On April 23 2015 the Jiangsu Price Bureau – the provincial branch of the National Development and Reform Commission (NDRC) – announced on its website that it had imposed a fine of Rmb350 million ($56.49 million) on German automobile manufacturer Mercedes-Benz, along with a combined Rmb7.87 million ($1.27 million) fine on its dealers. The fine came as a result of Mercedes-Benz concluding and implementing resale price maintenance agreements to fix the minimum prices of E and S Class cars, as well as certain auto parts. The announcement was published with few details of the relevant facts, the reasons for the fine calculations or the definitions of the relevant markets.
On May 22 2015 the Jiangsu Price Bureau published the full administrative penalty decision against Mercedes-Benz and its dealers. The penalty decision was dated April 20 2015 and sheds light on the facts of the case and the reasons behind the bureau's judgment.
According to the full penalty decision, the bureau discovered the following facts in its investigation:
- From January 2013 to July 2014 Mercedes-Benz had fixed the minimum price of E Class and S Class cars in the Nanjing, Wuxi, Changzhou and Suzhou markets through telephone and oral communication and meetings with dealers.
- In 2010 Mercedes-Benz had concluded an agreement with dealers in Jiangsu Province to fix the minimum resale price for auto parts, whereby it provided different levels of discount for insured cars, cars with expired warranty periods and cars within the warranty period.
- Mercedes-Benz had implemented the minimum price agreement by:
- tightening its performance review of dealers (eg, inspecting deals and the sales incentive system on a weekly basis);
- tracking the sales process and increasing the intensity of this assessment;
- issuing warnings and reducing support to dealers (eg, halting the supply of best-selling cars and prohibiting the opening of new stores) if they refused to cooperate with the price-fixing policies; and
- interviewing the employees of dealers and requesting terminations if they engaged in serious violations of the resale price maintenance agreement.
The Jiangsu Price Bureau held that by concluding and implementing resale price maintenance agreements with local dealers to fix the minimum prices for the company's E Class and S Class sedans, as well as some auto parts, Mercedes-Benz had excluded and eliminated market competition, harmed consumer welfare and violated Article 14(2) of the Anti-monopoly Law.
In accordance with Articles 46 and 49 of the Anti-monopoly Law, the bureau therefore:
- ordered Mercedes-Benz to immediately stop its illicit behaviour (ie, resale price maintenance);
- imposed a Rmb350 million fine on Mercedes-Benz, representing 7% of its sales revenues from the previous year in the relevant market; and
- imposed a fine on the dealers equivalent to 1% of their annual sales in the previous year. Two dealers were exempted from fines or received lighter penalties for providing key evidence and reporting proactively. According to the bureau's April 23 2015 announcement, the remaining dealers – from Nanjing, Wuxi and Suzhou – received a combined fine of Rmb7.87 million.
The timeline for the investigation was as follows:
- July 22 2014 – the bureau launches the investigation of Mercedes-Benz.
- August 3 2014 – in response to an antitrust probe,(1) Mercedes-Benz China announces a price cut for auto parts by an average of 15%, following an earlier average reduction of 20% in maintenance service prices.
- August 4 2014 – Mercedes-Benz's Shanghai office is raided by the NDRC.(2)
- August 5 2014 – five Mercedes-Benz offices in Nanjing, Wuxi, Suzhou and Danyang are raided by the NDRC.(3)
- April 23 2015 – the bureau fines Mercedes-Benz Rmb350 million for price fixing.(4) Mercedes-Benz announces that it "fully respects and sincerely accepts" the bureau's decision regarding resale price maintenance.(5)
- April 30 2015 – the bureau announces that Mercedes-Benz(6) has paid the fine in full.
Notably, the entire investigation – from the first dawn raid to the official penalty decision – took only eight months and was thus significantly faster than antitrust investigations in other jurisdictions. This could reasonably be viewed as a result of the bureau's emphasis on industries relating to people's livelihoods. In particular, the automotive industry – including automobile and auto parts manufacturers – has been continually subject to antitrust investigations.
Beginning in early 2014, antitrust investigations targeted various leading figures in the automobile industry. Previous investigations include the following:
- August 13 2014 – four BMW dealers were fined a total of Rmb1.62 million for price fixing.
- August 20 2014 – 12 Japanese auto parts and bearing manufacturers(7) received a record fine totalling Rmb1.24 billion for price fixing and resale price maintenance.
- September 11 2014 – FAW-Volkswagen was fined Rmb224 million, along with eight Audi dealers, for price fixing and resale price maintenance. Chrysler was also fined Rmb31.6 million and three Chrysler dealers were fined Rmb2.14 million for price fixing and resale price maintenance.
