PRIMER: China’s new anti-monopoly rules for tech companies
IFLR’s latest explainer looks at how companies are preparing for a new operating environment limiting anti-competitive behaviour
China’s State Administration for Market Regulation (SAMR) has released anti-monopoly rules targeting the country’s internet economy companies. While there are a number of measures that can target China’s tech companies, antitrust lawyers and market participants said that SAMR’s lack of resources and ambiguity in the new rules could make enforcement challenging.
What are the new rules about?
The rules provide guidance on the anti-competitive behaviour that SAMR will be targeting, including monopolistic agreements, abuse of a dominant market position, concentration of operators and abuse of administrative power to exclude or restrict competition.
With a strong emphasis on internet platform economy companies, the rules restrict monopolistic behaviour such as manipulating data, algorithms and imposing differentiated prices and conditions to different customers which restrict competition in the digital market.
The upper limit of fines are expected to go from RMB500,000 ($77,000) to 10% of the operators’ sales in the previous year.
Raymond Goh, group general counsel at China Travel Service, said that the rule changes are a positive development as it targets anti-monopoly practices by dominant players such as Alibaba and Tencent.
“These companies are using big data for pricing practices that are anti-competitive,” he said. “But it’s hard to capture this evidence of collusion. With the guidelines, the regulator can go after these companies to ensure that prices are not artificially inflated and the big players can’t force suppliers to choose their platforms and not any other.”
The guidelines prohibit monopoly agreements that exclude or restrict competition, including agreements that are reached by fixing prices, segmenting the market and restricting new products. In the past, these have been done by using a platform to collect or exchange sensitive information, using data and algorithms to achieve coordinated behaviour, and using platform rules to unify prices.
Under the new rules, hub and spoke agreements are forbidden. These agreements restrictions on the supplier or retailer that are implemented through vertically related players such as a common manufacturer or service provider. Such agreements are common in the digital economy where platform operators use platform rules, data and algorithms to exclude or restrict competition with operators in the digital market.
To prevent potential market concentration, the rules provide a notification mechanism where business operators must declare to the SAMR in advance about a concentration that reaches specific thresholds. The SAMR can eliminate or restrict the competition, and for concentration levels that are not specifically prohibited, the SAMR can apply certain conditions that lessen the negative impact on the market. These include requiring the business to divest its tangible and intangible assets, such as technology and data, and making the business open up its networks through technology licensing and terminating exclusive agreements.
How are companies preparing?
According to Cheng Xiaofeng, partner at Jingtian & Gongcheng, the largest platform operators in China will be most impacted by the new rules. Businesses will be monitoring the SAMR’s enforcement cases, as they will generate the real guidance on the market.
“These digital economy platform operators are dominant players in the market and some models have been adopted for quite a while,” he said. “A clear cut-off is possible theoretically, but the real impact on the macro economy post Covid-19 is difficult to assess.”
Laura Liu, special counsel at Baker McKenzie, said that platform operators in China should re-assess their compliance programmes by factoring in the new guidance. Parties with variable interest entities (VIEs) should assess the impact of the new rule as it expressly states that transactions involving VIEs are subject to merger control in China.
The regulations will constrain companies' ability to increase their market share and may require them to alter some of their existing practices to ensure compliance, said Lina Choi of the corporate finance group at Moody’s.
Market participants agree that the new rules will affect companies like Alibaba and Tencent the most. “Smaller competitors are happily lapping the new rules up, as it will carve up market space for them,” said Goh. “The market won’t be as concentrated and will have a few more big players, not just two.”
What are companies finding most challenging about the rules?
According to Liu, the challenge for companies, as faced in other jurisdictions, is how to advocate to regulators what constitutes good or bad conduct in highly dynamic markets. These markets are driven by innovation, which is more difficult to model than price effects.
Liu added that the digital economy industry has not been subject to heavy enforcement, so businesses will need to consider how the guidelines will ultimately be interpreted and what is going to fall on the wrong side of the line.
The in-house counsel at a Chinese technology company said that technology companies should weigh in on the impact of the rules on M&A decisions and he expects there to be more antitrust disputes.
“M&A in the technology space will not be as easy as the past,” he said.
While the law will mostly affect the big players the most, by SAMR’s design, Goh said that it is unlikely that their market shares will be cut down dramatically.
“Companies like Alibaba and Tencent have good relations with the regulators, so they will help each other out,” said Goh. These companies often share data with Chinese regulators for initiatives like the national digital currency, so be able to work around the new rules.
“Big internet economy players will have new methods that achieve the purpose of growing market share, like giving suppliers incentives and rebates,” he continued. “Anti-competitive practices won’t be as obvious as before but it will still be a cat and mouse game between the regulators and the big players.”
The new rules will also help prepare domestic Chinese companies internationalise, according to Goh. “When these companies go overseas to India, US and Europe, they will face the same minefields and won’t be welcomed into the market, so the rules are a mock test for domestic companies to figure out how to adapt,” said Goh.
What’s confusing about the new rules?
The rules are not all straightforward, however. Knut Fournier, senior lecturer at the University of Law in Hong Kong, and chairman of the Hong Kong Competition Association, said: “The most surprising element of the guidelines is the mention of policy goals which seem removed, or even potentially opposed, to antitrust considerations.”
For instance, the guidelines mention the enhancement of the international competitiveness of market players.
“If this is a policy consideration that the regulator has to take into account, this could mean that antitrust enforcement has to be balanced with the need for internet platforms to compete internationally,” he said. “It is unclear how this will play out."
Overall, the guidelines will have almost zero impact on international companies, which for the most part are cut off from the domestic Chinese market. “The notable exception might be Alphabet, Google's parent company which operates its Android OS in China, and Apple, which operates the Apple Store,” he said.
While the new rules may signal a desire to limit monopolies, Liu said that the guidelines also highlight that enforcement should pay attention to the equal treatment of all market players and enhance their international competitiveness.
“This may signal a desire to let China’s tech champions grow so they can compete internationally, but it remains to be seen how this will play out against other policy goals in day to day enforcement,” said Liu.
What enforcement challenges might the SAMR face?
While it will be challenging to unwind existing practices and a lot of resources will be needed, Goh said that the SAMR is determined to go down the route of strong enforcement. This is evidenced by some of its recent actions against Alibaba and Tencent for not reporting deals properly for antitrust review.
According to Cheng, the SAMR needs more experienced and sophisticated teams to review and scrutinise suspected anti-monopoly cases in order to properly supervise them.
“But the SAMR has just consolidated the anti-monopoly efforts of different ministries recently and how it will be properly staffed to perform efficient enforcement is still a market concern,” said Cheng.
Cheng added that while the SAMR may have a few enforcement cases in the market, cases of non-compliance, either in changed forms or in forms that are more skillfully covered up, could continue to exist in the market for a much longer time period.
While strengthening enforcement, Liu said that the SAMR may also need to tackle concerns that it should not over-regulate the tech sector, as well as the risks that heavy handed enforcement poses to innovation and development.