Chinese regulators have moved quickly and with unprecedented hostility in the past month to enforce their antitrust law, accusing numerous multinational firms of price-rigging and controlling large portions of market shares. The storming campaign surprises many executives of multinationals, as they thought they had built deep connections with both the central and local governments.
The law began with a surprise visit of more than “100 government antitrust investigators simultaneously marching into four of Microsoft’s offices across China,” according to The New York Times.
Shortly thereafter, the State Administration for Industry and Commerce, which enforces China’s antimonopoly law, announced that Microsoft is subject to investigation and suspected of violating the antimonopoly law.
Though it may be typical for a firm such as Microsoft to face antimonopoly investigations, other United States and European corporations that have not traditionally been regarded as monopolistic are not escaping the probe of Chinese regulation this time.
The Chinese regulators targeted the world’s largest automobile industry last month. The Financial Times broke the story that National Development and Reform Commission fined Toyota $28.5 million for violation of China’s antimonopoly law. Previously, NDRC also claimed that Audi and Chrysler engaged in monopolistic behavior by selling spare parts, and indicated that as many as 12 Japanese automobile companies could face penalties.
China’s antimonopoly campaign has drawn concerns and criticism among foreign investors. On Aug. 13, the European Chamber of Commerce in China issued a stern statement demanding the Chinese authorities not to “prejudge the outcome of investigation.”
After years of adopting a market-oriented system, China rarely works to reform and build a comprehensive judicial system that supports investments and transactions in the economy. Tax credits and business regulations come not from the formal legislature process but from temporary policies issued by local governments. Such policies are usually subject to unexpected changes.
At the beginning of the 1980s, China issued various tax credits largely in favor of foreign investment and privileges that gave foreign investors abundant access to land and labor at very low costs. But now, the Chinese government wants to take these perks back without a formal change in the laws, as it didn’t go through necessary procedures when it made such laws.
What is important to the investigation is that the enforcement of laws does not depend on the judicial system but only the regulators’ investigation and conclusions with almost no opportunity to appeal. China passed its antimonopoly law in 2008 but has not seen any enforcement until this year. Why has law enforcement suddenly become stronger than ever before, especially considering those foreign companies have been operating in China for more than two decades?
The answer reveals that connections with governments surpass the laws in China. After years of operating in China, foreign firms have found that connections appear to be more efficient in investing in a project or resolving conflict than filing suits in courtrooms. Over time, they tend to ignore what the laws say and put much emphasis on building contacts, leaving room for the Chinese regulators to accuse them of violating the law when necessary. Despite efforts they put into the networks, foreign firms are still relatively vulnerable to antimonopoly investigation because they lack profound political patronage that prevails in many sectors in China’s economy such as many state-owned firms.
That explains why many state-owned firms in energy and telecommunication industries are able to avoid antimonopoly investigation while they in fact are charging consumers higher prices than their foreign peers. In the short term, it is impossible for the Chinese regulators to settle antimonopoly disputes with foreign firms through legal means. Those firms that are penalized either pay an enormous fine or leave the country eventually. This antimonopoly campaign may again show that Chinese law enforcement treats state-owned and foreign firms unequally and may trigger an exodus of foreign investments in the coming years.
