Business | Trust-busting in China

Unequal before the law?

China’s antitrust crackdown turns ugly, with foreign carmakers at the forefront

|SHANGHAI

IN RECENT weeks, Chinese authorities appear to have been singling out foreigners in bars around Beijing, harassing them for allegedly breaking the country’s narcotics laws, conducting spot inspections of their bodily fluids and reportedly busting them without due process. This has made foreign boozers, especially those who have not dabbled in drugs, question the fairness and transparency of law enforcement in the country.

Bosses of big multinational companies are feeling similarly outraged. In recent weeks, the Chinese authorities have been singling out foreign firms in various industries around the country, harassing them for allegedly breaking the country’s antitrust laws, conducting spot inspections of their hard drives and reportedly busting them without due process. In a blunt note of protest, the European Union Chamber of Commerce in China recently asked whether “foreign companies are being disproportionately targeted.”

They are not, say Chinese officials. “Everyone is equal before the law,” declared Li Pumin, the secretary-general of the National Development and Reform Commission (NDRC), the most powerful of three agencies involved in enforcing antitrust laws in China. Foreign companies are not reassured. Consider the automobile industry.

Mr Li said that a group of ten Japanese car-parts firms has been slapped with fines totalling 1.24 billion yuan ($200m), the largest antitrust penalty ever imposed in China; no local firms were mentioned. A couple of days before, it was revealed that the NDRC had found Daimler, a German carmaker, guilty of using its market power to inflate the price of spare parts illegally. This comes on the heels of raids on the offices of foreign luxury carmakers. All have local joint-ventures, but their domestic partners seem not to have been harassed. And carmakers are not the only targets.

Foreign technology firms also complain about their treatment. The State Administration for Industry and Commerce (SAIC), another agency looking after competition law, recently raided the offices of Microsoft. It is hard to see how the American software giant could abuse its market power given that it has so little: most copies of its products in use in China are pirated. The NDRC is also conducting a monopoly-pricing probe of Qualcomm, an American telecoms-equipment firm. Observers say this is aimed at forcing the firm to reduce the price of its technology, which is vital to China’s rollout of 4G mobile phones.

These investigations come after crackdowns in 2013, which saw Chinese regulators impose record fines of $242m for market abuse. At the start of last year, the NDRC fined foreign manufacturers of liquid-crystal display panels. A few months later, the agency noisily found half a dozen manufacturers of baby formula guilty of “resale-price maintenance”; all but one were foreign. And the future may be more troubling than the past. David Yang of IHS, a consulting firm, warns foreign multinationals that more investigations are coming in the construction, telecoms, waste-management and banking sectors.

There are several concerns arising from China’s antitrust activism. The first and most obvious one is that foreign firms look as if they are being singled out. The picture may be somewhat more complex, though. The annual statistics disclosed by the antitrust agencies since 2008 (when China’s anti-monopoly law came into force) are opaque and incomplete. But they show that the Chinese regulators have also targeted domestic firms, ranging from drinks manufacturers and gold retailers to salt producers.

How much weight to put on this is unclear. In contrast to the vociferous bashing of foreigners, it appears that many local cases have been settled quietly and with no disclosure of wrongdoing. On the other hand, regulators have been extremely reluctant to take on the biggest state-owned enterprises. There was a surprising exception: the NDRC’s case against China Telecom and China Unicom for stitching up the broadband market, which officials often point to as an example of their even-handedness. Alas, whispers one lawyer, the case has stalled as the agency “misjudged its strength and was forced to back down by higher-ups.”

Another serious concern is that China is undermining its monopoly laws, which experts say are good on paper, by enforcing them in increasingly thuggish ways. Last year, some three dozen lawyers for big foreign firms were gathered in a room by an NDRC official and warned not to challenge its inquiries or risk facing extreme penalties. The American government took up this matter directly with Chinese counterparts during its last high-level “strategic dialogue”, and won a public promise that the targeted firms would have an “effective opportunity” to present evidence in their defence. Alas, as the complaint by the EU makes clear, the reality is that multinationals are still facing “administrative intimidation tactics” such as the browbeating of firms not to seek outside legal advice or to challenge investigations in court.

That is a pity, for one bright spot is the progress being made by China’s courts in their handling of such matters. Though still too rare, private antitrust cases are handled by the same well-trained cadre of judges that deals with intellectual-property rights. A regional court handling the challenge of Tencent, a Chinese internet giant, by Qihoo, a local rival, issued a thoughtful and transparent ruling that could have come from a Western court. In fact, says David Evans, an economist at the University of Chicago, he has seen judges in Europe with a weaker grasp of how markets work than those he deals with in Chinese cases.

A final cause for concern is that the antitrust campaign confuses and conflates differing, and possibly conflicting, policy goals. One troubling example is the Chinese proclivity for “indigenous innovation”. It is a strategy by which organs of the state have tried coercing leading foreign firms, by various means, to part with world-class technologies so that local firms can copy, adopt or steal them. The crackdown on technology firms appears driven in part by this sort of techno-nationalism, a trend that has unfortunately been fuelled by the local backlash to revelations of American spying made by Edward Snowden, a contractor at the country’s National Security Agency who leaked thousands of secret documents.

In addition to antitrust, observes Angela Zhang of King’s College London, the NDRC has a long-standing mandate to control prices. This perhaps explains why it often forces firms to slash prices—as it did in the Daimler case—as a remedy. Lower prices can be good for consumers, but not always—predatory pricing, for example, harms low-cost entrants—and regulators must consider long-term implications. The obsession with price reductions can at times get in the way of more appropriate remedies, such as demanding changes to supplier contracts and relationships.

China’s antitrust regulators are growing more confident and seem likely to issue more rulings that will upset foreign firms. It is wrong to claim that only foreigners are being targeted. However, it is surely also wrong to insist, as the NDRC’s Mr Li did this week, that everyone is treated equally in law. The recent bludgeoning of foreign firms in the cause of promoting competition, while egregious oligopolists like the big state-controlled firms are spared, suggests that in China some are more equal than others.

This article appeared in the Business section of the print edition under the headline "Unequal before the law?"

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