China Antitrust Enforcement Harms Multinationals

While it’s true that part of the reason for the high price of auto parts, and even the cars themselves, is thanks to a collection of taxes that include a value-added tax of 17%, an import tax of 25% and a consumption tax that can run as high as 40% based on engine displacement, that’s not what the agencies are examining. Instead, they’re considering other contributing factors. One of those is how much China contributes to a multinational company’s bottom line. If, in their judgment, it’s too high, that’s a good enough reason to investigate.

Blank said that in a lot of cases the Chinese agencies are right on things like “tying and bundling … it’s been done in the U.S. and Europe for a long time. You pay double for a special oil [from the dealer for your car]; it’s not okay, you just have to do it, but [the Chinese] are saying no, they don’t want that.”

Blank added, “They’re rational people and don’t want to blow up investment, trade, technology, and the rest. But they don’t want to be exploited and they want to stay in control. A lot of the bleeding and whining [from companies] is understandable, but at the end of the day a lot of the practices are not all that cool from a monopoly perspective … Having three agencies go at you is a lot, but that’s the message.”

While EU companies and countries that want to protest will likely have to go through the WTO, “the problem is that nobody wants to upset the applecart [of trade with China] … as long as China stays with parts and mergers that are obviously wrong, [there may not be all that much that the EU] will do.”

The EU’s Chamber is, however, trying to push for more transparency in China’s AML process. In its statement, it said, “The European Chamber has 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.”

However it plays out, Blank said the current enforcement flurry will be hardest on smaller businesses. “The little guys aren’t going to be able to play in these markets as easily any more. Whenever you put litigation [into the picture], it’s more obstacles for the little guy, more multinational attorneys, and [it’s the big] multinational companies that can afford them,” he said.

He cited Qualcomm as an example. The company has been under investigation for possible antitrust violations relating to patent licensing and smartphone chip pricing, and most recently a member of the NDRC was dismissed from his post after he was accused of accepting payments from Qualcomm and cowriting a report for the company on how it priced its licenses. “[Qualcomm is] big and strong,” said Blank. “But that’s the kind of thing that’s going to happen” if China continues on its current course.

Still, with the lure of such a large market, companies will find themselves adapting in one way or another, and China is likely counting on that.

While the AML actions are a “clear negative for big companies, a big hit for U.S. and small companies, and ambiguous as to whether it has any benefit,” the bigger risk is the Chinese market itself. “As an investor you buy Chinese stocks, U.S. and EU stocks with big positions in China revenue-wise…. That’s a different set of problems; securities issues are far more important than any trust issue.”

Blank warned that “massive shorting, low volume, the moratorium on IPOs and corruption all poison things as far as China stocks are concerned. Taxes and antitrust [problems are] in the second rank, and the first rank is the actual maintenance of security markets themselves.”