The penalty decision against Mercedes-Benz has become the highest antitrust fine ever imposed on automobile manufacturers in China, although this upward trend shows no signs of abating. It was recently reported that Nissan Motor is likely to be the next manufacturer to incur a penalty from the NDRC for antitrust violations.
Per se illegal rule or rule of reason?
Ever since the Anti-monopoly Law enforcement authorities handed down the first penalty decision on vertical monopoly agreements – in the Moutai & Wuliangye case – the NDRC's attitude towards resale price maintenance agreements has been heavily debated. This is due to the fact that neither the Anti-monopoly Law nor the relevant implementing rules provide clear guidance. Even the former director general of the NDRC, Xu Kunlin, has noted that the agency's approach to resale price maintenance follows neither the 'per se illegal' rule nor the 'rule of reason'.(8) Following Moutai & Wulianye (for further details please see "The rumours are true: antitrust watchdog imposes record penalties on luxury liquors"), the local agency in Guizhou provided no substantive analysis of the effects of resale price maintenance on market competition in its official announcement – which might imply that the per se illegal rule was adopted. However, the local agency in Sichuan briefly considered Wuliangye's strong market position as a factor in establishing its violation and analysed the impact of Wuliangye's activity on market competition, as well as its anti-competitive behaviour. This indicates that the authority may have followed the rule of reason.
With regard to subsequent NDRC enforcement, the penalty decision in the Baby Formula case included no analysis of the effects of the milk powder companies' illegal activities on the relevant market (eg, it lacked substantial information regarding market structure, market shares and market power). It remains unclear whether the NDRC adopted the rule of reason approach in this case.
On the other hand, judicial practice has provided a relatively clear approach to dealing with vertical monopoly agreements. In Rainbow v Johnson & Johnson the appellate court applied the rule of reason, as opposed to the per se illegal rule, to a vertical price agreement (for further details please see "Rainbow v Johnson & Johnson: a roadmap for vertical monopoly assessment"). Through comprehensive analysis of the economic impact of Johnson & Johnson's vertical price fixing, the appellate court further established an analytical approach for the rule of reason by considering:
- whether there was sufficient competition in the relevant market;
- whether Johnson & Johnson had an overwhelming market position;
- the underlying incentive of Johnson & Johnson to execute a resale price maintenance agreement; and
- the impact of a resale price maintenance agreement on competition.
After considering all four elements, the Shanghai High Court concluded that Johnson & Johnson's resale price maintenance had directly restricted price competition in the relevant market. On certain occasions, the presiding judge in Rainbow v Johnson & Johnson noted that the degree of concentration and market power in the relevant market were essential issues that were considered in the tribunal's deliberations.
In the full penalty decision against Mercedes-Benz – following pages of facts and details obtained during the investigations – the agency simply considered Mercedes-Benz's advantageous position and strict management measures imposed on its dealers, without further examination of its competition status and position in the relevant markets (including market share, market power, brand influence and control over distributors). In assessing the net competitive effect of Mercedes-Benz's price fixing, the agency simply considered the obvious negative anti-competitive effects, whereby:
"the price control behaviour deprived or interfered with dealers' independence in price setting, therefore eliminating and restricting price competition among dealers, weakening the role of price in guiding resource allocations and damaging consumers' rights and interests."
The agency's approach may be a result of its understanding of the typical and traditional distribution system in China – especially in the automotive industry, where automobile manufacturers have a strong position and maintain strict control over distributors (indeed, many auto industry investigations have been triggered by disputes between manufacturers and dealers). Another reason may be the agency's insightful knowledge of the automotive industry, where the vertical restraint involved had the clear and obvious effect of eliminating or restricting market competition. Specifically, the harm to consumer interests and the reduction in social welfare that resulted from the price controls in the automotive industry were very apparent, at least from the regulator's perspective. Further, the spare-parts-to-car-price ratio was astronomically high at the time and became a hot-button issue in 2014. Mercedes-Benz's justifications, such as efficiency and improved product quality and safety, were not reasonably established during the assessment of the overall effect of the price fixing on competition. Thus, the antitrust enforcement agency most likely concluded that the nature and effect of Mercedes-Benz's price fixing behaviour were so plainly anti-competitive that it should be treated as unlawful per se, without further elaboration on or analysis of the competitive effect of the price restraints.
