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03 September 2020
Assessment framework for vertical restraints
Conditions for assumed and individual exemptions
Enforcement attitudes towards RPM in automobile sector
Enforcement attitudes towards territorial and customer restraints in automobile sector
Indirect vertical restraints on aftersales service and distribution of spare parts
Other vertical restraints relating to sales and service capacity
The automobile industry has been under the radar of China's antitrust enforcement for several years. Since 2014, the agency has successively issued fines against many players in the automobile supply chain, including auto parts manufacturers and motor vehicle suppliers and distributors. By November 2019, the aggregate antitrust fine in the car sector was Rmb2.5 billion. Except for cartel-related penalties against 12 Japanese auto parts manufacturers in 2014, all of the other penalties related to the violation of vertical restraints.
China's antitrust agency's greatest competition concerns in the automobile sector relate to vertical restraints. Possibly underscoring this concern, the newly published Antitrust Guidelines on the Automobile Industry placed its main focus on clarifying issues arising therefrom. Therefore, it is critical to take stock of these guidelines in order to better understand the enforcer's attitude towards vertical restraints for companies in the automobile sector.
To help companies in the automobile industry better make their own assessments on antitrust compliance in China, this article explains the antitrust rules relating to vertical restraints provided in the guidelines and analyses their implications.
On whether a given vertical restraint constitutes a vertical monopoly agreement banned by the Anti-monopoly Law (AML), the guidelines clarify a three-step assessment framework that China's antitrust agency will usually employ. First, the agency determines whether a given agreement falls with the scope of vertical monopoly agreements prohibited by the AML. Second, it assesses whether the 'assumed exemption', which is similar to the block exemption in the European Union and will be further explained below, could be applied. Third, if the assumed exemption is not applicable, the agency will assess whether an individual exemption could instead be granted.
One valuable development in the guidelines is how they clarify the conditions under which the assumed exemption applies. Although at present the assumed exemption mechanism applies only to the automobile sector, theoretically it can also be of reference value to other industries.
According to the guidelines, companies that lack appreciable market power could, when imposing vertical restraints on territories or customers, usually be exempted from being considered as imposing a vertical monopoly agreement. The guidelines further clarify that a company usually does not have market power if its market share in the relevant market is below 30% (although this is a rebuttable presumption).
For individual exemptions, the guidelines provide no rules for the automobile sector besides those already described in Article 15 of the AML. However, with a view to clarifying its applicability for companies, the guidelines do illustrate circumstances under which assumed exemptions or individual exemptions usually apply. They are explained further below.
In practice, China's antitrust enforcement agency typically finds fixing resale or minimum resale prices (RPM) to be per se illegal, although judicial practice shows a different attitude towards RPM by the Chinese courts. The guidelines implicitly confirm that the assumed exemption will not apply to RPM. However, the guidelines do not exclude the possibility of granting an individual exemption to companies fixing RPM, subject to specific circumstances, even though the chance of doing so is relatively low. The guidelines further provide four scenarios in which individual exemptions are more likely to be granted.
First, fixing RPM in the short term for new energy automobiles may be individually exempted. This is in light of their benefits for energy conservation, environmental protection and avoidance of service free riding. The aforementioned 'short term' is further clarified in the guidelines as constituting nine months from the day on which the automobile supplier issues its first wholesale invoice. This term is subject to potential adjustment in the future.
Second, where the distributor serves only the function of a middleperson, fixing RPM may also be individually exempted. This scenario mainly refers to when the automobile suppliers directly negotiate the sales price with specific third parties or ending consumers, while the distributor provides only ancillary sales functions (eg, delivery, collection of payment, issuance of invoice and other services).
Third, fixing RPM in the course of government procurement may be individually exempted. This is because in practice automobile suppliers and distributors usually must collectively bid after agreeing on the quotation in government procurement projects. If the distributor in a government procurement scenario plays a role only in assisting completion of transaction, such as a middleperson, they may also be exempted.
Fourth, the RPM imposed by automobile suppliers in e-commerce may be also individually exempted. This exemption should be narrowly interpreted, as when automobile suppliers directly sell to ending users through e-commerce platforms, and the distributor plays a role only fulfilling the sale (eg, delivering the automobile, collecting payment and issuing the invoice for such transactions concluded through e-commerce platforms).
As mentioned above, restrictions on territory and customers imposed by suppliers with a market share below 30%, with justifiable reasons, can be assumed to be exempted. The guidelines illustrate the circumstances in which the assumed exemption is usually applied. These are elaborated below.
First, the distributors must engage only in distribution activities within their own business premises, but are not restricted from passive sales and cross-supply with other authorised distributors. Second, the suppliers restrict distributors from actively selling to the exclusive territories or customers which said suppliers reserve for another distributor. Third, the suppliers restrict wholesalers from directly selling to end users. Fourth, to avoid the spare parts being used by customers to produce the same products as the suppliers, the suppliers restrict distributors from selling spare parts to such customers.
The guidelines also provide circumstances in which the assumed exemption usually is inapplicable. This includes restricting passive sales and cross-supply between distributors and restricting distributors and service providers from supplying spare parts for repair and maintenance purposes to ending users.
However, even if the assumed exemption cannot be applied to specific territorial or customer restrictions, companies could theoretically continue to assess whether they may instead be eligible for an individual exemption.
Concerns over insufficient competition in the automobile aftersales market for repair and maintenance services have been articulated for a long time. These concerns are also reflected in the guidelines, which specifically stress that, if automobile suppliers impose unreasonable restrictions on the aftersales services and distribution of spare parts through warranty terms, they may raise competition issues. Such circumstances include but are not limited to the following:
In addition, the guidelines enumerate other typical circumstances in which a vertical monopoly agreement may be found, to remind companies of the potential antitrust risks.
First, the automobile suppliers obligate distributors and service providers to purchase automobiles, aftersales spare parts, consumables, repair tools and testing instruments that distributors and service providers did not order. Second, the suppliers force distributors or repairers to accept unreasonable sales targets, inventory variety, automobile quantities or aftersales parts orders. Third, the suppliers force distributors to bear the costs of advertising and promotion in the name of suppliers or restrict the specific ways and media that the distributors use to carry out promotions, at their own expense. Fourth, the suppliers force distributors or service providers to use the services only of specific design or construction companies, or require them to use only specific brands, suppliers and supply channels for building materials, general equipment, information management systems or office facilities. Fifth, the suppliers restrict distributors from dealing with other suppliers' goods. Lastly, the suppliers refuse supply or terminate the distribution agreement ahead of time due to the distributors or service providers engaging in activities that promote competition.
The guidelines do not only clarify the rules for market players in the automobile sector, but also provide valuable reference for companies in other sectors which heavily rely on external distributors on how to structure internal controls and limit antitrust risks. Specifically, in China, a large portion of manufacturers rely on external forces to distribute their products, and vertical restraints on distributors are oftentimes indispensable for them in the commercial world. Clarifications provided in the guidelines are undoubtably beneficial for in-house counsel to conduct their own internal assessments. However, the real commercial world is diverse and the guidelines cannot cover all commercial situations that may occur. When facing more complicated situations, seeking specialised legal advice from external counsel is recommended.
For further information on this topic please contact Hao Zhan or Ying Song at AnJie Law Firm by telephone (+86 10 8567 5988) or email (email@example.com or firstname.lastname@example.org). The AnJie Law Firm website can be accessed at www.anjielaw.com.
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