By Alan Zhou｜Richard Xie｜Samantha He

I. Case Brief

On August 20, 2014, the Price Supervision and Inspection Division of the Antitrust Authority of National Development and Reform Commission (the "NDRC") issued a record 1.2354 billion yuan (approximately 201 million USD) in fines against Japanese auto parts makers and bearing makers for manipulating prices in further governmental efforts to step up enforcement of anti-trust laws. Eight Japanese auto parts manufacturers (the “Auto Parts Manufacturers”) and four bearing manufacturers (the “Bearing Manufacturers”) were suspected of involvement in horizontal monopoly agreements and were inspected by the NDRC (collectively hereinafter “Involved Manufacturers”).

After the inspection, the NDRC found out that the Auto Parts Manufacturers and Bearing Manufacturers reached and implemented monopoly agreements on auto parts and bearing pricing respectively. It was concluded that the agreements violate relevant China anti-trust laws and regulations, restricts and/or excludes natural market competition, affects the price of auto parts, whole cars and bearings, and also damages the rights and interests of downstream manufacturers and Chinese consumers.

In accordance with the severity of the monopoly conducts and factors whether the Involved Manufacturers could be reduced or exempted from the administrative punishment, the NDRC ultimately determined that the fines for the Involved Manufacturers should range from 4-8% of sales in previous year. Meanwhile, the NDRC decided to exempt the Auto Parts Manufacturer Hitachi and Bearing Manufacturer Nachi-Fujikoshi from administrative punishment, since they actively reported the facts of price monopoly and provided important evidence thereof, despite their involvement with the price monopoly.

After the issuance of the Administrative Punishment Announcement (the “Announcement”) by the NDRC, all Involved Manufacturers vowed to take corrective measures to change their sales practices: (1) immediately rectifying and changing the sales mode and sales policy in China’s market in compliance with the Chinese laws and regulations; (2) training all employees to ensure that they will comply with Chinese laws and requirements; and (3) taking actions to eliminate the adverse influence due to the horizontal monopoly agreement, to prevent from future violation and to protect rights and interests of the customers.
 

II. Case Analysis

A. Horizontal Monopoly Agreement violates Chinese Laws

It was verified by the NDRC that, from January 2000 to February 2010, eight other Japanese Auto Parts Manufacturers, (i.e., Hitachi, Denso, Aisan, Mitsubishi Electric, Yazaki, Mitsuba, Furukawa and Sumitomo), frequently held bilateral or multilateral conferences in Japan, mutually negotiated prices of auto parts, and then reached and implemented fixed-price agreements for the purpose of reducing competition and unreasonably getting the most favorable prices for their products. Starters, alternators, throttle bodies, harness and other 13 kinds of auto parts with the fixed price, were provided to auto manufacturers such as Honda, Toyota, Nissan, Suzuki, Ford and the other 20 auto manufacturers in Chinese market. This went on till the end of 2013. For the bearing price fixed by the Bearing Manufacturers, from the year of 2000 to the year of 2011, Nachi-Fujikoshi, Seiko, JTEKT and NTN organized/participated in the conference to negotiate the prices of bearings and the range of the bearing price increase from time to time.

From the legal perspective, the above-mentioned price fixing conducts constitute horizontal monopoly agreements. Horizontal agreements are always identified as the most typical monopolistic conducts and are made between two or more competing enterprises. Relying on the monopoly agreement, competing enterprises intend to reach an agreement and fix the price of the proposed products in the certain market. Since horizontal monopoly agreements may seriously affect the price of the proposed products in an affected area, which, in turn, significantly limits competition and harms the rights and interests of consumers, many countries expressly forbid the conclusion and implementation of any horizontal agreements.

Under Article 13(1) of the Chinese Anti-trust Law, monopoly agreements with any content of fixing or changing commodity prices are prohibited. Article 7 of the Provisions on Anti-Price Monopoly issued by the NDRC also states that competing manufacturers are prohibited from concluding the following price monopoly agreements, i.e., fixing or changing the price of commodities and services, fixing or changing the range of price changes, adopting agreed prices as the basis for transactions with a third party, agreeing to adopt standard formulas in calculating prices, etc. Under US laws and EU laws, parties concluding horizontal monopoly agreements to fix or limit the prices of products/service are considered forbidden “cartels” as well.

In our case, since the Involving Manufacturers did frequently hold bilateral or multilateral conferences to negotiate the price and the range of the price increase of auto parts and bearings, then reached fixed-price agreements and finally implemented such agreements (for example, in the bidding process, all Bearing Manufacturers unanimously agreed that one of the Bearing Manufacturers could offer the lowest but fixed price so it can succeed in such bidding. The rest Bearing Manufacturers will copy such behavior by turn so that every Bearing Manufacturer will benefit from the manipulated bidding.), such conducts violated current Chinese anti-trust related laws and regulations.
 

