China: Abuse of Dominance

The enforcement of China's Anti-Monopoly Law (AML) against abuse of dominance in 2018 encountered relatively few major incidents. Nevertheless, several events need highlighting.

The first is the enforcement agencies' integration. Before 21 March 2018, abuse of dominance authorities were the National Development and Reform Commission (NDRC) and the State Administration for Industry and Commerce (SAIC), respectively. The NDRC was responsible for price-related abusive behaviour, while the SAIC was in charge of non-price-related abusive behaviour (the other authority being the Anti-Monopoly Bureau of the Ministry of Commerce, which is responsible for merger control). After March 2018, the two above-mentioned authorities were integrated into the Anti-Monopoly Bureau of State Administration of Market Regulation of China (AMB). Therefore, as of 21 March 2018, the AMB is the single authority against monopoli­stic activities, regardless of whether the behaviour is price-related. To be more specific, the AMB established the Abuse of Dominance Investigation Division to oversee AML enforcement against abusive behaviour.

In addition, the State Administration for Market Regulation (SAMR) is formulating the Draft Provisions Prohibiting the Abuse of Market Dominance (the Draft Provisions), which is regarded as an important legislative development in the field of regulating abusive behaviour in China. Nevertheless, at the time of writing, the Draft Provisions have not yet been published.

In terms of enforcement in 2018, the AMB and local branches have initiated 32 investigations into instances of anticompetitive conduct. Among them, 15 cases have been closed.1 The authorities have published four decisions in relation to abuse of dominance. As a comparison, in 2017, the authorities concluded seven investigations of abuse of dominance. All of the published abusive cases in 2018 only concerned domestic companies, although certain ongoing investigations involve foreign companies, such as the investigation towards chip-makers Micron, Samsung Electronics, SK Hynix2 and Microsoft.3

Integration of the enforcement authorities

Three former Chinese antitrust enforcers, the NDRC, the SAIC and the Anti-Monopoly Bureau of Ministry of Commerce, have been integrated into a single authority, the SAMR. The SAMR established an integrated AMB in charge of enforcing the AML on 30 July 2018.4 Under the AMB, there are 10 divisions. Among them, the Abuse of Dominance Investigation Division is, in particular, responsible for enforcing the AML, regardless of whether the behaviour is price-related.

It is hoped that this integration will improve efficiency with regard to anti-abuse enforcement. The integration may optimise the use of resources for the SAMR's enforcement priorities because former professional staff at the NDRC and the SAIC can now work together. This consolidation will also allow for the combination of existing enforcement resources, streamline the enforcement process and optimise the use of resources for the SAMR's enforcement priorities.

Second, there will be less legal uncertainty. The previous enforcement agency's structure was criticised because of the ambiguous distinction between 'price-related behaviour' and 'non-price-related behaviour'. In practice, an abusive behaviour concerned may be related both to price and non-price factors, so the allocation of authority among the agencies was not always clear. Therefore, the combination of the three antitrust authorities would resolve the tensions created by overlapping jurisdictions.

Last but not least, this integration of the Chinese antitrust authorities reflects the government's increased focus on antitrust issues. After the integration, the new SAMR will be more active and aggressive in its enforcement of the AML. According to Mr Zhang Mao, the Minister of the SAMR, the new agency will 'strengthen antitrust and anti-unfair competition enforcement'.5

Enforcement record against abusive behaviour in 2018: from a comparative perspective

As at 18 December 2018, 11 monopoly agreement cases and four abuse cases have been published,6 which is less than 2017. The following table summarises four abuse cases published in 2018:

Four abusive cases in 2018

No.AuthorityCompany concernedType of abusive behaviour
1AIC of Jiangsu Province under the authorisation of the former SAICNanjing Lishui District Power Supply Branch of State Grid Jiangsu Electric Power Co, LtdImposing unreasonable trading conditions
2AIC of Inner Mongolia under the authorisation of the former SAICInner Mongolia Branch, Agricultural Bank of China Co, LtdImposing unreasonable trading conditions
3AIC of Hubei Province under the authorisation of the former SAICHubei Ginko Tuogangbu CorporationDiscriminatory treatment
4AIC of Inner Mongolia, under the authorisation of the former SAICChina Mobile Communications Group Inner Mongolia Co, LtdImposing unreasonable trading conditions

Industries concerned

The above table indicates that the abuse cases in 2018 concerned electricity supply, banking, port services and telecommunication. Compared with the industries concerned in 2017 (i.e., the pharmaceutical industry, software and public goods supply (water, gas and electricity supply)), it can be observed that, in general, the focus of enforcement has broadly remained the same. These industries share several similarities:

  • they are closely related to the national economy and general public;
  • they can be categorised as natural monopolistic industries; and
  • they are highly regulated by the government.

