in the Chinese market, price fixing, and increasing transactions and undertakings within the Chinese market.

Coca-Cola’s case is particularly important because of the iconic status of the company involved. According to one official in Beijing I spoke with in March 2009, the Chinese government was extremely worried that in taking over a key retail sector in China, Coca-Cola would automatically be in an over dominant position.

In addition to this, with the growth prospects for this particular beverage sector, the venture would almost certainly grow rapidly in the coming few years, while many other markets are either stagnating, or contracting.

This raised suspicions the Chinese government is protecting a key growth sector for one of their own companies and violating the national treatment obligations outlined in the World Trade Organization (WTO) agreement which China signed in 2002. The court is still out on this issue.

Meanwhile, looking at the G20 countries that met in London in April of this year, 17 of those nations attending have been accused by the WTO of implementing protectionist measures since the economic crisis hit the world in 2008. But some commentators have said the definition of anti-protectionism is far too wide and, in any case, China’s actions with its Anti-Monopoly Law are in line with international practice, and rational.

One point foreign manufacturers with interests of any sort in China need to note, however, is that there was a large volume of anti-Coca-Cola comment on Chinese Internet sites, citizens’ blogs, and even in the national media while the case was being considered.

Coca-Cola was portrayed as an aggressive foreign interloper with anti-Chinese designs and as a company whose increased interests in China, through taking over a respected local brand, were regarded negatively.

However unfair this actually might have been for Coca-Cola, one of the earliest companies to enter China (1979) and which has a considerable sized investment in China, it hints at how a major PR campaign might have been required to help stave off some of the negativity in the attacks.

For those with interests of any sort in China, either in sourcing material there, or manufacturing for the internal or export markets, or being part owners of a Chinese entity, familiarity with this new law is important.

At the very least, companies and executives must factor certain considerations into their business plans of execution and if they find they need to seek approval from the Anti-Monopoly Bureau under the Chinese Anti-Monopoly Law, they will need to allow for a number of months for approvals to be considered and hopefully passed.

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