The intensifying antitrust crackdown by China’s National Development and Reform Commission is raising questions about the impact the probe is having on foreign investment, and what is motivating it as authorities have seemingly come down harder on multinationals than domestic operations.
To some critics, it looks like China is trying to build in advantages for domestic manufacturers at the expense of western companies, and that it relates to wider diplomatic and military attempts to isolate Beijing. There is no better example than Microsoft, which has been given 20 days to answer charges over the compatibility of its operating system and its Office software suite, a battle fought out previously in European Union courts. Altogether, according to Reuters, at least 30 foreign countries have come under scrutiny by antitrust regulators.
Whatever the motivation, it is arguably the biggest such action since China opened to the west. On Aug.20, the NDRC announced it was imposing its heaviest antitrust fines yet on Japanese auto part manufacturers, with ¥1.24 billion (US$200 million) in fines divided among 10 companies and seven auto-parts makers. Some of the companies have rolled over, knowing they stand little chance in a Chinese courtroom, but believe business in the country still pays dividends.
Aisan Industry, Denso Corp, Furukawa Electric, Mitsuba Corp, Sumitomo Electric Industries and Yazaki Corp, were fined roughly ¥830 million (US$135 million). Sumitomo suffered the largest fine, of ¥290.4 million, the largest Chinese fine levied against a foreign company in an antitrust ruling. Three bearings manufacturers, Jtekt Corp., NSK Ltd., and NTN Corp., were fined ¥405 million (US$66 million). Two more companies, Hitachi Automobile Systems and Nachi-Fujikoshi Corp., were indicted but avoided fines by collaborating with the authorities during the investigation.
The companies are accused of collusion and price-fixing between 2000 and 2011, unfairly manipulating the prices of manufacturing parts such as alternators, wire harnesses and bearings. These parts are used in at least 20 car models from Ford, Honda, Nissan, Suzuki, Toyota and others. The NDRC said in its statement that this had resulted in unreasonably expensive foreign cars, constituting “crimes against the consumer.” CCTV has reported the prices for Land Rover, Porsche, Volkswagen and BMW models are three times higher than in other countries.
Some of the companies involved, such as Denso and Furukawa, have previously faced heavy fines in other regions for similar offences. Yazaki, who paid the second largest fine, was ordered to pay US$470 million (¥2.8 billion) in the United States in 2012, and €136 million (¥1.1 billion) to the EU Commission.
Although there has been some speculation that this latest penalty stems from worsening Sino-Japanese diplomatic relations, there does not appear to be an unfair regulatory bias against Japanese firms. Foreign companies in general are under increased scrutiny. The Secretary General of the NDRC, Li Pumin, has categorically denied that foreign firms are being especially targeted, but has not released information on Chinese firms facing pressure. The central government has expressed a desire to make multinational corporations accountable to Chinese courts, enacting stricter anti-monopoly regulations and authorizing fines up to 10 percent of annual revenue (the Japanese companies faced 4-8 percent fines).
The crackdown seems widespread. In addition to the high-profile investigation of GlaxoSmithKline and OSI, six foreign infant formula companies were fined ¥670 million at the start of August. Microsoft’s offices have been visited by State Administration for Industry and Commerce. Daimler had its Shanghai offices raided as part of a greater investigation that may be targeting companies like Audi, BMW, Chrysler and Jaguar among others.
Although fines can be appealed, government control over the judiciary has led most companies to conclude that legal action is fruitless. Corporations can get lighter punishments if they collaborate with government investigators.
Fears of Negative Impact on FDI
There are concerns that China’s anti-monopoly measures may discourage foreign companies from investing in China. In June, FDI has dropped 17 percent from last year after having started off strong in January. It’s at its lowest in two years in the first seven months of 2014; FDI from Japan is down 45 percent, and the EU and US have both dropped about 17.5 percent as well.
Economists suggest rising labor costs, relatively high energy prices and expensive industrial property as reasons behind the drop in investment, but there are also suggestions that foreign companies are feeling unwelcome. Despite driving a significant influx of technology and funding, as well as providing millions of jobs, there’s speculation that the government’s seemingly unfair attention on foreign companies has resulted in hesitance and caution with regards to China’s market.
However, FDI is only down .4 percent compared to last year, and the Ministry of Commerce has warned that since it fluctuates from month to month, it shouldn’t be taken as a sign of a greater trend. Some economists suggest that while the crackdown may be a setback for some, most companies can afford the fines and are making enough money in China to justify the losses. While more crackdowns and fines can be expected in the future, it’s not expected that they will significantly deter foreign interest in China.
The author is a consultant in Shanghai who prefers to remain nameless because of the potential repercussions for his firm Credit to SJ Grand