Public Competition Enforcement Review 2020 (I)

Michael Gu [1]

The year 2020 was an unusual year. The outbreak of the covid-19 pandemic and continued international trade tensions have posed challenges to the Chinese antitrust law enforcement authority, the State Administration for Market Regulation (SAMR). In particular, the SAMR was tested on its ability to address the impacts brought by the crisis and to rapidly respond to new circumstances in the Chinese market. Despite the challenges, the SAMR demonstrated its professional competence and enhanced efficiency in China’s antitrust enforcement in 2020. In 2020, the SAMR published 18 penalty decisions on monopoly agreements and abuse of market dominance and concluded 473 merger review cases . [2] In addition, a total of 13 penalty decisions against non-filers of merger cases were published throughout the year. 

As to legislative work, on 2 January 2020 the SAMR released a revised draft of the Anti-monopoly Law of the People’s Republic of China (AML) for public comment. [3] The revised draft is the SAMR’s key step to amending the law. Although the finalisation of the revised draft will be subject to several rounds of discussion by various government agencies and must be approved by the National People’s Congress, it signals the SAMR’s enforcement priorities and indicates legislative trends that could have a profound impact on China’s antitrust enforcement landscape. In addition to revising the AML, the SAMR and the Anti-monopoly Commission of the State Council (the Anti-monopoly Commission) published a number of anti-monopoly guidelines that either pertain to the regulation of competition in several key industry sectors or clarify investigative procedural processes, including the Anti-monopoly Guidelines for Automotive Industry (the Automotive Guidelines) [4] , the Anti-monopoly Guidelines for Platform Economy Industry (the Platform Economy Guidelines) [5] , the Guidelines for Applying Leniency Program to Horizontal Monopoly Agreements (the Leniency Application Guidelines [6] ) and the Guidelines on Undertaking’s Commitments in Anti-monopoly Cases (the Commitments Guidelines) . [7]

As to antitrust behaviour investigations, the SAMR maintained its rigorous approach. The types of industries investigated by antitrust law enforcement authorities in 2020 were diverse, though the key implicated industries were still closely related to people’s livelihoods, (e.g., gas and water supply, building materials, automobiles, funeral and pharmaceutical industries). Sixteen out of 18 cases published by the SAMR concerned such areas.

As to merger control reviews, the overall case handling efficiency has improved in view of the fact that the total number of cases concluded increased while the average time for case review was reduced. According to SAMR’s annual working report for 2020, [8] the SAMR accepted 481 filings and concluded its review of 473 cases. The figures represent an increase of 5 per cent for accepted merger filings and 1.7 per cent for concluded merger cases from 2019. The average time for case filing and conclusion fell by 27 per cent and 14.5 per cent, respectively. As to conditionally approved cases, the figure was relatively stable in 2020 (four cases) compared to the previous year (five cases). In addition, the SAMR actively investigated non-filing cases and published 13 penalty decisions on non-filing cases.

In 2020, the SAMR prioritised rulemaking. Apart from its publication of the revised draft of the AML, the SAMR and the Anti-monopoly Commission released several regulations and guidelines including the Interim Provisions for Merger Control Review (the Merger Control Regulation), Provisions on Prohibition of Abuse of Intellectual Property Rights to Exclude and Restrict Competition and the Anti-monopoly Guidelines for Platform Economic Industry. 

Revision of the AML is in process

On 2 January 2020, the SAMR released a revised draft of the AML for public comment. In essence, the revised draft closely follows the current in effect AML framework and makes notable amendments to meet the changing demands of enforcement practice. For instance, the revised draft adds relevant provisions on hub-and-spoke agreements, clarifies the identification of dominance of the undertakings in the internet sector, and introduces potential criminal liability of monopolistic behaviour. Also, the revised draft significantly enhances the legal liability of AML violators. For example, Article 55 of the revised draft stipulates that the proposed penalty would be up to 10 per cent of the non-filer’s annual sales in the previous year instead of the maximum amount of 500,000 yuan under the current AML. It is therefore expected to pose a greater deterrent effect on non-filers once the revised draft is adopted.

The revision of the AML has been scheduled as a key legislative work for 2021, [9] and the revised AML is expected to be adopted in the near future.

