WANTED for Monopolization

The year of 2014 is the sixth year since the issuance of China’s Anti-Monopoly Law. Apparently， China does not want this year to go uneventful.

From the beginning of this year， the National Development and Reform Commission of China （NDRC） launched an anti-monopoly investigation into Qualcomm， marking the start of an anti-monopoly storm in this country.

The storm is getting bigger and bigger as days fly by. No one knows when the storm will be ended. Foreign media condemns that the Chinese government is compressing or driving the foreign companies away to give out spaces for local brands， while the Chinese government insists on saying that the antimonopoly investigation does not target the foreign enterprises exclusively and what they do is “set up a fair and balanced market for every player”.

It is hard to tell whether the antimonopoly investigations in China are only for the foreign companies. But as the investigation scope is getting bigger， more and more companies were exposed and falling “victims” to the antimonopoly investigations. People interested in this could not help but “wow”at the names they might meet on the daily basis.

Now， let’s have a look at the list of well-established foreign companies placed stung by China’s anti-monopoly sword.

Target No. 1： Qualcomm

As the largest mobile chip designer and manufacturer in the world， Qualcomm owns over 1，400 patents in the 3G and 4G sectors， establishing its unshakeable vantages in the intellectual property market.

However， the Chinese government， reportedly answering to the call of Chinese local smartphone manufacturers， was going to challenge this. It is said that the NDRC locked the U.S. chip giant at the end of 2013 and turned it into the first “victim” of the anti-monopoly storm in this country.

The reason for the NDRC’s investigation into Qualcomm is its abuse of dominance in China. Its profit earning does not stop after the sale of the chips. It also collects fees of using patents from smartphone manufacturers. Concretely， the smartphone manufacturers need to pay Qualcomm the patent fees accounting for 3%-5% of the sales price of every device they have sold. The smartphone industry calls it the“Qualcomm tax”. With that vantages， Qualcomm’s profit margin is 32%， much， much higher than the 1%-5% profit margin of Chinese smartphone manufacturers. This unfair trading relation has enhanced the Chinese government’s dedication to fighting against Qualcomm’s monopolization.

After months’ investigation， the NDRC reported to have found enough proofs to affirm the monopolization of Qualcomm in July. In the past half a year before the confirmation， Derek Aberle， president of Qualcomm， came to China in April， May and July to answer questions of and exchange ideas with the NDRC.

The result of the anti-monopoly investigation into Qualcomm has not come yet， but the recent speeches made by Aberle and other senior executives of Qualcomm have shown their compromised attitude. It is widely believed that Qualcomm could only do two things in that matter： either accepeting ticket for the monopolization or meeting the Chinese companies in the half way by adjusting the price of chips and patent use fees.

Actually， the rise of Qualcomm is closely related to the Chinese market. It earned US$24.87 billion in revenue in 2013， 49% of which came from the Chinese market. The importance of the Chinese market makes Qualcomm know that it is of no use to quarrel with the Chinese government or enterprises in the matter of monopolization. Its cooperation with the Chinese company SMIC in the production line of 28nm chip and the plan to bring a part of production line of its Snapdragon chip in China are considered to be a positive response to the anti-monopoly investigation.

Target No. 2： Microsoft

If the investigation into Qualcomm is time-consuming and a result of answering to the Chinese smartphone manufacturers， the anti-monopoly investigation into Microsoft is unexpected and happened in a flash.

On July 28， China’s General Administration of Industry and Commerce（GAIC） made a sudden investigation into four branches of Microsoft in Shanghai， Guangzhou and Chengdu. According to a report issued by the GAIC after the investigation， the administrative body had checked over the reported issues about the incompatibility， bound sale and file accreditation as a result of the half-hidden information of Microsoft’s Windows system and Office software， but this check could not remove the possibility of Microsoft’s involvement in the monopolization， leading to the sudden on-the-spot investigation.

Even though the Chinese government did not reveal how Microsoft was involved in the monopolization， it is believed that the anti-monopoly investigation into this company is possibly a result of its abuse of its dominance in the operating system market.

Notably， Microsoft stopped the technological support for the Windows XP system， exposing about 200 million computers in China to virus and cyberattacks. Meanwhile， it improved the sales price of Windows 8. This combination of actions was once suspected of “abusing the market dominance and being involved in the monopolization”.

Even though Microsoft stated that it would work closely with the Chinese government in the investigation to cleanse it of the suspect of “monopolization”， the Chinese government won’t let it go so easily. On August 6， the GAIC’s investigation launched on-the-spot investigations into Microsoft’s offices in Hubei， Liaoning， Fujian and Beijing， as well as its outsourcing company Accenture.

