Watchdog bites with no favor
Updated: 2013-09-13 10:01
By Meng Jing (China Daily)
Peter Wang of Jones Day says the enforcement of the anti-monopoly law is improving in China. Gao Erqiang / China Daily
Bala Ramasamy, professor of economics at the Shanghai-based China Europe International Business School, says that measuring foreign and domestic firms with the same yardstick may be out of the question. "The NDRC is a state agency, so investigations against state-owned enterprises may not be done in the public domain, considering that China's social and economic context is different from that of the West.
"The public is not too aware of such investigations as they are often done within the government framework," says Ramasamy, whose teaching focus at CEIBS is international business strategy. He says there is sound logic on why most of the companies being investigated are multinationals.
Ramasamy says that in the 1980s and even 1990s, the foreign investment that came to China was for exports. "In the past, the Chinese government was not too concerned about price-fixing, because the majority of the companies came to China to use the resources, such as labor. The large proportion of what they produced in China was for exports.
"Over the past several years, with the growing market in China, more and more multinationals are beginning to look at the Chinese market. That's why we are going to see more cases involving multinational companies."
The investigations are being conducted to protect the Chinese market and to make sure Chinese consumers pay the right price for the right-quality products, Ramasamy says.
"Do I see more kinds of investigation happening? Definitely, as more investors are coming to China to tap the Chinese market."
Echoing similar views are James Roy, a senior market analyst with the Shanghai-based Market Research Group. Roy says the Chinese government is under great pressure to provide people the access to affordable prices, and the price differences between the same product being sold in China and other countries have often led to huge desire among Chinese to buy products from abroad.
Citing an example, he says a basic iPad 2 costs $488 in China, whose average per capita income is about $7,500. The same product costs $399 in the US, whose average per capita personal income is more than $42,000.
Clothing and other apparel are on average 70 percent more expensive for consumers in China than in the US, according to data provided by SmithStreet, a Shanghai-based strategy consulting and corporate advisory firm, which compared the prices of 500 items across 50 brands in both countries.
The huge demand to buy genuine high-quality infant formula at relatively low prices has also created an industry named daigou, an Internet-based business in which overseas Chinese act as shopping agents for those who are based in China.
Wang Huainan, CEO of Babytree.com, one of China's largest mother-and-baby online communities, says that whether or not the foreign baby formula companies violate the law or not, the retail price of foreign infant formula sold in China can often be twice that of the same product in other countries.
"Some of the foreign-branded milk is produced locally in China with ingredients imported from home countries, while some others export their final products directly to China. But the tariff China charges on imported dairy products is only about 4 percent of the price, so high tax is obviously not the reason for huge price differences," Wang says.
He also says China's domestic baby milk producers raised their prices by about 6 to 7 percent every year, whereas their foreign counterparts raised prices by 10 to 20 percent every year.
However, Roy of the China Market Group says pricing is an important part of a company's branding strategy, so every company should have the right to set their price differently in different countries.
"Our research finds that in many cases people have a lot of uncertainties about what they are buying. Price is often an ideal indicator to show what is good and what is not good. Producers don't charge very high prices, but only what the market can bear."
Peter Wang, antitrust law partner with Jones Day, a Washington-based law firm, says there is no law prohibiting companies from setting their own prices. "However, if we make certain products and you make certain products, it is not OK for us to agree that we keep our price high together. That's what we call a price-fixing cartel.
"Manufacturers are also not allowed to set or fix the selling price they want from consumers with their distributors. This is called resale price maintenance, and that's the issue that has cropped up in infant formula investigations in China.
"In general, cartels are illegal everywhere with no exception. Retail price maintenance can sometimes be illegal in the US, but enforcement and punitive actions usually are not that stringent and companies can raise appropriate defenses such as that the arrangements are actually beneficial to competition."
Foreign companies have been hit harder by the recent investigations because China wants to enforce anti-monopoly laws and does not want prices to be unreasonably high, Wang says.
Foreign firms are usually high-end companies with more pricy labels, compared with domestic firms. "So when your concern is high prices, then naturally you end up focusing more on multinational companies," says Wang, who has been practicing anti-monopoly law for more than 21 years.
Many of the foreign baby milk producers have cut prices in China after the NDRC investigation. John Ross, senior fellow at the Chongyang Institute for Financial Studies with Renmin University of China and an economic consultant to the mayor of London between 2000 and 2008, says the price reductions show that excess profits existed.
Talking about the recent investigations, Ross says the pharmaceutical industry in particular is prone to corruption in all countries.
The consequence of the patent system - wherein a company that can sell its drugs during the patent period may achieve 10 times the price, and extremely high profits, compared with the period after the patent has expired - is a form of limited-time monopoly, he says.
"This creates huge incentives to attempt to achieve rapid sales, and high profits during the patent period make corruption economically rational. As this is not a problem confined to China I am even slightly surprised that there have not been scandals of this type previously," he says, adding the investigation is a good sign that the Chinese government is serious about anti-monopoly law enforcement.
Wang of Jones Day agrees with this viewpoint and says that when the anti-monopoly law first came out in China in 2008, most of the actions pertained to mergers and acquisitions, such as Coca-Cola's failed bid to acquire China's Huiyuan Juice Group.
Over the past several years, the antirust authority has approved some cases but only with conditions. "In the second stage the authority expands its focus to price fixing and over the last few months we have heard a lot about cases related to resale price maintenance," Wang says. "It is obvious that things are progressing in China."
Such steps have also simplified the job procedures for professionals like him, he says. "My job every day is to tell clients that there are these laws and you need to be careful about it. Five years ago in China, nobody would have believed that the antitrust laws would be enforced. But now when I tell people to be careful of price retail maintenance, they say 'We know, we know', because everybody reads the newspapers."
Waterman of the US Chamber of Commerce believes that in China following the law is critical but often is not enough. "You see the way Apple and Volkswagen were recently treated by the Chinese media. Those actions appear more like targeted actions aimed at tarnishing reputations of foreign competitors in China's marketplace. Foreign companies need to be mindful of the environment they are in," he says, adding that the interface between anti-monopoly laws and industrial policies have often been an issue in China.