Price-rigging fines on foreign firms insufficient

Policy | Mike Bastin

For the first time, overseas companies have been fined for price fixing in the Chinese mainland market. This was the announcement made recently by the National Development and Reform Commission, China's top economic planning agency.

Surely this is a momentous step toward modernization and full market economy status for China. But why, when the price rigging took place from 2001 to 2006, has it taken until 2013 for this judgment and punishment to be doled out? And why is the penalty of 144 million yuan ($23 million) a tiny fraction of the fines meted out for similar anti-competitive deeds in the United States and the European Union?

Mike Bastin

The chief culprits are the South Korean global giants Samsung and LG who, together with four Taiwan producers of LCD display screens, have admitted to covert meetings between 2001 and 2006 in order to maintain artificially high prices. Each has now been ordered by the commission to pay 144 million yuan in fines and return 172 million yuan of extra payments to Chinese mainland buyers.

These sums may appear hefty, but they pale in comparison to Microsoft's penalty of just over $1 billion for a similar abuse of market power. In particular, Samsung will be able to absorb such a financial penalty without the slightest adverse effect on its profit and loss statement or balance sheet.

This rather tame monetary fine appears to result from the new anti-monopoly law passed in China in 2008. According to the legislation passed then, the precise financial amount to be levied is determined by, and equal to, the illegally gained revenue that resulted from any price manipulation. While this may appear logical, any closer look soon reveals a fundamentally flawed piece of legislation.

First and foremost among the legislation's deficiencies is the lack of any regard to what the offending companies do with their immorally gained money.

Surely some scrutiny must be given to the short- and long-term benefits that have resulted and may result from any investment of such funds. Once erected, barriers to market entry often become insurmountable and many often smaller competitors are shut out forever. Fraudulently gained investment which then enables such market concentration should not, therefore, simply equate to any consequent financial penalty.

Regulators, and in this case the commission, need to go much further and if necessary totally re-jig any imbalance of market power that has resulted from anti-competitive behavior.

In addition, simply repaying sums of money lost by industry competitors, suppliers and retailers may often not be sufficient to restore these companies to their former competitive position. Once again, it is the commission that should be prepared to go much further.

However, some praise must still go to the commission for this landmark ruling and the positive signal it sends to many of the foreign corporate giants that continue to rely on the Chinese mainland more and more for enormous profits.

This decision will also act as a much-needed fillip to many of China's emerging producers and service providers.

The commission definitely got it partially right, but another cause for concern is the time it took to finally arrive at this judgment. Complaints from across the LCD panel industry and consumers date back as far as 2006.

Covert price rigging and other forms of corporate collusion are inherently difficult to prove beyond doubt. But the commission needs to act much quicker if its work is really to be seen as a deterrent.

In this case, and maybe many others, the NDRC appears to have simply reacted, and very slowly at that, to complaints. What is necessary is a culture change across the commission from this reactive approach to a far more aggressive pursuit of any form of anti-competitive behavior.

This price-rigging case will go down in Chinese legal history, but it should also be seen as a catalyst for change toward even greater and more effective regulation across the Chinese mainland business environment.

The author is a visiting professor at the University of International Business and Economics in Beijing and a researcher at Nottingham University's School of Contemporary Chinese Studies.