Domestic undertakings: focus of enforcement

Another feature, which was the same in 2017, is that enforcement seems to be active towards domestic undertakings or state-owned enterprises (SOEs). The targets of all the published cases in 2018 are domestic undertakings and SOEs.

Nevertheless, the investigation of three dynamic random-access memory (DRAM) makers' abuse of dominance is undergoing. Samsung, SK Hynix and Micron are all multinational companies. According to Wu Zhenguo, the director-general of the SAMR's Antitrust Bureau, significant progress has been made in this investigation.7 It is believed that the DRAM case will be another influential abusive case concerning global market players after Tetra Pak (2016)8 and Qualcomm (2015).9

Therefore, the authority seems to attach its focus on domestic undertaking or SOEs, especially those concerning general public. Further, the authority is determined to punish any anticompetitive behaviour, regardless of whether the companies are domestic or foreign.

Types of abusive behaviour in 2018

It is interesting that compared with the types of abusive behaviour in 2017, such as tying, designated dealing and refusal to trade, the types of abusive behaviour in 2018 are relatively simple. Three of the four cases concern imposing unreasonable trading conditions, and one concerns discriminatory treatment.

This may to a large extent be due to the fact that all three undertakings engaged in imposing unreasonable trading conditions are SOEs and concern 'natural monopolistic industries'. Generally, these undertakings have dominant market positions and strong bargaining power. They are able to impose unreasonable trading conditions through, for example, unreasonable standard contracts, whereas the customers most likely have to accept such unreasonable contracts owing to limited alternatives. Therefore, for those undertakings with dominant market positions, attention should be paid to the trade conditions to ensure they comply with the provisions in the AML.

Decentralisation of the enforcement authority

The above table demonstrates that all the abusive cases in 2018 were investigated by the local branches of the SAIC under its authorisation according to article 10 of the AML. Decentralisation of enforcement is consistent with 2017 practices.

It is believed that such an approach could increase the effectiveness and efficiency of AML enforcement in China. First, the local branch may be in a better position to investigate the case, because, normally, the local branch is more familiar with the situation and possible local features than central government. Second, it allows the SAMR to focus its limited resources on more significant antitrust cases, which may improve the AML's overall enforcement.

Investigation result

In 2018, in only one case was a fine imposed, and the rest of the three investigations were terminated without imposing any fines. This sharply contrasts 2017, when fines were imposed in six investigations with only one exception.

According to the published decisions, the amount of fine imposed in the discriminatory treatment case was 6 per cent of Hubei Ginko Tuogangbu Corporation (Ginko)'s sales value in 2016. Generally, the rate of fine ranges from 2 to 7 per cent of the undertaking's sales in the previous year. In these 'termination of investigation' cases, all three undertakings are SOEs that engaged in imposing unreasonable trading conditions and concern 'natural monopolistic industries'.

Critical developments in the future

Key legislation: Draft Provisions

The Draft Provisions have not been published. Nevertheless, it is believed that this key legislation will address many important issues with regard to enforcement against abusive behaviour.

From a procedural perspective, it is believed that the power allocation between the SAMR and its local branches should be regulated. First, the AMB may be responsible for nationwide abuse cases or cases that the AMB considers important. Second, the AMB's provincial branches may be empowered to enforce the AML against abusive behaviour in their respective territories. Third, for abusive behaviour crossing the provinces, autonomous regions and directly controlled municipalities, the AMB may be in charge. Also, the provincial branches may be designated to investigate cross-provincial cases.

Questions may arise regarding the recent enforcement of the AML, such as how to:

  • identify market dominance for internet companies;
  • identify market dominance for undertakings in the field of intellectual property;
  • assess joint dominance;
  • define 'cost' in the abusive behaviour of selling goods below cost; and
  • identify 'justifiable reason' for the abusive behaviours in practice.

After the issuance of the Draft Provisions, it is believed that the legal certainty of enforcement against abusive behaviour will be enhanced, because some grey areas, in practice, are supposed to be addressed by the provisions.

Important recent cases

Chlorpheniramine API

The latest finished SAMR decision against abusive behaviour is Chlorpheniramine API, which was published on 18 January 2019.10 In this case, two pharmaceutical companies, Hunan Erkang and Henan Jiushi, were fined because they abused their dominance to charge excessive prices.

The relevant market of this case is defined as 'chlorpheniramine APIs' in China, and the two pharmaceutical companies can be presumed to have market dominance in the relevant market due to their extremely high market share. Specifically, in 2017, the total market share of the parties accounted for 96.38 per cent of China's chlorpheniramine API; from January to July 2018, the combined market share was 88.55 per cent, and the market share of each of the parties exceeded 1:10.11 According to article 19 of the AML, Hunan Erkang and Henan Jiushi can be presumed to be market dominators in the market of chlorpheniramine APIs in China. Additionally, the authority also considered the following factors when assessing market dominance:

  • the parties' strong ability to control market sales;
  • downstream undertakings having a high degree of dependence on the parties;
  • significant market barriers; and
  • whether the parties can jointly dominant the market.

