China's Anti-Monopoly Policies
By LARRY ROMANOFF – October 10, 2020
In 2014, due to repeated complaints and alarming suspicions, Chinese authorities undertook an enormous wide-ranging anti-monopoly investigation of the country's auto industry that involved more than 1,000 Chinese and foreign companies including automakers, dealers and suppliers, many of whom were suspected of collusion in price-fixing, price-gouging, other anti-competitive behavior, as well as fraudulent sales, service and warranty terms. A major thrust of the investigation was the illegal fixing of extremely high prices, a focus that would appear to have been well justified since, as soon as news of the investigation broke, dozens of foreign automakers simultaneously engaged in a panic reduction of their auto and parts prices, with Audi and Mercedes instituting reductions of as much as 40% and BMW doing something similar, perhaps hoping by this means to stave off criminal conviction. In fact, virtually all foreign automakers panicked and cut prices heavily when news of the probes became public, knowing full well the honeymoon of breaking all of China's laws with impunity was quickly coming to an end. From the China Daily:
"Jessica Su, antitrust scholar and Institute of American Studies associate professor at the Chinese Academy of Social Sciences, said the commission has strong evidence and a legal base to continue its investigations. In the new-car and after-sales markets, the conduct of international automakers may have infringed the antitrust law, including price-fixing, territorial restrictions and customer restrictions. In the after-sales car market, suspected conduct includes exclusive supply, exclusive purchase and excessive pricing of replacement parts, as well as restrictions on the supply of technical information needed for repair and maintenance, she said. "Such behavior mainly comes from car manufacturers suspected of substantially impeding competition and harming consumer welfare. If similar conduct occurred in the United States, European Union, Japan, South Korea and other mature market economies, it would doubtless trigger antitrust investigations".
The discrepancy in prices for foreign cars, service, and especially spare parts, between China and abroad was part of the reason for the recent anti-trust investigation. As one example, a BMW 650i Convertible that sells for about $95,000 in the US, can cost well over $300,000 in China. A Mercedes-Benz standard E-class sedan, made in China, will cost about $70,000 in China, but Mercedes exports the same car to the US from Germany to sell at only $48,000. An Audi A4L, with full options and made in China, sells for almost $100,000, yet is about half that price in the US. A Ferrari 458 Italia costs a little over $225,000 in the US but almost $750,000 in China. A Rolls-Royce Ghost sedan costs around $250,000 in the US but almost $700,000 in China. All foreign luxury brands are quick to blame the huge price discrepancies on "import taxes", but that's nonsense, since China has steadily reduced these to the point where they add at most 15% to 20% to the price of a typical imported car. And in any case, most of these items are manufactured in China and incur no import taxes.
The real problem appears to be the prior creation of only a single sales channel and the subsequent dominant, monopolistic control of that channel exercised by the foreign automakers, who not only set minimum selling prices that guarantee the manufacturer 40% profit margins but load their single dealer channel with financing and other costs that don't exist in the West. Due to the manufacturers' structure, there is also only a single channel for auto parts and after-sales service in China, forming a powerful vertical monopoly that is openly abused to the point where it pushes auto prices into the stratosphere. Firms in other industries do the same, especially luxury consumer goods companies like LV, who attempt to convince consumers they must charge $5,000 for a man's shirt because of high local taxes when the garments are made in China and subject to no more tax than any Chinese brand. Even the fast-food industry promotes this gambit, with firms like KFC and Starbucks attempting to blame the Chinese government as a way to disguise their own greed. All of this is just unconscionable profiteering and price-gouging.
"Many of the world's biggest consumer names find themselves under unprecedented attack. German car companies and Japanese auto-parts makers have been the latest targets in a wave of antitrust investigations that have resulted in fines and steep price cuts. The campaign has embroiled everybody from Microsoft to Mercedes-Benz. What's going on?" The answer, according to whoever wrote this article, is a combination of several things, one of these being “maybe” some "questionable practices" by multinationals. Thus, for Western readers, a vast program of national price-fixing and dozens of other clear illegalities involving billions of dollars siphoned from public pockets, is degraded to ‘maybe’ a 'questionable practice'. Another factor is "bullying" by Chinese authorities, the new American adjective used when we charge a criminal with a crime. And, of course the price-fixing investigations resulted primarily from "anti-foreign sentiment". There definitely is anti-foreign sentiment in China, and for many damned good reasons. But we're told that what bothers the Americans the most is "the heavy-handed way" the investigations are being pursued, and the "highly-charged media coverage" that, sadly, makes for "a troubling atmosphere" for American and other foreign companies.
