China: Antimonopoly Law

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It has been another busy year for antitrust in China. Beginning with the entry into force on 1 February of the Interim Measures on the Investigation and Sanction of Non-notified Concentrations of Business Operators, there have been a number of legislative developments, procedural refinements (including a new merger control notification form), a set of Provisions on Issues Concerning the Application of Law in Civil Dispute Cases Arising out of Monopolistic Conduct issued by the Supreme People’s Court and a steady flow of merger decisions. We review some of the highlights below.

International cooperation

The Chinese antitrust authorities stepped up efforts in 2012 at cooperation and dialogue with foreign authorities, which include signing an impressive list of memoranda of understanding – no fewer than five, in fact, over the course of the last 12 months. These are as follows:

  • Memorandum of Understanding on Antimonopoly Cooperation between the Ministry of Commerce of the People’s Republic of China and the Office of Fair Trading of the United Kingdom (April);
  • Memorandum of Understanding between the Korea Fair Trade Commission and the National Development and Reform Commission of the People’s Republic of China on Antimonopoly Cooperation (June);
  • Memorandum of Understanding on Cooperation in the area of Antimonopoly Law between the European Commission and the National Development and Reform Commission and State Administration for Industry and Commerce of the People’s Republic of China (September);
  • Memorandum of Understanding on Cooperation between the State Administration for Industry and Commerce of the People’s Republic of China and the Australian Competition and Consumer Commission (September); and
  • Memorandum of Understanding on Cooperation in the Competition Field between the Brazilian Council for Economic Defence of the Federative Republic of Brazil and the State Administration for Industry and Commerce of the People’s Republic of China (September).

Generally these documents are fairly modest in terms of content and often do little more than codify existing arrangements in respect of capacity-building assistance for the three Chinese regulators: the Ministry of Commerce (MOFCOM) which oversees merger control, the State Administration for Industry and Commerce (SAIC) which deals with non-price related infringements of the behavioural rules and the National Development and Reform Commission (NDRC) which polices price-related behavioural infringements. In this context, one might point to certain provisions of the memorandum of understanding with the EU Commission which provide for the ‘exchange of views on developments in competition legislation and... experience in... enforcement’, ‘the enhancement of the operation of the Sides’ competition authorities’, the sharing of ‘experiences on competition advocacy’ and ‘technical cooperation’, etc.

Even so, it would be a mistake to underestimate the significance of these documents as expressions of intent of a kind and possibly harbingers of a more robust enforcement by the NDRC and SAIC than we have seen to date. And there is clearly something genuinely ambitious in the reference in the memorandum of understanding with the EU’s DG Comp to a possible framework for the exchange of information in respect of ongoing cases and the possibility of coordinated enforcement activity. Should this actually happen it would be quite a significant step and bring EU cooperation with the Chinese regulators closer to the cooperation one sees with other Asian competition authorities, such as the Japan Fair Trade Commission or the Korea Fair Trade Commission.

Merger control

In merger control too, MOFCOM has made notable strides in catching up with other, more established regulators; particularly welcome are its moves towards greater transparency in terms of its deliberations and review of cases. In this respect, on 16 November, MOFCOM published for the first time a list of 458 unconditionally cleared transactions processed in the period between 1 August 2008 and 30 September 2012. Up until this point, MOFCOM had only published a total of 15 – generally relatively short – conditional clearance decisions and one outright prohibition; the Chinese Antimonopoly Law (AML) only mandates MOFCOM to publish decisions where it imposes remedies or blocks a deal. While the list is modest in terms of the information it reveals on individual cases (it merely lists the undertakings involved in a given transaction without any information on or description of the issues MOFCOM had to address) the list is telling in one important respect: approximately 90 per cent of notified cases concern or involve a foreign party, which would tend to suggest that Chinese companies are not complying with the AML obligation to notify deals. In this respect, the publication of the list of cleared cases could well be seen as a signal to the domestic audience that the AML is not merely for foreigners, and a further indication – following publication of the Interim Measures on the Investigation and Sanction of Non-notified Concentrations of Business Operators earlier in the year – of MOFCOM’s determination to police the filing obligation going forward. In recent months, MOFCOM officials have in fact indicated informally that there have been cases where MOFCOM pursued parties who did not notify a concentration, although no sanctions have been imposed and it is understood that two investigations are ongoing.

