On March 23, 2016, China’s National Development and Reform Commission (“NDRC”) published the Auto Sector Draft Antitrust Guidelines (“Guidelines”), for public consultation until April 12, 2016. The Guidelines provide guidance for evaluating diverse common industry practices in the sector, mostly relating to the vertical relationship between automakers, auto parts manufacturers, distributors and after-sales services providers. The Guidelines provide a series of exemption scenarios and outline NDRC’s view on practices it considers anti-competitive. In this client alert, we highlight a few key aspects of the Guidelines.
Cooperation Agreement Between Competitors
The Guidelines acknowledge that certain types of cooperation agreements between competitors can be pro-competitive, and that such agreements can range from joint R&D agreements, to specialization agreements, standardization agreements, joint production agreements, and joint procurement agreement. Cooperation agreements between competitors to research and develop new energy cars is seen under the Guidelines as a good example of an agreement that is eligible for an individual exemption under Art. 15 of China’s Anti-Monopoly Law (“AML”), and thus will not be prohibited.
Resale Price Maintenance
Setting a resale price or minimum resale price (“RPM”) is prohibited under Art. 14 of the AML. NDRC’s enforcement records in the past a few years have repeatedly reinforced this prohibition. The Guidelines provide four scenarios whereby an RPM arrangement can be individually exempted from prohibition:
- Promotion sales of new energy cars;
- Sales via dealers who function as intermediaries;
- Sales in the context of public procurement;
- Sales via e-commerce platforms.
- Territorial Restriction and Customer Restriction
The Guidelines see the following four types of restrictions as substantially anti-competitive and which in general shall not be allowed. Exemption is possible only on a case-by-case basis.
- Restriction of passive sales by dealers;
- Restriction of cross-supply between dealers;
- Restriction of auto spare parts sales to end-customers by dealers and auto repairers;
- Restriction of sales of auto spare parts and other equipment by the suppliers to dealers, auto repairers and end customers, except in case of OEM contracts.
The Guidelines introduce a market share threshold of 25%–30% as a sort of safe harbor. The following four types of restrictions, when satisfying the above thresholds, are considered under the Guidelines as being eligible for an exemption under Art. 15 AML, when proven to yield efficiencies and when justified:
- Territorial restrictions that do not restrict passive sales or cross-supply;
- Restriction of active sales into non-allocated regions;
- Restriction of direct sales to end-customers by wholesalers;
- Restriction of auto parts sales by dealers to customers who use such auto parts to manufacture the same products as the auto suppliers.
Branding of and Access to Spare Parts
The Guidelines prohibit automakers with dominant market positions from, among other things, restricting auto parts suppliers from placing their own trademarks or logos on spare parts; restricting dealers or repairers’ access to spare parts of “equivalent quality” or their ability to purchase original spare parts from alternative channels (e.g., parallel imported spare parts); restricting dealers or repairers’ ability to sell spare parts; restricting the attainability of technical maintenance information; etc.
Other Restrictions in the Repair and Servicing Market
The Guidelines lists a few “unreasonable” vertical restraints in the auto repair and servicing market such as maintenance by authorized repairers, use of original spare parts, maintenance of parallel imported cars, and other obligations imposed on the dealers in terms of tie-in products, unreasonable sales and stocking targets, promotional expenses, choice of facilities service providers, etc.
The Guidelines came into shape after rounds of storming antitrust investigations in China’s auto sectors over the past a few years. The Guidelines went in depth to address industry practices that have been distorting competition in the market. The views expressed in the Guidelines, when finalized and promulgated, will have wide and profound implications for other industry sectors too. The Guidelines introduce, for the first time, safe harbor threshold for evaluating certain types of vertical restraints. They also introduce the concept of “active sales” and “passive sales” in the European competition law to provide a differentiated approach towards territorial restriction.
As we cannot elaborate on all the details in this client alert, please feel free to contact competition attorneys at Winston & Strawn if you want to learn more about the Guidelines and their implication for your business.