American media columnists and apologists for the foreign automakers repeatedly raise the issue of import taxes, suggesting the Chinese government itself is responsible for these exorbitantly high prices, but without ever informing readers that most of these cars are made in China and therefore not subject to import taxes. Almost every existing model of VW and Audi are manufactured in China, as is true for a great many models of Mercedes, BMW, and most other foreign auto brands, so the reference to import taxes is simply a hoax to deceive readers. Not only that, but China's manufacturing costs are generally much lower than those in the West, especially in Germany, but BMW can export can export its X5 SUV to the US where it sells for about $100,000 including import taxes, yet charges over $330,000 for the same car made in China without import taxes. As well, the tax bill on autos manufactured in China is not different for domestic or foreign brands, so the entire tax reference is just smoke to disguise greed. These columnists also fail to state that the vast majority of foreign autos, imported or otherwise, are not subject to the higher levels of tax, and which are minor relative to the sales prices. The identical problem exists with respect to auto parts which are often prohibitively expensive in China. For example, buying all the parts to build a Mercedes C or E Class (both of which are made in China) would cost more than 12 times as much as purchasing the car. And even the lowest-margin foreign autos would cost three to four times the price of the car, far more than in the West. One issue was that the illegally-fixed high margins tended to be on those parts most often requiring replacement, a special method of unfairly 'targeting' consumers, and in fact a group of European auto parts makers requested the Chinese government initiate this investigation to curb the rampant abuses they witnessed from the foreign automakers.
One such combined corporate apologist and confirmed China-basher is Chris Buckley of the NYT who did his best to mislead readers in an article on this auto business in August of 2014. The headline for his article should have read "Foreign auto companies in China guilty of massive price-fixing and monopoly frauds", but no. The headline read: "China's Energetic Enforcement of Antitrust Rules Alarms Foreign Firms". So the issue isn't that foreign auto companies have broken laws and conspired to fix prices, thereby cheating consumers out of billions of dollars while violating half the statutes on the books. The issue is that China is bad, "energetically" enforcing its own laws, and thereby "alarming" our fine foreign friends who didn't do nothing to nobody. Our conclusion from the news should be that foreign auto companies in China are all criminal enterprises and their executives should all be in prison, but no. The conclusion we draw from Buckley's article is that the Chinese government is a mean bully and that China is a bad country in which to do business. Buckley told us that "... inquiries over pricing and sales policies ... have raised pressure on foreign corporations across China". I wonder if Buckley would like to write an article about how "inquiries about pedophilia are 'raising pressure' on pedophiles all across America", or how about "enquiries into the practices of dishonest, biased and lying journalists are raising pressure on members of the Beijing Foreign Journalists Club". What would be the headlines if Chinese auto firms were engaged in the same behavior in the US? Would Chris Buckley be telling the world that "America's energetic enforcement of antitrust rules alarms Chinese firms"? Probably not. And once again, we spin and weave until the truth disappears from view.
According to the Washington Post, unspecified "business groups" say the secretive and abrupt way the investigations are conducted is alienating foreign companies. Well, that's just too bad. Let them be alienated. After all, they're criminals and should be in prison. Maybe the Washington Post should write an article titled, "Bank robbers claim police investigators are too secretive and abrupt", and maybe a follow-up titled, "Police investigations are alienating bank robbers: Nation up in arms". And then we have AmCham telling us Beijing "might be violating its free-trade commitments" by charging criminals with crimes. If that's true, then maybe China shouldn't have signed onto those trade agreements since they seem to have a few flaws.