As regards published decisions, MOFCOM has had a bumper year with six conditional clearance decisions (up from four in 2011). It is also evident from observing these decisions that MOFCOM’s confidence and expertise as regulator continues to develop with a much more sophisticated economic and empirical analysis than in the past. That said, the argumentation is still relatively brief and not what one would be used to in other contexts.

On what may be a negative note, the conditions imposed for clearance appear increasingly stringent in certain cases, with MOFCOM not shying away from pricing, operational and behavioural controls, coupled with ongoing reporting requirements over substantial periods of time. We explore some of the year’s cases in more detail below.

On the procedural front, MOFCOM’s new merger filing form released over the summer has significantly increased the burden for filing parties and would appear to have added to MOFCOM’s own regulatory burden as the period taken to review cases has become noticeably stretched in recent months. Additionally the time between when a filing is actually submitted by the parties and when it is accepted as complete (ie, when the review clock starts to tick) has frequently lasted for up to two months. This was the case in both UTC/Goodrich and again in Walmart/Yihaodian (both cases decided this year). In recognition of a clear need for a ‘fast-track’ procedure, in May MOFCOM published the Draft Interim Provisions on Case Classification for Concentrations of Undertakings, which envisaged ‘simple cases’ being cleared within Phase I (30 days from acceptance of the notification). In the event, these Draft Interim Provisions have not yet been adopted but there is an expectation that MOFCOM will move to introduce some sort of procedural improvement for dealing with less complex cases which raise no antitrust issues during the course of 2013.

MOFCOM published its Interim Measures on the Investigation and Sanction of Non-notified Concentrations of Business Operators on 5 January 2012, and they came into effect on 1 February 2012. According to the Interim Measures, MOFCOM may enquire into any M&A deal where a third party reports a believed ‘failure to notify’ situation to MOFCOM, or on its own initiative. In such circumstances, MOFCOM will, if it considers there is a sufficient basis to believe that the notification obligation has been infringed, notify the relevant business operators involved in the transaction of the investigation, and provide them with an opportunity to explain the failure to notify within 30 days. Within 60 days of the response, MOFCOM is then required to complete its initial investigation on this issue. Thereafter, if MOFCOM determines that there has been an infringement of the notification obligation then the relevant business operators will be required to submit the required notification documents in relation to the transaction within 30 days and MOFCOM may impose a fine up to 500,000 renminbi on such business operators and order them to take relevant measures to restore the pre-transaction situation (including by disposing of relevant equity or assets within a specified time limit). The Interim Measures explain that the decision as to whether or not to impose a fine or other penalty on the relevant business operators is made by taking into account such factors as the nature, degree and duration of the infringing conduct, as well as MOFCOM’s assessment of the transaction’s impact on competition – as determined in the review of the notification once it has been submitted. This suggests that MOFCOM would seek to identify effects on competition before actually ordering that a deal be unwound. As mentioned above, MOFCOM officials have explained informally that business operators have in fact already been pursued for failing to notify transactions.

MOFCOM’s published decisions in 2012 have continued to attract considerable comment and we turn now to a brief review of some of the cases.


On 9 February 2012, MOFCOM approved subject to conditions the establishment of a joint venture between Tiande Chemical Holdings Co Ltd (Tiande) and Henkel Hong Kong Holding Ltd for the production of cyanoacrylate monomer. MOFCOM imposed conditions in view of certain vertical concerns. MOFCOM noted that there were only two main suppliers in the upstream global market for ethyl cyanoacetate, one of whom was Tiande. Both of these suppliers produced ethyl cyanoacetate products in China for sale globally and each enjoyed a global market share in the region of 45 per cent to 50 per cent. Concentration levels in the upstream market for ethyl cyanoacetate were therefore extremely high and MOFCOM characterised barriers to entry as significant. As regards the market for cyanoacrylate monomer – downstream of ethyl cyanoacetate – MOFCOM found that over 70 per cent of global production took place in China although competition in the market was ‘relatively strong’. The notified joint venture was to operate at this level producing cyanoacrylate monomer using supplies of ethyl cyanoacetate sourced from Tiande. In this respect MOFCOM noted that before the transaction, Henkel purchased approximately 5 per cent of Tiande’s total output of ethyl cyanoacetate. After the establishment of the joint venture, Henkel and the proposed joint venture’s expected aggregate demand would rise to 25 per cent of Tiande’s total output. In MOFCOM’s view this gave rise to a foreclosure concern in the market for cyanoacrylate monomer going forward and MOFCOM imposed as a condition for clearance the requirement that Tiande would continue to supply ethyl cyanoacetate to all downstream customers based on principles of fairness, reasonableness and non-discrimination, including by not selling at unreasonably high prices, or adopting a discriminatory supply strategy as against third parties in the downstream market for cyanoacetate monomer. Tiande and Henkel are obligated to report annually to MOFCOM on the fulfilment of the conditions imposed.

