Background

On 31 July 2013, the State Administration for Industry and Commerce (“SAIC”) promulgated the Announcement on Stopping Recordal of Automobile General Distributors and Authorized Branded Automobile Dealers (“Announcement”). Starting from 20 August 2014, the SAIC will no longer accept any filing for recordal of authorized dealers of branded automobiles (including general distributors) and the implementation of the current recordal system of general distributor and dealers for branded automobiles will cease by then. For any new general distributors or authorized dealers, their business scope will be stated as “sales of automobiles” without mentioning the brand of the automobiles for sale. For the existing ones, they may also apply for changing their business scope from “sales of [brand name] automobiles” to “sales of automobiles”. The Announcement also emphasizes that the SAIC will strengthen its administration and supervision of the operational activities in the automobile industry, protect the lawful rights of consumers and maintain a market with fair competition.

The Announcement is interpreted by the market as a signal that the Chinese government will soon overhaul the Implementation Measures for the Administration of Sales of Branded Automobile (the “Branded Automobile Sales Measures”) in order to address increasing monopoly concerns in the Chinese automotive industry.

Current Dealership Arrangement under the Branded Automobile Sales Measures

The Branded Automobile Sales Measures were promulgated by the Ministry of Commerce, the National Development and Reform Commission (“NDRC”) and the SAIC on 21 February 2005 and took effect on 1 April 2005. The Branded Automobile Sales Measures provide for a dealership arrangement under which one general distributor is in charge of the entire sales and after-sales service chain.

According to the Branded Automobile Sales Measures, the plan for the distribution and after-sales service network for each single brand of automobile shall in general be formulated and implemented by one single enterprise in the PRC, i.e. either the automobile manufacturer in the PRC itself or an authorized general distributor. Usually such network plan is implemented by the general distributor. The latter in most cases is a wholly owned subsidiary of the automobile manufacturer or jointly established by the shareholders of the automobile manufacturer. The general distributor provides the authorized dealers with the automobiles and components and the automobile manufacturer’s own service trademark to implement the network plan. The general distributor also has the power to regulate the sales and after-sales service activities of the dealers.

Under such dealership arrangement, the general distributor is the sole player in its segment. The general distributor has control on the entire supply chain for automobiles sales and after-sales services. Given the above, the general distributor has a very strong position towards the dealers. Usually the dealership agreement is concluded and renewed on a yearly basis and prohibits the dealers from selling the automobiles of other brands.

Monopoly Concerns Arising

It has been alleged in Chinese media that some general distributors take advantage of their strong position to require the dealers to follow the lowest resale prices of automobiles and components set by the former from time to time. If this eliminates or restricts competition, such requirement violates Article 14.2 of the PRC Anti-monopoly Law, according to which a business operator shall not reach an agreement with its trading counterparts to fix the lowest price for resale of commodities to third parties. Such violation can lead to fines of the violating business operator of up to 10% of the sales turnover of the preceding year. Recent investigations of some automobile manufacturers launched by the NDRC and its local counterparts have been linked by the Chinese media to the suspicion of price monopoly activities in this industry.

Possible Amendments to the Branded Automobile Sales Measures

The “one general distributor” policy under the Branded Automobile Sales Measures has been heavily criticized by the public for years. The voices calling for “more than one distributor for each brand of automobile” have become louder and louder. Meanwhile, it is also reported that the Shanghai Free Trade Zone has submitted a pilot plan for parallel importation of automobiles to the Ministry of Commerce for approval. If this plan is approved, a parallel trader may import automobiles from abroad without the permission of the automobile manufacturer or its general distributor in China.

Comments

The “one general distributor” policy grants a general distributor a strong control on the entire supply chain of automobile sales and after sales service activities of its dealers. Sometimes it is inevitable that monopoly concerns may arise due to the current dealership structure. The call for amending the Branded Automobile Sales Measures has lasted for years and the promulgation of the Announcement by the SAIC in this August is a sign that the amendments are approaching this time. However, since the Branded Automobile Sales Measures were jointly formulated and promulgated by the Ministry of Commerce, the NDRC and the SAIC, the attitude of the other two authorities are of utmost importance on whether the above measures will finally be amended.