Since July 2014, the Chinese anti-monopoly authorities have investigated and imposed fines totaling over RMB 1.9 billion on 15 foreign automobile and automobile component manufacturers for their monopolistic practices.
In this context, on January 6, 2016, the Ministry of Commerce (“MOFCOM”) released the draft administrative measures for automobile sales for public comments. Once approved, they are expected to end the automobile manufacturers' monopoly of the automobile industrial chain and force them to pay more attention to distributors' interests.
In addition, on March 23, 2016, the National Development and Reform Commission released the draft anti-monopoly guidelines for the automobile industry for public comments (“the Draft Guidelines”) to further regulate this sector. The period for public comments is open until April 12, 2016, and the Draft Guidelines will be submitted to the Anti-monopoly Commission of the State Council by the end of June 2016.
The highlights of the Draft Guidelines:
- Definition of relevant market
Wholesale and retail are segmented relevant markets. Also, the automobile distribution market may be further segmented in terms of supply-side and demand-side substitution.
Aftersales market may be further segmented into aftersales spare parts distribution and aftersales maintenance and repair. Because of compatibility and lock-in effects, automobile brands are an important factor in defining aftersales market; this implies that it will probably be further segmented according to different brands.
- Identification of vertical monopoly agreements
The Draft Guidelines identify the following vertical restraints imposed by automobile suppliers in agreements, which exclude or restrict competition, driving up prices of distribution and repair channels, and harming consumers’ interests:
- Engaging distributors or repairers in compulsory tie-in sale of unordered automobiles, aftersales spare parts, maintenance tools and inspection instruments.
- Forcing distributors or repairers to accept unreasonable sales objectives, inventory types and quantity of automobiles or aftersales spare parts.
- Forcing distributors to bear expenses for advertising and promotion, or forcing them to advertise and publish according to specific methods and on specific media at their own expense.
- Forcing distributors and repairers to pay for the services of specific design or construction entities, or to use specific brand construction materials, universal equipment, information management systems and office facilities, suppliers and supply channels.
However, the Draft Guidelines recognize that certain vertical restraints on setting resale and minimum resale prices may not be anticompetitive under article 15 of the Chinese Anti-Monopoly Law: (i) promotion periods of new energy automobiles of less than nine months, (ii) distributors acting only as intermediaries, (iii) government procurement, and (iv) e-commerce sale by automobile suppliers.
Additionally, territorial and customer restraints set by operators without prominent market power are considered effective and justified, and may not be considered anticompetitive under article 15 of the Chinese Anti-Monopoly Law: (i) limiting distributors to engage in distribution activities only within their respective business premises, while passive sales and cross supply among distributors are not restricted (ii) barring dealers from actively selling in the territory or to customers exclusively reserved by an automobile supplier for another dealer; (iii) barring a wholesaler from selling directly to end users; and (iv) barring a dealer from selling spare parts to certain customers to prevent them from using the spare parts for manufacturing products identical to those of the automobile suppliers.
Based on relevant practice and study, the Draft Guidelines provide that an operator with a market share below 25%-30% on a relevant market is not likely to have prominent market power.
- Definition of abuse of dominant market position by automobile brands
Automobile brands will become an important factor to define the automobile aftersales market. Therefore, automobile suppliers are likely to have dominant positions in the aftersales market of their own brands. Abuse includes:
- entering into agreements with spare parts manufacturers for the initial automobile assembly to prohibit labeling these components with their own trademarks, logos and codes;
- barring distributors and repairers from purchasing spare parts of similar quality or purchasing original spare parts through other channels (including parallel import);
- barring spare parts suppliers from supplying their own brand spare parts through aftersales channels;
- barring cross supply of aftersales spare parts between distributors and repairers; - barring distributors and repairers from selling spare parts required for maintenance to end users;
- barring access to maintenance technology information, maintenance tools, testing instruments or other equipment.
Date of issue: March 23, 2016. Deadline for public comments: April 12, 2016