The Henkel/Tiande decision is interesting in a number of respects. In particular, it continues the clearly welcome trend of a progressively more detailed and cogent analysis in MOFCOM’s published decisions. It is also, however, a further reminder of MOFCOM’s willingness to accept behavioural conditions which may have a superficial appeal to the parties involved in view of their apparent flexibility. In practice, though, an ongoing obligation to report to MOFCOM might be seen as akin to submitting to economic regulation of a kind and could, depending on the intensiveness of the monitoring, prove very burdensome indeed for the parties over time. These remarks are perhaps even more fitting in respect of MOFCOM’s decision in the Western Digital/Hitachi transaction, discussed below.

Western Digital/Hitachi

Following the imposition of extensive behavioural commitments in Seagate/Samsung (published in 2011), MOFCOM revisited the hard disk drive market in Western Digital/Hitachi. The proposed acquisition of Viviti Technologies Ltd (Viviti), a wholly owned subsidiary of Hitachi and active in the manufacture of hard disks, was notified to MOFCOM by hard disk manufacturer Western Digital on 2 April 2011. The filing was accepted as complete on 10 May. MOFCOM opened a Phase II investigation on 8 June and then a so-called ‘Phase III’ (which can last a further two months) on 7 September. Thereafter, in a pattern seen in other cases, just before the expiration of Phase III – when the statutory period for review under the AML would have run its course (and MOFCOM would have been deemed to have cleared the deal absent a decision to the contrary) – Western Digital applied to withdraw and resubmit its notification on the grounds of ‘material change of circumstances’. The newly notified deal was ultimately cleared with conditions at the end of a further (ie, a second) Phase II review on 2 March 2012. Given this extended period of review – running for the best part of a year – it might not come as a surprise that the conditions imposed were particularly far-reaching and merit close attention.

In its competition analysis, MOFCOM found that the hard disk market was highly concentrated, with only five active manufacturers on the global market. Moreover, the market was particularly transparent and susceptible to coordinated effects. In view of such concerns, MOFCOM required the parties to divest the main 3.5 inch hard disk assets of Viviti to a third party – the structural remedy was also mandated by the European Commission and the US FTC – but, in addition, MOFCOM imposed some strikingly burdensome behavioural remedies:

  • Post-transaction, Viviti was to be maintained as an ‘independent competitor’ in the hard disk drive market. In this respect Viviti was to retain it status as an independent legal entity and pursue an independent business strategy including as regards to R&D, manufacturing, purchasing, marketing, financing, investment and staffing.
  • Post-transaction, Viviti would be required to keep its existing production line and production team with products being sold independently by its original sales team under the company’s original brand names Travelstar and Ultrastar – all pursuant to an ‘independent and reasonable’ pricing mechanism.
  • Western Digital and Viviti had to establish a firewall to safeguard against the exchange of competitively sensitive information.
  • Post-transaction Western Digital would be permitted to exercise its shareholder rights over Viviti, but not in such a manner as would ‘prejudice the independence’ of the two companies, or result in the elimination or restriction of competition. Matters concerning the exercise of shareholder rights by Western Digital would need to be reported in advance to an appointed supervising trustee; any suspected of prejudicing the independence of the companies or likely to result in an elimination or restriction of competition between them would need a prior approval from MOFCOM.
  • While Western Digital and Viviti could cooperate in research and development, they were required to submit specific proposals in that respect to MOFCOM for prior approval; both parties were required to continue making investments in research and development, comparable in terms of quantum to investments made by the parties in recent years, prior to the merger.
  • Western Digital and Viviti undertook to determine production capacity and output ‘reasonably’ in light of market demand, with capacity and output information being reported to the supervising trustee monthly.
  • Post-transaction, Western Digital and Viviti accepted to not materially change their business modes, nor would they force clients into exclusive purchase arrangements.