Release of the interim provisions for merger control review

In October 2020, the SAMR released the Merger Control Regulation. [10] In general, the Merger Control Regulation consolidates all the previous major rules for merger control review into one coherent, comprehensive and easy-to-follow regulation, with no substantial changes being made. Nevertheless, it is notable that Article 2 of the Merger Control Regulation specifies that the SAMR can authorise its provincial branches to take charge of merger control review. Although it remains unclear what types of cases can be reviewed by provincial administrations for market regulation, it is believed that such decentralisation serves to relieve the burden of the SAMR and ensures that the SAMR can allocate more resources to handling other relatively more complex cases. 

Industry focus: platform economy, automotive and pharmaceutical industry

In 2020, three major sectors: automotive, active pharmaceutical ingredients (APIs) and the internet, have been targeted as enforcement priorities, and the Anti-monopoly Commission has released relevant guidelines regulating competition in these industries.

The automotive industry has been a focus area of China’s AML enforcement agencies since 2011. In June 2020, the Anti-monopoly Commission released the Automotive Guidelines, indicating future enforcement trends in this sector. For instance, the Automotive Guidelines have listed a number of non-price vertical restraints that may eliminate or restrict competition. Meanwhile, the Automotive Guidelines have also specified‘safe harbour rules’ applicable for exempting particular vertical restraints.

The Anti-monopoly Commission released the world’s first antitrust guideline that specifically focuses on the platform economy: the Anti-monopoly Guidelines for the Platform Economy Industry (effective from 7 February 2021). Furthermore, the SAMR announced three platform operator gun-jumping cases involving variable interest entity (VIE) structure and revealed several cases pending investigation (e.g., an investigation into Alibaba’s exclusionary behaviour on its e-commerce platforms).

In the pharmaceutical sector, the focus is still on APIs, and the Calcium Gluconate API case [11] attracted the highest penalties in 2020. Also, in October 2020, the Anti-monopoly Commission released the draft Anti-monopoly Guidelines for APIs for public comment, [12] but the formal version has yet to be adopted.

More legal certainty for undertaking’s defences during the investigation procedures

In 2020, the Anti-monopoly Commission introduced the Leniency Application Guidelines and the Commitments Guidelines. These two guidelines are consistent with the relevant clauses of the AML and the guidelines further elaborate how undertakings could make such application in practice.

With regard to the scope of application, the Leniency Application Guidelines only apply to horizontal monopoly agreements, while the Commitments Guidelines can be applicable to various types of monopoly cases (except core cartels, such as price-fixing agreements). It is notable that the Commitments Guidelines also apply to resale price maintenance (RPM). It is believed that the guidelines provide clearer guidance for the suspension and termination of investigations as well as greater clarity on the content of commitments that undertakings would need to make.

In November 2020, the Central Committee of the Communist Party of China emphasised that enforcement in the competition sphere would be strengthened, and disorderly capital expansion would be prevented. On 10 January 2021, Mr Gong Zhang, the chief director of the SAMR, stated in an interview with Xinhuanet [13] that the antitrust enforcement authority has been keeping a close eye on new trends on market developments and issues of fair competition, and the enforcement authority would endeavour to address major competition concerns and promote fair market competition. It is expected that the SAMR will continue to intensify its enforcement on anti-monopoly behaviour and unfair competition practices, of which both the online and offline market will be under significant scrutiny in 2021.

With regard to monopolistic behaviour, it is expected that cases relating to the internet sector, automotive, chemical industry, semiconductor, public utilities and pharmaceutical industry will continue to be investigated and penalised. In addition, we may expect a record penalty decision on an abuse of dominance case in 2021.

Regarding merger review, it is believed that the SAMR will maintain its professionalism and consistency during the review process. It is also likely that the average time for merger review will be further shortened, particularly for simple procedure cases. Further, we believe that the SAMR will continue to adopt its usual approach on reviewing normal procedure cases (particularly conditionally approved cases). In addition, we believe that undertakings (especially in the internet sector) will need to spend significant time and resources to deal with non-filing cases from past years.

2020 was a relatively quiet year for cartel investigation both in terms of the number of penalty cases and the total amount of penalties. The SAMR and local agencies published 10 cartel cases in 2020. Compared with that of 2019 (nine cases), the number of cartel cases increased slightly in 2020. The penalty cases involved a variety of industries, such as building materials, automobiles and gas. The total amount of penalties amounted to 45.31 million yuan, and the average amount of fines imposed in each case by the SAMR was relatively lower compared to previous years. Among the 10 cases, the case with the highest penalty is a price-fixing case relating to the building materials industry in Guangdong Maoming. [14] The Guangdong Administration for Market Regulation imposed a total of 7.65 million yuan fine on 19 local concrete companies for reaching and implementing the monopoly agreement.