According to the report， Microsoft， which was haunted by the pirated software in China， initiated a grand campaign to protect their own interest and rights in China. They forced the computers installed with the pirated Windows OS to have the blue screen and issued huge tickets for those who use the pirated software. Meanwhile， the stop of technological support for Windows XP and the improvement of Windows 8 price were considered to be the retaliatory actions for the infestation of pirated software in China. Experts call Microsoft’s actions the “excessive protection of its own interest” and this is a reason for the anti-monopoly investigation into this company.

Right now the GAIC and other governmental departments of China are still collecting proofs about Microsoft’s monopolization. If Microsoft is found guilty， it is likely to be fined of maximally US$600 million according to the Anti-Monopoly Law of China.

Target No. 3： Mercedes Benz

The anti-monopoly investigations Chinese government has launched not only target the IT industry， the automotive industry， especially the foreign luxury brands， are also important targets.

Mercedes Benz is among the list of targets. In the late July， the Jiangsu Provincial Price Administration launched sudden investigations into the dealers of Mercedes Benz in Jiangyin， Wuxi， Huai’an， Yangzhou and Danyang upon the appointment of the NDRC. The Chinese government also had an investigation into the East China headquarters of Mercedes Benz in Shanghai.

It is widely known that the luxury cars like Mercedes Benz are sold at a higher price in China than in foreign countries. This is partly attributed to the tax and tariffs in China， but the foreign automotive manufacturers are also to blame for this. In addition to the lofty price of cars， Mercedes Benz was investigated this time for its control of the component prices. We all know that the components for foreign luxury automotives are usually exclusive and hard to find substitutes from other factories than the manufacturers themselves. Mercedes Benz， as well as other foreign luxury auto brands， makes use of this feat to force the car owners in China to pay dearly for any damages or to-bereplaced components of their cars.

There is a term called “componentcar price ratio” referring to the ratio between the total price of all components in a car and the price of an assembled car. For the C-class products of Mercedes Benz， this ratio is 1273%， meaning that the total price of all components for a C-class car is 12.73 times as high as that of an assembled car. This ridiculous figure pushed Mercedes Benz into the minefield of vertical price monopoly.

An insider from the Jiangsu Provincial Price Administration said on August 18 that they had found enough proofs to make Mercedes Benz guilty of vertical price monopoly. “Mercedes Benz makes use of its own dominance in the market to control the price of components and maintenance services of cars in the after-sale market.

Sensing its own mistakes， Beijing Mercedes Benz Automotive Sales Co.， Ltd announced on August 3 that it would lower the price of a part of components as of September 1， covering all types of cars of Mercedes Benz. It was reported that over 10 thousand components were involved in the 15% average decrease in the price.

But even the compromise did not release Mercedes Benz from trouble in China. On August 4， one day after the decision of lowering price， the distribution office of Mercedes Benz in Shanghai was visited by the anti-monopoly department of China. Several senior executives of the company were asked to speak with the governmental officials and several computers in the offices were taken away for further investigation.

For Mercedes Benz， the trouble is far from being ended.

Target No. 4： Audi

When Mercedes Benz is struggling with the anti-monopoly investigations， its German peers BMW and Audi are not free of trouble either. Audi， which is the leading brand in China’s luxury automotive market， also meets the biggest problem here.

Like Mercedes Benz， Audi is also trapped in the high “componentcar price ratio” in China as the figure reached 400% averagely， but the real problem of Audi is the huge price gap between the Chinese market and foreign market. Audi Q7， which is very popular in both the Chinese and foreign markets， is sold at 47.7 thousand euros or 300 thousand yuan in the European market， but in China， the price reached 1.3 million yuan with the profit margin hitting 400%. This means that the profit earned from one car Audi sells in China equals the one of selling 100 cars in Europe.

The huge price gap has caused a lot of anger from the Chinese consumers and is believed to be one reason for the anti-monopoly investigations into Audi and other established automotive brands.

Audi， with its never-fading fame in China and the title as the “car for governmental officials”， is under the spotlight because of its heavy reliance on the Chinese market. In 2013， Audi sold 1.57 million high-end automotives in China， completing the goal of increasing the sales volume to 1.5 million units two years earlier than expected. In the first seven months of this year， Audi sold 316，945 units in the Chinese market with the sales up 17.4% year on year. In July， the Chinese market accounted for 33.5% of the total sales of Audi in the world， and the proportion in the first seven months of 2014 was 31.3%， highlighting the importance of the Chinese market for Audi.

Audi reportedly reaped the sales revenue of 200 billion yuan from the Chinese market. This figure is not only enviable for many automakers in China， but also rationalizes the rumored 1.8-billion-yuan ticket for Audi， since China’s Anti-Monopoly Law sets the ticket for companies involved in monopoliza- tion at 1%-10% of their annual sales revenue. Even thought this terrible ticket proved to be a rumor and the actual ticket might be no higher than 280 million yuan， the punishment from the Chinese government still rang a clear alert for Audi it has announced the plan to lower the price in the Chinese market， a good start to adapt to the new environment.