B. Discretion on Administrative Punishment Held by the NDRC

According to the Announcement issued by the NDRC, the Auto Parts Manufacturers were fined as follows: (1) Hitachi, as the first to report and provide key evidences of the monopoly conducts, is not fined; (2) Denso, as the second to report and provide evidence of the monopoly conducts, is fined 4% of the sales in the previous year, in amount of 150.56 million yuan; (3) Since Yazaki, Furukawa and Sumitomo negotiated and conducted the price monopoly on only one auto part, so they are all imposed 6% of the sales in the previous year, i.e., 241.08 million yuan, 34.56 million yuan and 290.4 million yuan, respectively; and (4) Since Aisan, Mitsubishi Electric and Mitsuba negotiated and conducted the price monopoly on two or more auto parts, so they are all imposed 8% of the sales in the previous year, i.e., 29.76 million yuan, 44.88 million yuan and 40.72 million yuan, respectively. The administrative punishment imposed on the Bearing Manufacturers are as following: (1) Nachi-Fujikoshi, as the first to report and provide key evidences of the monopoly conducts, is not fined; (2) Seiko, as the second to report and provide evidence of the monopoly conducts, is fined 4% of the sales in the previous year, in amount of 174.92 million yuan; (3) Since NTN quitted the conference negotiating the bearing price in Asian area in September 2006 but still participated in the conference negotiating the price of bearings exported to China, it is imposed 6% of the sales in the previous year, in amount of 119.16 million yuan; and (4) JTEKT is imposed 8% of the sales in the previous year, i.e., 109.36 million yuan, because it initiated and proposed to hold the conference negotiating the price of bearings exported to China.

We can see from the Announcement that the NDRC used its own discretion to levy different levels of administrative punishment against the Involved Manufacturers. In this case, the NDRC specifically stated that it employed Article 46(2) of the Anti-trust Law, which states that if the manufacturer, on its own initiative, reports about the existence of a monopoly agreement to the anti-trust enforcement authority, and provides material evidence, the enforcement authority may, at its discretion, mitigate, or exempt the manufacturer from the administrative punishment. We see three characteristics of the discretion on administrative punishment used by the NDRC at present:
 

1. The NDRC determines the administrative punishment on a case by case basis

Under Article 46(1) of the Anti-trust Law, where a manufacturer, in violation of the Anti-trust Law, concludes and implements a monopoly agreement, the enforcement authority shall instruct it to discontinue the violation, confiscate its unlawful gains, and, in addition, impose on it a fine of not less than one percent but not more than ten percent of its sales achieved in the previous year. We compared the administrative punishment imposed on the monopoly companies in last two year as following:

Based on this article, the administrative punishment imposed by the NDRC against the Involved Manufacturers was as high as 8% for the bearing maker JTEKT and auto parts maker Aisan, Mitsubishi Electric and Mitsuba.

2. The NDRC gives great weight to the Surrender Policy

Article 46 (2) of the Anti-trust Law states that once an enterprise reports the existence of a monopoly agreement, and provides material evidence, the NDRC may on its discretion mitigate, or exempt the such company from punishment even though it also participated in the monopolistic conduct itself. Generally speaking, the companies involved in a monopoly case share common interests and are in the same “bundle.” Employing a “surrender policy” may break the alliance between the “bundled” enterprises, because being the first to report may release the company from huge penalties.  

3. Key factors in deliberating the punishment for price fixing

In the present case, the NDRC decided the final penalties imposed on the Involving Manufacturers on the severity of their conducts, so NDRC exempt the administrative punishment from Hitachi and Nachi-Fujikoshi and determines the penalty proportion ranging from 4-8%. The NDRC outlined the following three factors it considered in arriving at its administrative punishment in its final Announcement:

(1) The order of in which the enterprises reported their behavior: the earlier the report, the less punishment;

(2) The amount of enterprise’s products involved in the monopolistic agreement;

(3) The degree to which the enterprises were active in participating in the price fixing meetings.

Above facts are critically considered by the NDRC for deciding the range of the administrative punishment.

III. Takeaway

A． Competing Enterprises Should Pay Close Attention to Horizontal Monopoly Agreements

Since horizontal monopoly agreements made between competing entities are forbidden under Chinese laws, companies should pay more attention to situations in which they directly or indirectly are involved in reaching or implementing horizontal monopoly agreements, such as fixing the products price in the certain market, fixing the range of the products price increase. In recent years, the NDRC has begun to focus on anti-trust conduct in the market and has issued several huge penalty announcements on enterprises for monopoly conducts, so enterprises should take actively measures to avoid participating in or to promptly correct monopoly conducts.

B． Appropriately Take Advantage of the Surrender Policy

Except for the articles regulated in the Anti-trust Law, Article 14 of the Regulations on Procedures for Enforcement of Administrative Law on Anti-Price Monopoly promulgated by the NDRC in 2010 details the proportion of the penalty that an enterprise may avoid when such enterprise takes advantage of the surrender policy: where the enterprise takes the initiative to report to the authority the relevant information on conclusion of the price monopoly agreement and provides key evidence, such authority may reduce or exempt punishment on the enterprise depending on the actual situation. The first enterprise to report the relevant information on conclusion of the price monopoly agreement and to provide key evidence may be exempted from punishment. The second enterprise to do the same may have their punishment reduced by 50 percent or more. Any other enterprises involved in the monopoly that take the initiative to do the same may have their punishment reduced by 50% or less. Therefore, as soon as an enterprise is inspected by the NDRC for suspicion of anti-monopolistic behavior, it may consider exercising the surrender policy appropriately to protect its own interests and rights. Besides, enterprises should also keep an eye on the malicious use of surrender policy conducted by the other competing enterprises involved in the monopoly. For example, an enterprise may initiate or participate in concluding a horizontal monopoly agreement and then firstly report such monopoly conduct to the NDRC, so it can exempt from the administrative punishment while take swipe at its competitors. 

Mr. Alan Zhou is a partner based in Global’s Shanghai Office and is specialized in general corporate, M&A and regulatory compliance. (E-mail: alanzhou@glo.com.cn)

Mr. Richard Xie is a senior associate of Global’s Shanghai office and is specialized in general corporate and M&A. (E-mail: richardxie@glo.com.cn)

Ms. Samantha He is a paralegal of Global’s Shanghai office. (E-mail: samanthahe@glo.com.cn)