Hunan Zhongmin Gas Cartel Case [15]

On 2 July 2020, the Hunan Administration for Market Regulation (Hunan AMR) published a decision fining Hunan Zhongmin Gas Co, Ltd (Zhongmin) 1.76 million yuan for entering into a horizontal monopoly agreement.

According to the penalty decision, Zhongmin and its rival Huaihua Railway Economic Technology Development Co, Ltd (Huaihua Railway) colluded with each other, entering into a joint operation agreement in March 2013 and divided the gas supply market in Huaihua City. Specifically, they verbally agreed that Huaihua Railway would take up 40 per cent of the total gas filling and distribution business, with Zhongmin taking up the remaining 60 per cent. The companies’ conduct was organised by the local government agency (i.e., Huaihua Housing and Urban-Rural Development Bureau).

The market division conduct of Zhongmin and Huaihua Railway violated Article 13 of the AML which prohibits market players from reaching an agreement with rivals to divide the sales market or raw material procurement market. During the investigation, Huaihua Railway was the first to proactively report to Hunan AMR that it divided the distribution area with Zhongmin and provided material evidence. Huaihua Railway also applied for an exemption from penalties for the following reasons:

1. the activities of Huaihua Railway were organised by the local government department;

2. the cooperation activities between Zhongmin and Huaihua Railway had a positive effect on gas bottle security;

3. Huaihua Railway conducted rectifications;

4. Huaihua Railway once applied to stop cartel activities, but was rejected by the local government; and

5. Huaihua Railway reported the monopoly activities to Hunan AMR and provided material evidence.

In view of the fact that the evidence provided by Huaihua Railway played a key role in identifying the content and implementation status of the monopolistic agreement, Hunan AMR accepted Huaihua Railway’s arguments and granted it a full exemption from penalty. In contrast, Zhongmin, which raised similar arguments but failed to become a whistle-blower, was still given a fine equal to 3 per cent of its previous year turnover.

This is a typical case where a cartel member can be exempted from penalties under the leniency programme in accordance with Article 46 of the AML, provided that the cartel member voluntarily reports to the anti-monopoly enforcement authority about the monopoly agreement, provides material evidence and satisfies other procedural requirements. In addition, the Anti-monopoly Commission published the Leniency Application Guidelines in 2020. The Guidelines provide detailed provisions on leniency application and determination, such as the application time, the materials and evidence to be submitted, the form of application, the order of leniency and other conditions that shall be met.

Another notable feature of this case is that even though the monopoly agreement was reached under pressure from or under the instruction of government agencies, undertakings cannot be exempted from liability for breaching the AML. Undertakings must therefore be cautious not to engage in monopolistic conduct organised or instructed by administrative agencies.

In 2020, the SAMR and local agencies concluded 10 cartel cases and none of them were high-profile cases. The number of cartel cases increased slightly and the total amount of penalties was relatively low compared to the previous year. However, the SAMR is investigating German carmakers including Daimler, Volkswagen and BMW with regard to their possible collusion in emission controls following the European Commission’s probe in September 2018. This shows that Chinese antitrust law enforcement agencies have been closely monitoring cases investigated by other jurisdictions and may follow suit from time to time.

Another noteworthy point is that in January 2021, the SAMR published five cartel cases (involving the automotive, insurance, tourism and firefighting industries) that were penalised in 2020. This is in line with the SAMR’s focus on particular industries, and it is expected that more horizontal cases will be investigated and penalised in 2021.

The key industries for antitrust enforcement in 2020 were those closely related to people’s daily lives, especially those relating to water and gas supply. The Hunan Zhongmin Gas case is a typical example. Other than cases relating to water and gas supply, cases relating to the construction and automobile industry was also a key focus of cartel investigation in 2020. In particular, six out of the 10 cases were related to the automobile industry. It signals the SAMR’s greater antitrust concern in the automobile industry.

In addition, since the revised draft of the AML and the Platform Economy Guidelines have introduced clauses on hub-and-spoke agreements and algorithmic collusion, it is expected that the SAMR may keep track of several life services or OTA platforms’ potential illegal price or non-price collusion in the near future.

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[ TO BE CONTINUED ]

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