The Post stupidly repeats the idiotic assertion that Beijing is trying to create "national champions", with (again) unspecified "business groups" accusing regulators of "using the anti-monopoly law and other regulations to shield domestic companies from competition". Every nation, including the US, tries to create what we call national champions, and takes great pride in them. There is nothing sinister about wanting a domestic company to be a world leader in some field, but the Western media state this like it’s dirty if anyone else does it. The Post's accusation about China - made with no evidence whatever - that China is using its antitrust laws to protect domestic firms from competition, is an outright lie, and a rather despicable one we see repeated almost daily. Domestic Chinese auto firms have no protection whatever from competition, and in fact don't have much strength in the luxury car market where most foreign firms operate. The WSJ itself reported that Mercedes-Benz, BMW and Audi have a combined 72% of that market. These antitrust investigations and heavy fines will do absolutely nothing to benefit domestic firms, and the Post's writers are well aware of this. It's all just another chance to blacken China's name on the world stage. It's so interesting that freedom of the press in America means freedom to libel and slander, to make unjustified charges and accusations unsupported by evidence, and to state ideological rubbish as fact.
The Post also told us that business groups initially welcomed the enactment of China’s anti-monopoly law in 2008 but now claim it is enforced more actively against foreign companies than local rivals. That may be true, but it’s true only because foreign companies have always felt free to break all the laws in China, to simply ignore all legislation and do whatever they wanted to do. It isn't only the automakers of course. The big pharma companies, baby milk firms, FMCG companies, fast food and retail firms, Microsoft, Google, Apple, and so many more, have felt a total immunity to prosecution and exhibited no fear of violating the country's laws.
Rolls-Royce showed no hesitation in jumping onto this China-bashing bandwagon, the company's CEO with the unlikely name of Torsten Mueller-Oetvoes, telling us his higher China prices are (solely) due to taxes that were "extremely high" and exceeded those in other markets. He said, "One should not be mistaken by the absolute price. The difference in price is very much taxes. There are also other costs and fees that add to the final retail price in China. For us, it is not a big difference between a car sold in China than a car sold in the U.S. or Middle East, profit-wise." I don't much care about his Middle East profits, but to suggest that taxes in China make the entire difference between prices in China and the US, and to claim that Rolls-Royce makes no more profit on, the $700,000 sale in China and the $250,000 sale in the US, are hardly credible assertions because the actual taxes are minor in relation to the selling prices.
The European Union Chamber of Commerce in China, an organisation we can loosely define as a mindless ideological echo chamber, also jumped on this wagon, stating that although Chinese companies had also come under scrutiny, "the European business community is also increasingly considering the question of whether foreign companies are being disproportionately targeted." In evidence of its apparent concerns and accusations, it offered - nothing. There is actually no evidence whatever that foreign companies are being targeted for anything, this anti-trust investigation involving more than 1,000 firms, most of which were domestic. In fact, The National Development and Reform Commission initially reviewed the 335 most serious anti-monopoly cases against companies and industrial associations, and only 33 of these, less than 10%, involved foreign-invested companies or their JVs, with the remainder all domestic firms, so where do we find evidence of targeting foreigners? The foreigners who should be targeted, and have their visas cancelled, are the American newspaper correspondents who make these slanderous allegations in their columns.
There was another, more useful, point raised by our European friends, this being that it had "received numerous alarming anecdotal accounts from a number of sectors that administrative intimidation tactics are being used to impel companies to accept punishments and remedies without full hearings. Practices such as informing companies not to challenge the investigations, bring lawyers to hearings or involve their respective governments or chambers of commerce are contrary to best practices." I love the part about 'best practices', but let's take a quick look at the rest of their statement. It is true that Chinese authorities will deal with the manufacturers and not with their lawyers, and will certainly not permit the US State Department or the UK Foreign Office to involve themselves in the defense of criminal activity. That is not a violation of anyone's rights; it is a matter of refusing to permit a criminal to politicise his actions and allow a foreign government to exert diplomatic pressure in obtaining leniency for what are criminal acts. This is China, not the US or Europe, and the 'tactics' do not constitute intimidation, but practicality. If you have committed a crime in China, you will experience leniency if you admit your crime, cooperate in the investigation, express sincere remorse, and provide credible evidence you will not repeat. But if you choose to do things in the American way, waging war by bringing in a battery of lawyers accompanied by your mother the State Department to intimidate the authorities into dropping their charges, you will not only lose but will see no mercy. I see no fault in that. The main difference is that in China corporate executives are not immune from criminal prosecution as they are in the US, and in serious cases such as the melamine baby milk fiasco, they are executed for their crimes. A few hundred such events in the US would be of great benefit to the whole world.