The imposition of such extensive ‘hold-separate’ remedies in the context of a global deal is obviously worthy of note in and of itself. More remarkable perhaps is the fact that the remedies were imposed for an initial period of 24 months, after which time the parties might submit a reasoned application to MOFCOM for their release – an application which MOFCOM is under no obligation to accept. In sum the parties in Western Digital/Hitachi accepted as a condition for clearance a highly intrusive and apparently open-ended monitoring of their business practices.

Google/Motorola Mobility

Google’s $12.5 billion acquisition of Motorola Mobility triggered multi-jurisdictional filings in the United States, Europe and Korea. The China filing was first submitted on 30 September 2011 and accepted on 21 November 2011, but was not cleared until May 2012 – the end of a Phase III review (and it is notable that all of MOFCOM’s recent conditional clearances have required a Phase III). Interestingly, while MOFCOM appeared to acknowledge that the markets concerned – the market for smart mobile terminals (including phones and tablets) in which Motorola Mobility was active, and the market for operating systems for smart mobile terminals in which Google was a lead player – were global, the regulator was forthright in stating that it paid ‘more attention’ in its review to effects on the ‘market’ in China – a factor which may go some way to explaining that it was the only antitrust authority to impose restrictive conditions on the transaction. In this respect it is notable that MOFCOM paid particular attention to the fact that the Android platform, developed by Google on a free and open-source basis, accounted for 73.99 per cent of the market in China (giving it a dominant position) as compared with the Symbian system developed by Nokia and iOS developed by Apple, which accounted for 12.53 per cent and 10.67 per cent of the China market respectively.

MOFCOM noted that Google, given its dominant position on the market for operating systems, would have the incentive and ability to discriminate in favour of its own subsidiary Motorola Mobility by affording it better treatment than other smart mobile terminal manufacturers – such as by providing Motorola Mobility with the latest version of the Android system, ahead of other manufacturers. MOFCOM’s main concern, then, was to ensure that Google would continue to make its Android platform available on a free and open-source basis and to treat all original equipment manufacturers equally. Google eventually proposed commitments in that respect which were imposed for a period of five years in order to secure a clearance.


On 6 February 2012 MOFCOM accepted a filing by United Technologies Corporation (UTC) in respect of its proposed acquisition of the Goodrich Corporation. The decision, in contrast to the cases discussed above, was largely uncontroversial with MOFCOM focusing its review on horizontal overlaps in the aircraft AC power generation systems market. MOFCOM noted that the market was global with a total of six suppliers but found that UTC and Goodrich had 72 per cent and 12 per cent market shares respectively making them market leaders. Further, Goodrich was the only competitor which appeared to impose any competitive constraint on UTC pre-merger. Post-transaction, the combined market share of the parties would be 84 per cent with an HHI index of 7,158 and a delta (or increase as a result of the combination) of some 1,728. These various factors led MOFCOM to grant a clearance on 15 June, but subject to the requirement that Goodrich divest its electrical power system businesses – a condition also imposed by regulators elsewhere and given its purely structural nature almost something of a novelty for MOFCOM.

Antitrust in the courts

On 8 May 2012, China’s Supreme People’s Court released a new Judicial Interpretation relating to the AML: the Provisions on Issues Concerning the Application of Law in Civil Dispute Cases Arising out of Monopolistic Conduct. The Provisions, which took effect on 1 June 2012, explain how China’s courts will handle civil cases brought by persons or companies that claim to have suffered loss as a result of a violation of the AML. Release of the finalised Provisions is a welcome development given that China’s courts have been hearing AML-related civil actions since the law commenced in August 2008, notwithstanding that there has been some significant uncertainty during this time regarding how such cases should be processed. Perhaps because of this uncertainty, it is understood that many case applications have been rejected on technical grounds (just 61 cases had been accepted by the end of 2011), and there is also a view that the courts have been focusing only on those cases in relation to which there is a relatively settled view amongst the antimonopoly enforcement authorities (MOFCOM, the SAIC and the NDRC) and related government bodies about how enforcement should occur. With the new Provisions in effect, the scope of AML related cases coming before China’s courts, and the speed of progress of such cases, may therefore increase.

