On March 18, 2009, the Ministry of Commerce of the PRC (MOFCOM) announced MOFCOM’s decision to bar the Coca-Cola Company’s proposed acquisition of China Huiyuan Fruit Juice Group Limited (“Huiyuan”) due to antitrust concerns (the “Announcement”), and we briefed you on the Announcement in our March 19, 2009 Antitrust Update. MOFCOM’s actions raised concerns in the business community both because it was the first time that MOFCOM barred a proposed acquisition after conducting a preconcentration review and because the reasoning behind the action was unclear; the Announcement only laid out the review process without offering either an analysis of the transaction or an explanation of the government’s reasoning behind the decision. Public opinion was that MOFCOM should expound on its decision. In response, on March 25, 2009, MOFCOM posted a record of a Q&A session with the media on its website, in which Yao Jian, MOFCOM’s spokesperson, discussed some of the key issues concerning the Coca-Cola/Huiyuan case. In this edition of Antitrust Update, we will brief you on the highlights of the Q&A.
MOFCOM Only Considered Competition-Related Factors in the Review
Prior to the issuance of the final decision regarding the Coca-Cola/Huiyuan transaction, some within China urged MOFCOM to bar the proposed deal in order to protect a significant Chinese enterprise and brand, some insiders predicted that the proposed transaction would not pass MOFCOM for this reason. Although the Announcement does not address this issue, some critics maintain that concern for the survival of a national brand was an underlying factor in the decision and, as a result, are concerned that MOFCOM’s future reviews of proposed mergers and acquisitions may follow suit.
In the Q&A session, Yao Jian tried to defuse this concern, stating that MOFCOM considered only competition-related factors in reviewing the Coca-Cola/Huiyuan case. Specifically, MOFCOM considered all of the factors enumerated in Article 27 of the Anti-Monopoly Law (AML), including the share in and control over the relevant market of the parties to the transaction, the degree of market concentration in the relevant market, the transaction’s impact on market access and technological advancement, consumers and other relevant business operators, on national economic development, and any other factors impacting market competition that the national anti-monopoly authorities considers it necessary to review. Of particular importance in this transaction was the possible impact on national economic development, and the catch-all factor. According to Yao Jian, concern regarding these two factors underlies concentration review across the world, and MOFCOM’s focus on them is consistent with the AML’s purpose of protecting the public interest and ensuring a robust socialist market economy. He noted that the seemingly catch-all phrase “any other factors” is in fact limited to considerations affecting competition; and that non-competition considerations are left for other laws and regulations to address.
Yao Jian further stated that MOFCOM rendered its decision based on a comprehensive assessment of the proposed transaction’s various potential effects on competition in China’s fruit juice market. During the process, MOFCOM conducted a number of investigations and solicited opinions from various sides. Yao Jian stressed that MOFCOM did so in strict compliance with the law and with its mandate to conduct an independent review, and delivered an objective ruling free of the interference of factors unrelated to competition or the impact of the so-called “nationalistic sentiment” as labeled by foreign media.
The Fruit Juice Market is Defined as the Applicable Relevant Market
In the Q&A, Yao Jian further expanded on how MOFCOM determined the relevant market in the review. First, without explicitly citing them, Yao Jian referred to the rules laid out in MOFCOM’s draft Guidelines on the Definition of Relevant Market (the “Guidelines”), which has been published on MOFCOM’s website for public comments. In the Guidelines, MOFCOM recognizes two methods that are commonly adopted in defining the relevant market; demand substitution analysis and supply substitution analysis. Once officially enacted, the Guidelines may guide MOFCOM in its defining of the relevant markets in its pre-concentration reviews. We touched on this in our January 8, 2009 Antitrust Update.
According to Yao Jian, the proposed Coca-Cola/Huiyuan transaction involved two major categories of non-alcoholic beverages; fruit juice drinks and carbonated drinks. Fruit juice drinks may be further classified into pure fruit juice, mixed fruit juice with a concentration from 26% to 99%, and fruit juice drinks with a concentration of no more than 25%. Both Coca-Cola and Huiyuan produce fruit juice drinks, but only Coca-Cola produces carbonated drinks. Yao Jian stated that during the process of delineating the relevant market, MOFCOM conducted an in-depth economic analysis on the substitution between fruit juice drinks and carbonated drinks, and the substitution between the above three types of fruit juice drinks of different levels of concentrations. After having conducted market surveys and collected evidence, MOFCOM determined that the fruit juice market was the relevant market applicable to this case because juice drinks and carbonated drinks cannot readily substitute each other, but fruit juice drinks of different concentrations may be highly substitutable in terms of demand and supply.