Americans are all for "free markets", and "letting the market decide" prices, and having "a level playing field", but when the Chinese authorities intervene to kill monopolistic behavior and free the market to decide prices, and in fact to level the playing field, suddenly the Americans reject this as "a violation of free market competition". So, to the Washington Post anyway, free market competition means the freedom for American companies to exercise a monopoly and freely engage in anti-competitive behavior, price-gouging, price-fixing and intimidating dealers into obedience. Chinese companies of course are still expected to obey the laws. More serious is that with the monopolistic behavior by foreign automakers in China, all the business risks are borne by domestic enterprises. Regardless of market conditions, the foreign manufacturers are in a position to force even slow-moving inventory onto the Chinese dealers, dictating minimum prices, controlling auto financing sources and profits, and creating intense financial pressure for the local firms. Any dealer attempting to bypass the monopoly will be 'severely punished' by the manufacturers. In the recent past, the foreign automakers had sufficient control to squeeze almost all the profit from the entire industry chain into their own pockets, leaving nothing but debt for the local companies, and these practices are what the Chinese authorities ended.
Upon public confirmation of the Chinese authorities having initiated this grand anti-trust sweep, I found the response from foreign auto companies revealing and humorous. As soon as news broke about the antitrust enquiries, almost every foreign automaker in China made a panic reduction in their selling prices and in the prices of auto parts, Mercedes and BMW as much as 40% - and this was even before the authorities contacted them. GM was also quick to offer a 20% reduction on most of its 40 or so models, though I'm uncertain of the timing, but what does that tell you? Are those the acts of an innocent man? Why would a company operating within the law and following acceptable business practices suddenly reduce all prices by 40% when it hears the police are coming? And if these auto firms can suddenly justify a reduction of 40% in the selling prices of their automobiles, how bad must the price gouging have been before this? The baby milk companies did the same.
Audi will face a fine of about 2 billion yuan for operating a monopoly, while Mercedes Benz paid 350 million yuan on a variety of price-fixing charges. Audi and Chrysler were levied almost 300 million RMB in fines for overcharging consumers in auto sales and after-sales service. Ten Japanese auto parts manufacturers were fined a total of 1.25 billion RMB for their part in price-fixing and anti-trust activities. In Hubei, Audi was fined 250 million RMB for price-fixing of both autos and parts. Four BMW dealerships in Hubei were fined as much as 1 million RMB each for defrauding customers on auto deliveries. BMW will also face a company fine of perhaps 2 billion RMB for its national part in these anti-competitive practices. Still in Hubei, FAW-Volkswagen was fined 250 million RMB and several Audi dealers were fined 30 million. Chrysler Shanghai was fined 32 million for forcing minimum selling prices and punishing dealers who didn't comply, while several of its dealerships were levied fines in the millions. Some Mercedes dealers in Jiangsu were fined a combined 8 million.
And lest you think these monopolistic activities are unusual or that auto firms are somehow cleaner than big pharma, think again. Shortly after the Chinese authorities fined the country's foreign automakers billions of RMB for their vast conspiracy of illegalities, precisely the same happened in India with the same firms: GM, VW, Mercedes, BMW, Nissan, Toyota and friends - all foreign companies. Authorities in India fined these firms over $400 million for stifling competition, illegal behavior, failing to honor warranties, monopolistic control of their channels by refusing to provide parts or diagnostic tools to independent repair firms, and for criminal profiteering with markups as high as about 5,000% on parts; that means charging $5,000 for a $100 item. The companies were charged with grossly distorting competition and engaging in all manner of "deplorable" behavior, "especially considering their consumer-friendly practices in the West". Does that sound familiar? But there was one item missing in this wide-ranging national antitrust investigation - the ideological blather from the Western media. We didn't have Buckley or Bradsher or the WSJ's Murphy or Andrew Browne telling us India was "targeting foreign companies", even though India was doing precisely that. None of these unbiased geniuses were on the scene to inform us that India was "putting pressure" on foreign firms, nor was the Washington Post on hand to complain about "the secretive and abrupt way the investigations were conducted", or how they were "alienating foreign companies". We had nobody to accuse India's regulators of "using the anti-monopoly law to shield domestic companies from competition". Nobody even seemed to care if GM executives were "alarmed" or not, and AmCham didn't even bother doing a survey to prove that 70% of American companies no longer "felt welcome" in India. Draw your own conclusions.
