The National Development and Reform Commission ("NDRC") issued a press release on 29 September 2013, just before the start of the week-long Chinese 'golden week' holiday around National Day (1st October), reporting on its decision to impose sanctions on 39 companies in the tourism industry. The contested practices of the companies mainly relate to the preceding 'golden week' holiday, around Chinese New Year in February 2013.
NDRC's latest enforcement actions are not only relevant to businesses in the tourism industry – they are also revealing about the authority's enforcement priorities and point to possible future areas for enforcement in relation to anti-competitive market conduct.
The anti-competitive practices – overview
The NDRC press release describes the facts and actions in four different cases, with three different types of anti-competitive practices:
artificial prices/discounting practices with respect to local speciality products in Sanya, Hainan and Lijiang, Yunnan, two of China's prime tourist locations;
cartels fixing prices and dividing up markets between large-scale gift shops in Sanya, and price fixing among travel agencies in Lijiang; and
below-cost pricing for tours as 'bait' to lure tourists into designated gift shops.
Artificially inflating prices before discounting
Some gift shops in Sanya and Lijiang sold local speciality products such as crystals showinga very high original price on the price tag, to which they then applied a 'discount' of around 15-25%. This discount looked attractive to customers, but NDRC's decision revealed that the original price was "artificial" in the sense that it was a huge mark-up on the price at which the shops purchased the goods – at times as much as 100 times more expensive than the cost to the retailer.
In its press release, NDRC stated that this practice infringes Article 14 of the Price Law, a statute with antitrust provisions as well as rules falling outside the antitrust realm. This provision lists seven types of illegal practices, but the NDRC press release does not explicitly point to any one of them in particular. Most likely, NDRC might have been concerned that the discount applied to a very high original price gave customers the false impression they were actually getting a good deal. Hence, it is possible that, in NDRC's eyes, paragraph 4 of Article 14 – luring consumers or other business operators to enter into transactions by employing fake or misleading pricing methods – would be the applicable provision.
At the same time, paragraph 7 of Article 14 prohibits companies from making "exorbitant profits," and NDRC at various places in the press release pointed out the vast differential between the sales price and the cost to the retailer – that is, the 'profit.'
The two alleged cartel activities which NDRC challenged also took place in Sanya and Lijiang, respectively.
In Sanya, the NDRC statement notes that three of the only four large-size gift shops in Sanya (with parking space for tourist buses) met on numerous occasions to agree on prices and discounts for crystals, and divided up the market neatly amongst themselves by granting each participant a fixed market share. In mid-2012, the three companies entered into a written "industry self-discipline agreement" to do the same, and even opened a joint bank account where each of them made a payment that served as a deposit to ensure that it would not deviate from the agreed prices and market shares.
NDRC held this conduct to be market partitioning between competitors, in breach of the Anti-Monopoly Law (“AML”). The authority imposed fines of 4% and 2% of the annual sales revenues on two of the cartel members. Interestingly, the third participant in the illegal agreements was let off without a fine. The press release notes that the latter company was granted immunity from fines because it had self-reported and provided important evidence, allowing NDRC to discover the improper activities. Another interesting facet was that NDRC imposed an additional fine of close to RMB 100,000 (approximately USD 16,000 or EUR 12,000) on one of the cartel members for non-cooperation with NDRC during the investigation procedure, including the removal, concealment and deletion of evidence.
In Lijiang, NDRC found eight travel agencies – including the local branch of online agent Ctrip – to have engaged in price-fixing of hotel nights (for example, three star hotels at RMB 560 per person), meal vouchers and so forth. The companies reportedly met 24 times in 2011 and 2012 under the auspices of a local industry association. Like the gift shops in Sanya, the eight travel agencies in Lijiang entered into a written contract that allocated prices, discounts and market shares to each of the participants.
NDRC found this conduct to constitute a violation of the AML's anti-cartel provisions and ordered each of the eight companies to pay fines equivalent to 5% of their annual sales revenues, totalling around RMB 3.3 million (approximately USD 540,000 or EUR 400,000).
Bait-pricing to lure customers
NDRC's last investigation also took place in Hainan. Here, the authority challenged a common practice in China's tourism industry – the so-called "zero/below-cost group fee" (“零负团费”), whereby travel agencies charge their customers a price for a tour that is below cost. In China, it is a widespread practice that travel agencies attract customers by offering a below-cost group fee, and then receive commissions from the shops into which the travel agencies 'guide' the customers on the tour, often using pressure tactics to ensure the tourists 'consume' within the designated shops.
