China Bolsters Enforcement of Antitrust, Pricing Regulation

Chinese regulators are paying closer attention to pricing practices across several industries over the last few months, indicating that the government is ramping up antitrust enforcement.

From pharmaceuticals to food packaging and consumer products, no industry appears out of the reach of China's evolving antitrust regime. “Multinational companies might have felt that, for a while, they were not really exposed to these kinds of price-related antitrust risks,” says Peter Wang, partner-in-charge of Jones Day's antitrust practice in China. “Clearly, that's no longer the case.”

China enacted an anti-monopoly law five years ago, but it hadn't pursued many cases under the law until recently, leading many companies operating in China to pay little attention to it. “U.S. companies are very strict about antitrust compliance in the United States, but have been lax about antitrust compliance in China due to the short history of the anti-monopoly law and the lack of enforcement actions previously,” says Christina Zhang, a partner in the Shanghai office of law firm Cooley.

Now that Chinese regulators are getting more aggressive about pricing practices, however, many companies are reviewing their legal agreements and internal policies and practices, and they should provide trainings to their employees to ensure compliance with the regulations, Zhang says.

Earlier this month, China's central economic planning agency, the National Development and Reform Commission (NDRC), launched a probe into the production and distribution pricing practices at more than 60 domestic and foreign drug companies that operate in China. Among companies under investigation are GlaxoSmithKline, Merck, Novartis, Baxter International, and more.

A special investigation team from the NDRC, whose price supervision and anti-monopoly bureau oversee the price-fixing provisions of China's anti-monopoly law, said it will make field visits from July to October.

Still, some representatives of the pharmaceutical industry don't seem overly concerned about the crackdown. “We believe it's basically routine procedure,” says Mark Grayson, vice president of communications and public affairs at the Pharmaceutical Research and Manufacturers of America.

That doesn't mean that companies aren't taking any action, based on the antitrust investigations. In recent weeks, for example, food giants such as Nestle, Abbot Laboratories, and Danone have all committed to cut prices of their infant formula by as much as 20 percent in response to another widespread investigation launched by NDRC on July 2 alleging possible price-fixing and anti-competitive practices in violation of Article 14 of China's anti-monopoly law.

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Attorneys say multinational drug companies doing business in China could be faced with similar pressure to slash prices. The NDRC's investigation “might result in price cuts for many drug companies,” says Lei Li, counsel in the Beijing office of law firm Sidley Austin.

Article 14 prohibits companies from entering into monopoly agreements with trading partners that fix the price of commodities for resale to a third party or restricts the minimum price of commodities for resale to a third party. Companies that are found in violation of Article 14 may face fines ranging from 1 to 10 percent of global revenue for the preceding year.

There are signs that the NDRC may extend its investigations into other industries, and other countries, as well. For example, New Zealand-based dairy company Fonterra confirmed in a July 4 press release that it had been contacted by NDRC “regarding a current broad-ranging investigation of consumer dairy products in China.”

The NDRC is not the only Chinese regulator, however, to step up enforcement in this area. On July 9, China's State Administration for Industry and Commerce (SAIC)—the agency in charge of market supervision and regulation—launched a probe into alleged “abuse of dominant market position” against food packaging giant Tetra Pak. In a speech posted on the agency's Website, SAIC head Zhang Mao said the case is part of a wider effort to intensify anti-monopoly enforcement in China.

Who's a Target?

Among the investigations launched against pharmaceutical companies and infant formula makers, most involve foreign companies, including many in the United States and Europe. Still, antitrust experts say they do not view such enforcement activity as unfairly targeting foreign companies to give Chinese companies a leg up in the market.  

MONOPOLY PRACTICE VIOLATIONS

The following excerpt from China's Anti-Monopoly Law explains violations around prohibited monopoly practices and abuse of market dominance.

Chapter II Monopoly Agreement

Article 14: Any of the following agreements among business operators and their trading parties are prohibited:

Fixing the price of commodities for resale to a third party;

Restricting the minimum price of commodities for resale to a third party; or

Other monopoly agreements as determined by the Anti-monopoly Authority under the State Council.

Chapter III Abuse of Market Dominance

Article 17: A business operator with a dominant market position shall not abuse its dominant market position to conduct following acts:

Selling commodities at unfairly high prices or buying commodities at unfairly low prices;

Selling products at prices below cost without any justifiable cause;

Refusing to trade with a trading party without any justifiable cause;

Requiring a trading party to trade exclusively with itself or trade exclusively with a designated business operator(s) without any justifiable cause;

Tying products or imposing unreasonable trading conditions at the time of trading without any justifiable cause;

Applying dissimilar prices or other transaction terms to counterparties with equal standing;

Other conducts determined as abuse of a dominant position by the Anti-monopoly Authority under the State Council.

For the purposes of this Law, “dominant market position” refers to a market position held by a business operator having the capacity to control the price, quantity or other trading conditions of commodities in relevant market, or to hinder or affect any other business operator to enter the relevant market.

Source: China.org.cn.

Rather, Wang says, the intensified oversight more likely has to do with answering the escalating concerns of Chinese consumers: During these tough economic times, consumers are a lot more sensitive to the price of products than they have been in the past. Factor that in with the common complaint among Chinese consumers that foreign companies charge more in China than they charge outside of China for the same products. “That's obviously viewed as unfair,” he says, and that may partially explain why enforcement has “really seemed to pick up steam.”

“It's probably reasonable to assume that the government will be watching you very closely if consumers are complaining about the high prices you are charging, or that the industry as a whole is charging, especially if prices have been going up over time,” says Wang. 

Those most at risk of facing an investigation by the NDRC for antitrust pricing practices are those that market and sell “relatively high-profile consumer products,” Wang adds. The NDRC is typically targeting companies that enjoy high profit margins and are highly visible in the marketplace.

For example, most of the infant formula companies recently investigated by the NDRC are foreign companies, “but this is because the top selling high-end infant formula products in China are mostly foreign brands,” says Zhang. In China, infant formula sold by foreign companies has been a contentious issue since 2008, when melamine-tainted formula sold by a domestic provider caused the deaths of six children and made ill thousands more.

The crackdown could have a large impact on pricing policies, especially for pharmaceutical companies. According to IMS Health, a healthcare technology services provider that tracks pharmaceutical industry trends, China is on track to become the second biggest drug market behind the United States by 2016.

U.S. companies are limited to what they can do to avoid an antitrust probe by the NDRC or any other Chinese regulator, but they can at least be aware of the situation and be prepared, Wang says, especially if you are a company within one of these high-risk industries. “From a compliance perspective,” he says, “you want to be able to show your pricing is done in good faith and for good reason.”