Abstract: Current regulations, created by ministries and commissions such as the National Development and Reform Commission (“NDRC”), formulate that automobile distribution should follow the hierarchy from sole distributor to brand distributors. This is to prevent in-fighting within the individual brand, however, the results is a legal hotbed for monopoly practices to eliminate or restrict competition.
(By You Yunting) According to Media’s reports, China Automobile Dealers Association (the “CADA”) recently confirmed that the CADA is actively cooperating with the NDRC’s anti-monopoly investigation. But a senior executive of CADA explained that the investigation is aimed at whether automobile manufacturing enterprises fixed the minimum sale prices to distributors, not about the issue of high profit of imported automobiles into China. Setting a high price for import automobiles is a business decision, and does not constitute as a monopoly conduct.
Certainly, simply setting a high price for imported automobiles does not constitute as a monopoly conduct. Furthermore, when taken into consideration the tax rate set by the Chinese government for imported automobiles, the reason behind setting a high price for imported automobiles would seem to be reasonable. On the ground of economic principle, final profit margin would turn into general profit in specific relevant markets that has sufficient competition. However, if the overall profit in one industry is far higher than that of the average social profit for a long period of time, problems will arise. According to a recent National Business Daily report, at present, the distribution profit margin of imported automobile in China is roughly 30 percent and the cost-profit margin can reach 40 percent.
Where is the problem? The answer is in the system. In 2005, pursuant to Implementing Measures on Management of Automobile Brand Sale promulgated by the Ministry of Commerce, the NDRC and the State Administration for Industry and Commerce, all automobile manufacturing enterprises who will sell automobiles in China shall use a multi-level hierarchy, from sole distributors to brand distributors to sell automobile. The result provides the automobile manufacturing enterprises with an excellent institutional environment to control the terminal distributors.
To say that the Anti Monopoly Law was enacted for the purposes to prevent the practice of eliminating or restricting competition, the current regulations that all automobile manufacturers who try to sell automobile in China shall use multi-level hierarchy from solo distribution to brand distribution has undercut the effect of the law, providing a hotbed for vertical monopoly to eliminate or restrict competition between different brands. This created three huge problems with regards to monopoly practice: pricing monopoly of auto distribution, after-sale service monopoly, and reluctant distribution. Due to the current institutional environment in the automobile industry, where there is an illegal monopoly in the automobile import environment, there also is an illegal monopoly in the joint venture and the Chinese automobile field.
Since the hotbed only provides the environment for such action, to demonstrate that the actions were illegal, the fruits grown on the hotbed must be investigated. This means that investigated parties involving anti-monopoly investigation shall be the particular behavior of eliminating or restricting competition conducted by automobile manufacturing enterprises and distributors.
On the basis of the theory of the Anti Monopoly Law and the practical situations in the auto industry, anti-monopoly investigation can be directed to the following illegal situations: whether automobile manufacturing enterprises and distributors fixed a minimum sale price for an automobile, auto parts and services; whether automobile manufacturing enterprises and distributors implemented an irrational region segmentation system for the purposes of regional exclusive distribution; whether automobile manufacturing enterprises and distributors had a system of surface guided-priced but in reality implemented a compulsory minimum price; whether automobile manufacturing enterprises and distributors used unreasonable debates system to deprive distributors’ pricing rights; whether price alliance is formed between different distributors in the interbreed; whether automobile manufacturing enterprises and distributors made a man-made shortage of supplies to increase the sale price under the circumstance of sufficient supplies, etc.
With regards to above facts, if such situation does exist, the NDRC could clearly investigate evidences of manufacturers’ policies, contracts between manufacturers, and different level distributors and funds intercourse. Based on the fact that the import automobile manufacturing enterprises have received a high profit for a long time, we are optimistic about the anti-monopoly investigation on the automobile industry. On the other hand, we have also seen evidence that the monopoly problems in the automobile industry were caused or aggravated by the Implementing Measures on Management of Automobile Brand Sale promulgated by the Ministry of Commerce, the NDRC, and the State Administration for Industry and Commerce. Any offenders of monopoly practice discovered by this investigation should be punished, setting an example for other operators. Under the circumstance of existing hotbed environment for monopoly practices, monopoly practices of all industries will eventually return until the NDRC deal with the root cause of these problems.