Laurie Burkitt wrote an article on China's anti-monopoly laws in the WSJ dated Aug. 4, 2014, in which she stated, "Once targeted, industries and companies have little choice but to comply." Okay. And what happens in the US when American authorities launch a price-fixing investigation or the IRS decides to perform an audit? According to Burkitt, the American companies say, "Ahhh, we're not interested. Go away." Then she tells us that, "Unlike in other markets, foreign companies can't expect much recourse from the courts". On that one, I would like to see Burkitt's list of companies in the US who have been penalised after an investigation and who then received "recourse" from a court. I cannot find a single example of such a thing ever happening. The Americans pride themselves in marketing 'transparency', using the word as a moral truncheon against other nations while never themselves adhering to their own principles. US regulatory investigators always conduct their investigations behind closed doors, with court litigation occurring rarely, and only when settlements cannot be reached in private. Typically, this means the executives of a corporation agree to penalties which are less than those expected to be levied by a court, and which give them the freedom to "neither admit nor deny" wrongdoing. Chinese authorities don't play these games. In China, you will pay the criminal fines and admit you did wrong. How can we fault that? Why is it considered a flaw of the Chinese system to levy fines the criminals do not like? Why is it better to follow the cozy American system that levies criminal fines as a 10% tax on a corporation's illegal profits while assessing no liability against the individual executives who committed those felonies? Burkitt tells us all courts in China "are controlled by the Communist party", which claim is nonsense, but I can provide many examples in the US where White House officials meddled heavily in court cases to protect one of their friends. Then she quoted a former AmCham China president, the Jewish-American James Zimmerman, who apparently claimed the only major factor in price-fixing investigations was a need for China to "legitimize the party in power". Given that 1.5 billion Chinese consider their government quite legitimate, Zimmerman's statement, obnoxious though it is, is too foolish to bother refuting.
The article I liked best was by the ethically-challenged Andrew Browne of the WSJ who wrote a sobbing article, telling us that "A growing number of U.S. companies feel unwelcome in China". Americans come to China primarily (if not exclusively) to lie, cheat and steal and, when the local government finally says, "enough!", there is sudden evidence of "a darkening mood". Browne quoted AmCham, who claimed the sentiment was "rapidly deteriorating". AmCham's President apparently wrote that Chinese procurement policies "discriminate against foreign companies and narrow market opportunities." Would Browne or AmCham care to discuss Huawei in the US, or the vicious "buy American" policies initiated by the US government and most states? Would either care to discuss the "no high-speed rail in the US if China builds it" policy? But I digress. My main purpose in mentioning Browne's article is that I would like him to give me a list of all the Chinese companies that feel welcome in the US. To all the Americans in China who feel unwelcome, Browne included, I have a suggestion: you know where the door is. Stop whining, and use it.
Then, we had a truly bizarre article by someone named Neil Gough writing in the New York Times, cheering on American companies who are being brave enough to "push back" against the Chinese authorities who want to investigate them for crimes. The criminals are upset because they have been increasingly subjected to "surprise raids on their offices, protracted investigations of their operations and escalating fines". Well, that's not a very nice way to treat criminals. Shame on China for its "enthusiastic application" of its anti-monopoly laws. Gough tells us that foreign companies in China "lack the political patronage networks" that they enjoy in the US, which means an executive of almost any American MNC can stop by the White House or the US Senate, pull out his wallet, mention the next election, and ask his friends to call off the dogs. Sadly, they seem unable to do this in China, mostly due to China's one-party government, but also because Chinese officials are not as easy to bribe as are those in the US FDA and dozens of other similar so-called 'regulatory agencies'. Gough whines that American companies under investigation complain about a "lack of transparency", an accusation I love because it doesn't mean what you think it means. To normal people, 'transparent' means being able to see through something, but to the Americans it means being able to influence a proceeding and totally corrupt it with money or women to force the decisions in your favor. And they don't know how to do that in China. Then it becomes bizarre:
Gough tells us American criminal corporations in China are dismayed because they don't have a chance to call their lawyers before surprise raids are conducted, then claims this is a "right that is generally afforded in the US and Europe". I have no idea what this man is smoking, but the entire idea of a raid is that nobody knows you're coming and will have no chance to destroy evidence. But according to Gough and the NYT, the New York police first call a drug dealer, tell him a raid will be conducted on his premises tomorrow morning at 9:00 AM, and remind him to have his lawyer present. I guess Americans call this 'transparency'. I call it stupid. You decide.
