How the auto and tech sectors can prosper in China

January 21, 2015

The United States Federal Trade Commission (FTC) and the European Union (EU) recently opened antitrust probes into communications equipment maker Qualcomm. The FTC is looking into the company’s patent licencing business, while the EU is probing its baseband chipset business. The two probes are most unwelcome, if not surprising, for Qualcomm as they come hot on the heels of an investigation in China for alleged anti-competitive behaviour.

Qualcomm chief executive Steve Mollenkopf said: “We are fully cooperating with the agencies and believe our practices comply with the laws in their countries.”

Although the FTC and EU probes relate to different parts of the Qualcomm business and are still in their preliminary stages, with regulators simply collecting information, the probe in China was initially viewed as part of a wider pricing backlash that China is inflicting on foreign companies.

Half of the San Diego-based cellular chipmaker’s revenues originated in 2013 in China, where many of the world’s smartphones are produced. The AML investigation, which has been ongoing since November 2013, could result in a fine of up to ten percent of the company’s revenue in the previous year, or approximately US$1 billion.

Qualcomm president Derek Aberle visited Beijing in August 2014 to discuss the investigation with the NDRC. He has said that finding an end to the Chinese probe is the management team’s top priority.

In a similar fashion, in September 2014 Microsoft sent its chief executive officer to Beijing to meet with the SAIC.

The software maker had been publicly warned by Chinese regulators against obstructing an antitrust investigation into its United States-headquartered firm. The warning followed a raid of Microsoft offices in four Chinese cities by SAIC investigators.

The agency subsequently claimed that the company failed to disclose relevant security information or details on how it tied its software products together. Microsoft’s Deputy General Counsel and Corporate Vice President Mary Snapp was also questioned as part of the investigation.

Microsoft, which has battled software piracy in China for a number of years, had also previously stated that its business practices in China were designed to comply with Chinese laws. It has since pledged to cooperate with the current probe.

Other industry sectors

It is not just United States-headquartered technology companies that are under scrutiny by China’s antitrust regulators. German automobile makers, which control nearly 80 percent of the premium car market in China, have also been targeted.

The NDRC’s Shanghai bureau recently completed an antitrust probe into Audi, finding the German luxury car manufacturer guilty of engaging in monopolistic behaviour by setting prices for vehicle maintenance and spare parts. It was fined US$41 million. Other German brands under the regulators’ microscope include BMW and Mercedes-Benz.

The antitrust probes will likely apply additional pressure on foreign companies to cut the prices of their products in China. Executives at global companies with operations in China fear that China is using the AML as part of a protectionist push to favour domestic competitors.

CBRE’s Hong Kong–based Global Deputy Chief Ethics and Compliance Officer Sophia PK Yap disagreed. “It depends on the products and services, but this is not a strategy that’s peculiar to China,” she said.

Many also view the recent antitrust cases in China as being highly non-transparent, with responsibilities between relevant Chinese authorities often indistinct. And the concern for executives at global companies is that in a number of the recent cases it has not been clear which laws have been violated.

China’s antitrust officials argue that a number of domestic companies have also been investigated and that it is market abuse rather than country of origin that is the overriding consideration. Australian companies reportedly might be the next targets, especially in the medical, agriculture, food, mining and construction sectors.

Whatever the agenda, the campaign is certainly proving popular with Chinese consumers, who are often forced to pay higher prices for inferior products. And this almost certainly means that the Chinese authorities will continue to impose record-level fines on corporations that engage in certain types of conduct, such as resale price maintenance, market allocation and tying.

Nobel Biocare’s Hong Kong–based General Counsel Asia Pacific Stanley Lui said: “The Chinese may be a bit over zealous, but they haven’t got to the stage where they understand they’ve taken it too far.”

Be prepared

China is using its AML to have a greater say on global transactional activity. For chief compliance officers of global companies operating in China, this means that the game has changed. Regardless of the industry, it is no longer business as usual in China. Proactive and adequate measures need to be implemented to ensure that businesses are prepared for these challenges.

All companies in China should be prepared to cooperate if Chinese authorities request information. While local companies have been investigated, foreign companies have also been in the spotlight recently as targets for antitrust breaches. The authorities are also becoming more aggressive as they step up the number of dawn raids.

In order to avoid being caught off guard in the event of an antitrust investigation by Chinese authorities, companies with a presence in China should prepare for a possible dawn raid and ensure that the relevant staff know how to react. Front-desk staff must be trained on what to do when faced with investigators turning up at the door unannounced to seize documents and computers, and staff in each office must be taught how to properly interact with the officials. Importantly, all staff must understand their obligation to not destroy or tamper with evidence.

Interactive workshops are recommended to give staff the opportunity to role play and better envisage the scene that could confront them. Antitrust authorities in China are well staffed to be able to bring a daunting number of investigators to dawn raids. This can be an intimidating experience. Getting an opportunity to practice appropriate procedures in advance will help to ensure that staff are able to remain calm and collected should a real dawn raid ever take place. This face-to-face training should be accompanied by dawn-raid guidelines that provide staff with a step-by-step reference guide.

Companies should review their compliance programmes and audit antitrust controls in all areas of the business to safeguard their businesses in the event of an investigation. Antitrust policies should be communicated to staff and managers, especially to members of sales teams and staff responsible for setting pricing. Antitrust training should be given regularly to ensure that staff do not forget about their legal obligations.

Who does what?

National Development and Reform Commission

The National Development and Reform Commission (NDRC) is the central government agency that has broad administrative and planning control over the Chinese economy. It also examines and regulates price-related monopolistic activities. The AML, which came into effect in 2008, provided the NDRC with the authority and resources to investigate and punish pricing-related activities that eliminate or restrict competition.

The NDRC regulations contain explicit ranges of penalty reductions for businesses that provide evidence regarding pricing-related monopolistic activities.

State Administration for Industry and Commerce

The State Administration for Industry and Commerce (SAIC) is responsible for advancing legislation regarding the administration of commerce and industry, including the enforcement of the conduct (non-merger) provisions of the AML other than price-related monopolistic conduct, which is regulated by the NDRC. However, it is worth noting that there is no clear distinction between ‘price-related’ and ‘non-price-related’ anti-competitive conduct. Therefore, in certain cases, both the SAIC and the NDRC may claim jurisdiction.

Ministry of Commerce

The Ministry of Commerce (MOFCOM) is responsible for devising strategies and policies on foreign and domestic trade, and import and export regulations. It carries out anti-monopoly investigations and advises Chinese companies that have been accused of anti-competitive practices overseas. It also negotiates bilateral and multilateral trade agreements, among other things, and reviews, enforces and controls merger transactions.

Anti-Monopoly Commission

The Anti-Monopoly Commission (AMC) is organised under the State Council and establishes general policy guidelines and coordinates activities among MOFCOM, the NDRC and the SAIC. The AMC is made up of several ministers and heads of departments from the State Council.

China’s Anti-Monopoly Law

The 2008 AML prohibits many practices that were previously common in China. Business operators found to be in violation of the law face significant penalties (up to ten percent of turnover in many cases). This forces businesses with operations, customers or investments in China to take the AML seriously and take appropriate steps to ensure compliance.

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