The Provisions provide for the following matters, among others:

  • They confirm that plaintiffs can bring both stand-alone and follow-on civil cases relating to alleged infringements of the AML (ie, there is no requirement of a prior investigation or a finding of infringement by the SAIC or NDRC).
  • They specify that certain Intermediate People’s Courts will be the courts of first instance for antitrust cases (unless the Supreme People’s Court approves the lower-level Primary People’s Courts to hear such cases).
  • They include a two-year statute of limitations for the commencement of AML-related civil actions, starting from the day the plaintiff knows – or should have known – about the relevant violation (alternatively, if the SAIC and/or the NDRC investigates the alleged violation, this two-year period will commence from the date of their decision).
  • Perhaps the most notable aspects of the Provisions relate to the allocation of the burden of proof. In that respect, article 7 of the Provisions relates to the AML’s prohibition of restrictive (what the AML terms ‘monopoly’) agreements, such as horizontal price-fixing agreements or other cartel conduct, and effectively provides that once a plaintiff proves that such an agreement exists, that agreement will be presumed to have the effect of eliminating or restricting competition unless the defendant can provide evidence rebutting this presumption. Regarding abuse of dominance claims, the default position is that the plaintiff bears the burden of proof when it comes to proving that the defendant possesses a dominant market position in a relevant market and has engaged in abuse of such position. This is in keeping with the usual situation in other jurisdictions. However, a stated exception is that, if the defendant is a public utility or some other business operator that is granted monopoly status under the law (which may include Chinese enterprises dealing in such services and products as railways, petroleum, tobacco, salt and power), then the courts may (having regard to the relevant market structure and related matters) apply a presumption of market dominance unless sufficient evidence is present to prove otherwise. The reference in the Provisions to the courts needing to have regard for issues such as market structure before applying the presumption indicates that consideration will still be given as to whether products or services, in relation to which public utilities or other relevant enterprises in China have an exclusive position or exclusive rights, constitute a distinct market (which will strongly support applying the presumption of dominance), or are more properly considered to compete with other substitutable products or services.

In terms of actual cases in the courts, Beijing Ruibang Yonhe Science and Technology Trade Company v Johnson & Johnson Medical is particularly noteworthy in that the Shanghai No. 1 Intermediate People’s Court ruled on 18 May, in a case against Johnson & Johnson, that RPM was not a per se infringement under the AML; the presiding judge explained that the mere existence of an RPM arrangement was not sufficient for a finding of a monopoly agreement under the AML. The ruling is, however, currently on appeal and it is unclear whether the court’s position is in line with the NDRC’s practice in the area of RPM which seems more rigid.

Behavioural enforcement

Finally, while the NDRC and SAIC are comparatively less active than the Chinese merger regulator MOFCOM, mention should be made of an investigation which saw the NDRC impose a fine of 759,200 renminbi on a sea sand mining cartel in Guangdong Province. In that respect the NDRC found that prices for sea sand had been inflated from 5 renminbi per tonne in 2010 to 41 renminbi per tonne. The inflated prices were the result of a sea sand cartel that involved over 20 sea sand mining undertakings. The cartel apparently substantially inflated the cost of constructing the Hong Kong-Zhuhai-Macau Bridge. Interestingly it is reported that the investigation was triggered by an application for leniency and that the NDRC granted a 50 per cent discount in penalties to the whistle-blower.

We noted at the outset the possible significance of the various memoranda of understanding concluded by the NDRC and the SAIC with foreign regulators as harbingers of a more robust enforcement of the AML’s behavioural rules going forward. In this context, on 4 January 2013 and in stark contrast with the rather modest sea sand cartel fine discussed above, the NDRC announced the imposition of financial sanctions totalling some 353 million renminbi on Korean and Taiwanese manufacturers for their involvement in extraterritorial cartel conduct impacting the LCD sector. While these sanctions were technically imposed by the NDRC under China’s Pricing Law and not the AML, 2013 has already staked a claim to being a watershed year for antitrust in China. The LCD decision is nothing short of a revolution.

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