Then we had another bizarre Reuters Canada article by two dilettantes named Michelle Price and Norihiko Shirouzu who claimed Chinese investigators appeared at a Mercedes-Benz office in Shanghai, and not only appeared but "barged into" a "busy office" and came "to rip the office apart". Well, that doesn't sound very nice. Even worse, "People were starting a new week and were just back from lunch", when these men barged in and ripped the office apart. And that's not nice, either. Offices should be ripped apart before lunch. The Chinese need to learn some manners. And everybody knows Monday is already a bad day. If you want to conduct a raid, do it on Tuesday. Why upset people who are just 'starting a new week'? And why raid an office when it's busy? Criminals have feelings just like everybody else. Then we're told these raids "have spawned a cottage industry in preparing multinational companies", even holding mock raids and coaching staff on how to lie to investigators. I found this interesting because the only people who would bother preparing themselves for police raids are those who deserve to be raided. I've held senior positions in large MNCs, and if anybody cared to raid a company where I was in charge, they were welcome. I couldn't have cared less. The Chinese authorities haven't asked for my advice but, if they did, I would suggest they get a list of all the American companies in China that have provided "raid training", and raid them. That would be a sure list of all the worst criminals in China and the people who had the most crimes to hide. And lastly, no article would be complete without a final cheap shot at China, so our two dimwits provided this gem: "Officials can sometimes show their human side. One lawyer, who didn't want to be identified because he didn't exist, recalled how an official on one raid spent more time flirting with the secretarial staff than searching for incriminating evidence." There. Everything's better now.
As a final observation, I was astonished to read a media report quoting Wang Xiaoye, one of China's leading experts on competition law, who was apparently involved in the drafting of China's antitrust laws, and who is a law professor of at the Institute of Law at the Chinese Academy of Social Sciences in Beijing. According to the media reports, Wang was "frustrated" that foreign companies avoided direct confrontation with the Chinese government, and that foreign MNCs should challenge the authorities when proposed takeovers are blocked. One example was Coca-Cola's bid to take over Huiyuan Juice, Wang's comment: "At the time I hoped very much it would go to court. If they had gone to court a decision could have been made as to whether the ministry was correct." I can scarcely imagine an intelligent person making such a comment. The purchase, and possible destruction of one China's treasured brands, is an issue of culture and national sovereignty, not of law. That purchase would have given Coca-Cola a hugely dominant position in the China market, and would have been destructive to Chinese cultural values. No Western nation willingly surrenders national cultural icons to hostile foreigners whose main stated objective is the destruction of their nation. The last thing China needs is internal apologists for yet another Western colonisation. Further with Wang, media reports noted that corporations engaging in criminal antitrust activity are fined in the EU up to 10% of their global turnover, while in China the fines tend to be 5% or 6% of their Chinese turnover. Wang is defending low fines on foreign criminals in China, quoted as saying, "You can't have a situation where a company is fined up to 10 percent of global revenues in every jurisdiction since there is only so much of their global turnover to go round." She is advising that the Europeans can do this, but China cannot, because the companies don't have enough money to support such fines. Well, that's too bad, since even those fines appear insufficient to stop the criminal activity, but why is this woman, who apparently helped draft China's antitrust laws, protecting the foreigners who are destroying her own country? Either I'm the only one who is sane, or I'm the only one who is crazy.
Larry Romanoff is a retired management consultant and businessman. He has held senior executive positions in international consulting firms, and owned an international import-export business. He has been a visiting professor at Shanghai's Fudan University, presenting case studies in international affairs to senior EMBA classes. Mr. Romanoff lives in Shanghai and is currently writing a series of ten books generally related to China and the West. He can be contacted at: email@example.com.
Larry Romanoff is one of the contributing authors to Cynthia McKinney's new COVID-19 anthology ''When China Sneezes''.
Copyright © Larry Romanoff, Moon of Shanghai, 2020