Automotive industry at stake
In the Audi and Chrysler cases the NDRC found that both horizontal and vertical monopoly agreements had been involved (for further details please see "FAW-Volkswagen, Chrysler and dealers fined Rmb280 million for price fixing"). The automobile manufacturers had concluded vertical agreements with their downstream dealers to fix the sale price and service price for car maintenance, as well as to maintain the minimum third-party resale price. In addition, the NDRC discovered that the dealers had concluded and implemented agreements among themselves, thereby establishing a horizontal price cartel. The NDRC thus found both horizontal and vertical monopoly agreements culpable and imposed appropriate fines.
Although the full administrative penalty decision in the Mercedes-Benz case focuses on the vertical violation, the agency also addressed the horizontal violation among the dealers in a previous announcement. The agency concluded that Mercedes-Benz's dealers in Suzhou, Wuxi and Nanjing had violated Article 13 of the Anti-monopoly Law by holding meetings (organised by Mercedes-Benz) to conclude and implement agreements to fix the prices of certain car components. The agency fined the dealers involved a combined Rmb7.87 million, equal to 1% of the previous year's sales. However, the agency either exempted from penalties or imposed lighter penalties on the dealers that proactively reported the activity and provided evidence.
Mercedes-Benz is the third case in which the agency has uncovered both vertical and horizontal agreements. All three cases are rooted in the same industry, indicating that industrial features play a large role in raising antitrust concerns. In fact, it appears that the entire automotive industry is under antitrust scrutiny. The is largely due to the long industrial chain involved in the sector, with each link in the chain being highly susceptible to antitrust behaviour. For example, the notable 12 Japanese Auto Parts and Bearing Manufactures case (for further details please see "NDRC imposes record fines on 12 Japanese auto parts and bearing manufacturers") addressed monopoly concerns in the relevant auto parts market; while the Audi, Chrysler and Mercedes-Benz cases illustrate monopolistic activity in the car sales process. However, concerns do not stop at the car sale stage – the aftercare market process (ie, car maintenance) has also been linked to monopolistic behaviour.
Law-making process steps up
Considering the success of the NDRC's antitrust investigations of the automotive industry, it is safe to say that the agency overseeing price-related antitrust issues in China has accumulated substantial enforcement experience in the industry. Now is the perfect time to step up the law-making process by amending the existing rules and drafting new laws to advise the industry on antitrust compliance.
Due to monopoly concerns raised within the past two years, the government has amended the regulations concerning branded automobile sales, which became effective in 2014. Also, given the high spare-parts-to-car-price ratio of common car models, 10 government authorities jointly promulgated the Guidance on Promoting the Transformation and Updating of Automotive Maintenance Industry to Improve Service Quality on September 3 2013. The State Administration for Industry and Commerce also promulgated the Guiding Opinions on Strengthening the Supervision of the Automobile Market on October 29 2014, which are intended to limit the control of automotive original equipment manufacturers on the upstream supply market and aftercare market. Further, it has been reported that the Ministry of Transport might officially launch administrative measures requiring disclosure of auto repair information by automobile manufacturers.
The NDRC has taken a leading role in the drafting of antitrust guidelines for the automotive industry. The guidelines will cover antitrust compliance issues in the vehicle sales market and the aftercare market, including auto parts supply and after-sale maintenance. The antitrust guidelines for the automotive industry have reportedly been submitted to the State Council for review and can be expected to be published next year.
Moving forward, these initiatives may either encourage more comprehensive and subtle cooperation by unscrupulous industry officials or have the intended effect of discouraging similar misconduct in future. If the present trend of ramping up enforcement of antitrust regulations continues, the automotive industry will likely become more transparent and more closely regulated in order to prevent future instances of misbehaviour.
For further information on this topic please contact Hao Zhan or Moon Wang at AnJie Law Firm by telephone (+86 10 8567 5988) or email (firstname.lastname@example.org or email@example.com). The AnJie Law Firm website can be accessed at www.anjielaw.com.?
(1) See http://auto.ce.cn/auto/gundong/201408/04/t20140804_3281225.shtml (in Chinese).
(2) See http://auto.sina.com.cn/news/2014-08-05/10421316271.shtml (in Chinese).
(3) See http://finance.chinanews.com/cj/2014/08-07/6468807.shtml (in Chinese).
(5) See http://auto.sina.com.cn/news/2015-04-23/10011428910.shtml (in Chinese).
(6) See http://csj.xinhuanet.com/2015-05/02/c_134203693.htm (in Chinese).
(7) The eight auto parts manufacturers were Hitachi, Denso, Furukawa Electric, Yazaki, Sumitomo, Asian Industry, Mitsuba and Mitsubishi. The four bearing manufactures were Nachi-Fujikoshi, NSK, NTN and JTEKT.
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