NDRC challenged this bait-pricing practice on the basis that it infringed Article 14 of the Price Law. Again, the NDRC press release does not explicitly state which paragraph in that provision was considered to have been breached. Nonetheless, the press release speaks about "dumping," which seems to be a clear reference to paragraph 2 of Article 14, prohibiting "dumping" at below cost price.
NDRC slapped a fine of RMB 300,000 (around USD 49,000 or EUR 36,000 ) on each tour operator under investigation found to have engaged in this bait-pricing practice.
There are a number of issues in this Hainan and Yunnan tourism case that merit further analysis and attention. First, both the artificial pricing/discounting and the bait-pricing practices were punished under the Price Law. However, it would have been possible for NDRC to have challenged both types of conduct under the AML, provided that the respective conditions are fulfilled.
One underlying issue of the artificial pricing/discounting practice was that, even after discounts, the price of the goods was still substantially above their cost price. As mentioned, Article 14(7) of the Price Law prohibits making "exorbitant profits," but NDRC's finding must also be viewed in context of its enforcement action in the River sand case (for our update on that case, please click HERE), where the authority found two companies in Shaoguan, Guangzhou to have charged "excessive prices." The decision in that case was taken under the AML, and one of the parameters that led NDRC to find a breach of the law was that the prices charged were significantly above cost.
In turn, in the Hainan and Yunnan tourism cases, NDRC challenged the bait-pricing practice arguing that it constituted "dumping" in violation of the Price Law. Again, the AML has a very similar provision – 'predatory pricing' – which prohibits below cost pricing in a similar way as the Price Law does, and was relied upon by NDRC in the River sand case.
A key difference between the Price Law and the AML is that the latter requires a company to be in a "dominant market position" for the 'excessive pricing' and 'predatory pricing' prohibitions to apply, while the former does not. In these cases in the tourism industry, it is very likely that none of the companies under investigation is (or was at the time) in a dominant market position (which is presumed under the AML at a market share of 50% or above) – numerous gift shops and tour operators were involved in the artificial pricing/discount and bait-pricing schemes, respectively, which indicates low market shares.
When considered in conjunction with other cases, a consistent pattern in NDRC's enforcement strategy seems to be starting to emerge: when the AML is applicable, the authority will probably rely on this law, which allows the imposition of fines of between 1% and 10% of the perpetrating company's annual sales revenues. This is quite a powerful remedy that can also be combined with confiscation of unlawful income, and hence can serve as a deterrent to others who might be considering similar conduct. When the AML does not apply – for example, because the perpetrator does not have a dominant position – then NDRC may still initiate proceedings under the Price Law (where punishments "only" include fines up to a statutory maximum or a multiple of the "unlawful gains" obtained through the anti-competitive conduct).
In short, companies would be well advised to look beyond the AML and factor in the Price Law, the Anti-Unfair Competition Law and other laws and regulations with antitrust-type provisions in their competition law compliance efforts.
Second, the Hainan and Yunnan tourism cases would seem to be a further indication that NDRC is 'branching out,' tackling new legal issues, practices and industries. These cases illustrate how NDRC is going beyond classical cartel conduct (at least in NDRC's eyes), and starting to examine aspects of 'excessive' and 'predatory' pricing. With the exceptions of the River sand case and possibly the Shandong drug case, NDRC has to our knowledge not brought excessive or predatory pricing cases under the AML since the law came into effect. Now, clearly, NDRC has decided not to draw the line at prosecuting cartel and resale price maintenance cases.
Third, a key message of the Hainan and Yunnan tourism cases is that NDRC continues to be focused on products and services that are directly purchased by end consumers. The vast majority of NDRC's enforcement cases involve consumer goods or services (not industrial or intermediate goods). Examples are edible rice noodles, white liquor, salt, baby milk formula, washing powder, pharmaceutical drugs or Internet access.
The timing of the decision in this case is very telling – publishing the press release just before the National Day vacation could be taken as evidence that the authority was aiming to achieve maximum visibility in the media and in the eyes of the Chinese consumer; as people on the ground will be well aware, the whole underlying purpose of creating the long ‘golden week’ holiday was to encourage spending by consumers, and perhaps one reason for the timing was to convey the message to consumers that NDRC was looking after their interests as they prepared to embark on their travels.