Target No. 5： Japanese Automakers

When Audi， Mercedes Benz， BMW and even Qualcomm and Microsoft are still waiting for their tickets， the intensive anti-monopoly storm has already generated its first “profits”. On August 20， the NDRC published the decision of fining eight Japanese auto components enterprises and four bearing manufacturers for their price control. The 12 Japanese enterprises were fined of 1.235 billion yuan， which is so far the biggest ticket the Chinese anti-monopoly department has ever issued.

“This anti-monopoly investigation（into Japanese enterprises） is related to the horizontal price monopoly， referring to the monopoly agreement among the operators who are supposed to be competitors with each other. They formed an alliance to drive away other companies and limit the competition，”reported the NDRC.

From January 2000 to February 2010， eight Japanese auto components manufacturers， including Hitachi， Denso， Mitsubishi， Yazaki， Sumitomo and so on， formed an alliance to launch unified price for their products to win as many as orders from the automakers. They also worked closely with Japanese automakers like Toyota， Nissan， Honda， Suzuki and so on， monopolizing the component market for these cars in China.

Their combined efforts have pushed the market share of Japan-made automotive components in China to 27%. The NDRC found these enterprises guilty and issued the ticket. These enterprises have promised to make changes to create a fairer market for other competitors.

Behind the Investigations

The list of foreign companies that have been placed under anti-monopoly investigation also includes BMW and Chrysler， and yet no one believes that the list will end there. More companies， no matter they are in IT， automotive or other industries， might be exposed to the investigation in the future.

Then why did the anti-monopoly investigations break out in the sixth year after the implementation of Anti-Monopoly Law in China？ Zhang Chenying， an associate professor with Tsinghua University’s Law School， says that it is an accident for the intensive publicity of anti-monopoly investigations in July and August since some of the investigations started last year and only had the result published in this period.

Deng Zhisong， a lawyer with Beijing-based Dacheng Lawyer Firm， attributed the “year of anti-monopoly investigations in 2014” to the maturation and familiarity of Chinese people with the expertise and complexity in the fight against monopolization. “The anti-monopoly departments in China are getting more and more skilled in the past few years. The intensive investigations are a result of this，” he says. He also believes that there will be more anti-monopoly investigations in the next five to ten years. During that process， the enterprises and consumers are also getting used to and familiar with the anti-monopoly procedures of China. They will know about protecting themselves.

That’s what everyone expects： a fair and invigorated market every player is treated equally. But the current problem is that these anti-monopoly cases published in July and August all include foreign companies and no Chinese enterprises were involved. Therefore， it is speculated by foreign media that the Chinese government was driving away the foreign investors to give space to local enterprises in the sectors of IT， automotives and so on.

Even the foreign governments have shown concerns for this. The European Chamber of Commerce have raised one question： why are the investigations only targeting the foreign enterprises？

Shen Danyang， the spokesman for China’s Ministry of Commerce， says that the Chinese governments’ efforts in the anti-monopoly investigations is to promote the fair competition with the ultimate goal of protecting the interest and rights of consumers. “Many foreign enterprises which have been placed under the investigation admit that this is good for their long-term benefits in China. Since it is an international rou- tine for any country to initiate the antimonopoly investigation， any enterprises， whether they are Chinese or foreign companies， are going to be subject to one common standard.”

Actually， the GAIC published the tickets for two firework enterprises in Inner Mongolia on August 14， but these two cases are small compared with the cases involving foreign companies like Microsoft and Mercedes Benz. “All enterprises are in the same pool， where a common rule is implemented，” says Bai Ming， deputy director of International Market Research Office of the International Trade and Economic Institute with Ministry of Commerce. “The three major anti-monopoly administrative bodies the Ministry of Commerce， the NDRC and the GAIC are the three engines of China’s anti-monopoly investigations. They are using the AntiMonopoly Law to pull the foreign and Chinese enterprises back to the same starting line.”

The Anti-Monopoly Law is now the

major resort for China to fight against the monopolization. Internationally and academically， the law is usually considered to be “The Constitute for Economics”， but Dai Long， associate professor with China University of Politics and Laws， says that it is not the time for China’s Anti-Monopoly Law to live up to this title.

“The law is young and so are the administrative bodies for this issue. They need more experiences and cases to improve their skills. The Chinese legislation department should have a summary of the anti-monopoly cases in these years to find the defects in the relevant legal system and improve them for the adaptation and modification in the future，” says Dai Long.