Coca-Cola May Transmit Its Dominant Position in the Carbonated Drinks Market to the Fruit Juice Market
In the Announcement, MOFCOM states that it believed post-transaction Coca-Cola would be able to transmit its dominant position in the carbonated drinks market to the fruit juice market, but stops short of specifying how the transmission may occur. In the Q&A, Yao Jian elaborated on MOFCOM’s rationale. He stated that the data provided by the China Beverage Industry Association showed that Coca-Cola controls 60% of the total carbonated drinks market in China. Coca-Cola also enjoys dominance in terms of capital, brand management and marketing. Therefore, MOFCOM determined that Coca-Cola holds a dominant position in the carbonated drinks market.
Yao Jian further stated that while carbonated drinks and fruit juice drinks are not highly substitutable, they are both non-alcoholic beverages and constitute two closely related markets. The proposed acquisition could have strengthened Coca-Cola’s competitiveness and influence in the fruit juice drinks market on top of its existing dominant position in the carbonated drinks market. MOFCOM reasoned that Coca-Cola would have been able to sell its fruit juice drinks and carbonated drinks as a bundle, or impose exclusive conditions through use of its dominant position in the carbonated drinks market, and that Coca-Cola would transmit its dominant position in the carbonated drinks market to the fruit juice market. This would severely weaken or even deprive other fruit juice makers’ of the opportunity to compete with Coca-Cola, thus impairing competition in the fruit juice market and in the end, forcing consumers to accept products of fewer types at higher prices.
Restrictive Conditions Were Discussed But No Consensus Was Reached
In the Q&A, Mr. Yao Jian stated that MOFCOM required Coca-Cola to propose restrictive conditions to eliminate the proposed transaction’s potential adverse effects, but that the several rounds of negotiations between MOFCOM and Coca-Cola did not lead to a solution satisfactory to MOFCOM. What these possible solutions were remains unknown.
According to Yao Jian, the proposed transaction was prohibited because Coca-Cola failed to prove that the positive impact of the acquisition would outweigh its negative impact, or that the acquisition would be in with the public interest. In addition, Coca-Cola failed to propose remedies that would eliminate the transaction’s potential adverse effects. Therefore, MOFCOM blocked this proposed acquisition.
Yao Jian also indicated that MOFCOM would not release all the details of the case due to the confidentiality provisions of the AML.
Consideration of the Huiyuan Brand Is Not Protectionism
The Spokesperson reiterated that MOFCOM’s consideration of the Huiyuan brand was solely focused on competition and there was never any intention to protect a Chinese brand. He stated that fruit juice falls under the scope of food or fast moving consumer goods, in which branding plays a critical role. Due to consumer loyalty to existing brands, branding poses major barriers for newcomers to the beverage market. Therefore, if the proposed acquisition was approved, Coco-Cola’s control over the fruit juice drinks market would have been significantly enhanced because Coca-Cola would control the two most influential fruit juice brands in China: Minute Maid and Huiyuan. Yao Jian stated that Coca-Cola’s acquisition of Huiyuan would have increased barriers to entry into the market due to the combination of the branding issue with Coca-Cola’s dominant position in the carbonated drinks market and the transmittal effects between the carbonated drinks market and fruit juice drinks market.
In conclusion, Yao Jian stated that any pre-concentration review must address the issue of market access, a consideration completely independent of the protection of Chinese brands. The issue of whether the Huiyuan brand is a Chinese brand is irrelevant to the anti-monopoly review and had no weight on MOFCOM’s decision.
In addition, Yao Jian rebutted the assertion that MOFCOM’s rejection of the Coca- Cola/Huiyuan transaction indicates changes in Chinese policies on foreign investment. He stated that the AML is applicable to both domestic and foreign companies equally and is not specifically aimed at multinational companies. He stressed that the decision was a casespecific decision and will not change China’s foreign investment policies. He acknowledged that multinationals’ mergers with, or acquisitions of, Chinese domestic companies may benefit China’s economy by channeling capital, technologies, and management techniques into China, but if a merger or acquisition places a multinational in a dominant position and leads to restrictions on, or elimination of, competition, it will actually hinder the economic development.
In summary, the Q&A revealed additional details regarding the Coca-Cola/Huiyuan transaction, which may help market players better evaluate MOFCOM’s pre-concentration reviews under the AML. However, some uncertainties remain. For example, the Q&A does not answer the question of how business operators will be able to satisfy MOFCOM’s information requests and thus officially start the pre-concentration review, and rules for national security reviews, which may be conducted in parallel to pre-concentration reviews, remain unclear. For other unresolved issues, market players need to continue to keep close relations and coordinate with relevant authorities, and to take advantage of the informal consultation mechanism during the notification process.