It was ruled that the two pharmaceutical companies abused their market dominance by refusing to deal with downstream drug manufacturers and tying chlorpheniramine APIs, Hunan Erkang's starch capsules and medicinal sucrose, etc. Finally, the authority decided that the two pharmaceutical companies abused their market dominance in the Chinese market for chlorpheniramine APIs by refusal to deal, and tying and causing anticompetitive impact on the relevant market. Therefore, Hunan Erkang was fined 8 per cent of its total turnover in 2017 (about 8.5 million yuan); and Henan Jiushi was fined at 4 per cent of its total turnover in 2017 (about 1.6 million yuan).

Notably, the authority recognised joint dominance in this case. When making a presumption of the parties' market dominant position, the authority only based it on their total market share, without mentioning Hunan Erkang or Henan Jiushi's respective market share in the relevant market. In other words, even if either Hunan Erkang or Henan Jiushi's respective market share does not exceed 50 per cent, as long as their respective market share exceeds 10 per cent and the combined market share exceeds two-thirds (about 66.7 per cent) of the total market size, the two companies will be presumed to have market dominance.

DRAM

According to news reports, China has launched antitrust investigations into three makers of DRAM from America and South Korea. The DRAM market is highly concentrated and dominated by three companies: Micron Technology, Samsung Electronics and SK Hynix.12 These three companies, which together control more than 90 per cent of the global DRAM market, are accused of abusing their dominance to drive up chip prices, among other unfair practices.13

It will be interesting to see how the regulator will evaluate the hypothetical 'joint dominance' of the three DRAM makers, for example, whether it is necessary for the regulator to find the existence of 'collusion' between the companies to prove 'joint dominance'. In addition, it is believed that the semiconductor industry is one of the focal points of AML's enforcement. This ongoing DRAM abuse case may provide another piece of evidence.

Conclusion

In terms of AML enforcement against abuse of dominance, 2018 was a relatively quiet year. Nevertheless, there were several highlights.

From a legislative perspective, the integration of the enforcement authority against abusive behaviour is one of the most important of these, and may have a long-lasting influence. For example, the enforcement efficiency will be enhanced and legal certainty improved. In addition, ongoing legislation of the Draft Provisions is believed to provide a crucial rule against abuse of dominance, which may deal with grey areas in practice. For example, the Draft Provisions may answer the questions of how to identify joint dominance, how to assess market dominance for internet companies and how to identify justifiable reason for abusive behaviour in practice.

From an enforcement perspective, compared to 2017, enforcement against abusive behaviour in 2018 consistently focused on the industries related to the national economy and general public, categorised as natural monopolistic industries and highly regulated by the government. In addition, instead of foreign companies, it seems SOEs and domestic companies are the authorities' main targets. Moreover, other targets include the imposition of unreasonable trading conditions. Further, the decentralisation of the enforcement authority is still an ongoing process. Last but not least, three out of four decisions of terminating investigations reveal that it is fully possible for undertakings to avoid being fined by providing commitments to rectify their behaviour.

We may expect a more-active enforcement landscape against abusive behaviour in 2019. The recently announced Chlorpheniramine API abuse case against two Chinese pharmaceutical companies and the ongoing DRAM abuse case against US and South Korean semiconductor giants may serve to indicate enforcement trends of 2019. In addition, the landmark legislation of the Draft Provisions may further encourage the enforcement against abusive behaviour by providing more legal certainty both for the authority and the practitioners.


Footnotes

1 See Sohu Financial News on 27 December 2018: www.sohu.com/a/284889182_120044812.

3 See PaRR: China SAMR's investigation into Microsoft ongoing (available at https://app.parr-global.com/intelligence/view/prime-2646301).

4 See SAMR's Provisions on the Internal Organisation and Staffing of Functional Allocation.

5 See Zhang Mao, 'Devoted to Promoting Innovation and Reform in Market Regulation', available at:
http://samr.saic.gov.cn/xw/yw/zj/201805/t20180502_274005.html.

6 For the full list of case, see: Public notices of the State Administration for Market Regulation:
http://home.saic.gov.cn/fldyfbzdjz/jzzfgg/ and public notice of the Anti-monopoly and anti-unfair competition Bureau of the State Administration for Industry and Commerce: http://samr.saic.gov.cn/gg/index.html.

7 See footnote 2.

9 See the official website of NDRC: www.ndrc.gov.cn/gzdt/201503/t20150302_666209.html.

10 For the formal decision in Chinese, please refer to: http://samr.saic.gov.cn/gg/201901/t20190118_280436.html.

11 ibid.

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