By Susan Ning, Cheng Liu, Hazel Yin, Ruohan Zhang King & Wood Mallesons’ Commercial & Regulatory Group

untitledOnuntitled Muntitledarch 23rd, 2016, after several rounds of internal inquiries, Antitrust Guidelines for Automotive Industry (Draft for Comments) (hereinafter the “Consultation Draft”), drafted by the National Development and Reform Commission (“NDRC”) together with relevant authorities under the authorization by the State Council Anti-Monopoly Commission, was open for public comments. As the first comprehensive industrial antitrust guideline in China, the publication of the Consultation Draft stands as a milestone.

Automotive industry has long been under scrutiny by antitrust authorities. Early as in 2012, China Automobile Dealers Association conducted a research on antitrust issues in automotive industry from the perspective of the Anti-Monopoly Law (“AML”). Since the exposure of parts-to-whole price ratio in April 2014 for the first time, antitrust issues of automotive industry have been gradually stepping into public concerns. Several months later, the NDRC imposed fines totaling more than RMB 2 billion on several major automakers and spare part suppliers, which further ignited public concerns and heated up industry discussions. Thereafter, the State Administration of Industry and Commerce (“SAIC”), the NDRC, and the Ministry of Transportation together with other authorities, successively publicized a series of policies in furtherance of the institutionalization and legalization of antitrust practice in automotive industry , including the cease of brand authorization registration for auto distributors, the publication of Guiding Opinions on Promoting the Transformation and Upgrading of the Auto Maintenance Industry to Improve Service Quality, Administrative Measures on the Publication of Auto Maintenance and Repair Technical Information, etc.. Compared with these policies, the Consultation Draft has made greater breakthrough as for the width or depth of issues involved.

As for the layout, the Consultation Draft teases out a series of business arrangements in automotive sales market and aftermarket that may constitute monopolistic behaviors. In analyzing these arrangements, the Consultation Draft requires an evaluation of both pro-efficient effect and anti-competitive effect. Also, the Consultation Draft puts forward presumptive exemptions for vertical agreements that are evidenced in practice to be pro-efficient without seriously restricting competition (the authorities may recognize the relevant agreements as monopoly agreements based on the specifics of the individual case)[1]. In terms of a vertical agreement not presumed to be exempted, the Consultation Draft requires a determination on whether it meets the statutory requirements specified in Article 15 of the AML before determining whether the said agreement can be individually exempted. It is worth noting that for the first time, the Consultation Draft clearly establishes non-price vertical restrictions, e.g. territorial and customer restrictions may also constitute monopoly agreements. This brings with positive effect in furthering the corporate’s efforts on antitrust compliance work.

In terms of its content, the Consultation Draft covers rights and obligations among auto suppliers, spare part suppliers, and auto distributors. It also covers multiple levels of industry chain, including production, wholesale, retail and aftermarket, etc. Based on the AML, the Consultation Draft introduces a series of new concepts, including significant market power, single branding in the aftermarket, cumulative effect, passive sales, intermediaries, and genuine subcontracting agreement. Some of these concepts are broadly employed in well-developed antitrust jurisdictions; while for Chinese antitrust-related legislations, this will be the first time for these concepts to be recognized. Some of these legislative endeavors even make break-through based on foreign legislations and practice. It is for sure that the promulgation of the Antitrust Guidelines for Automotive Industry will have a far-reaching influence on China’s antitrust practice in the days to come.

For more detailed introduction of the Consultation Draft, please see other articles that we are publishing together with this overview. In this paper, we are laying down some typical issues that may arise from the Consultation Draft in the form of Q&A.

  1. Question: Is the Consultation Draft legally binding after it takes effect?

Answer: Antitrust Guidelines for Automotive Industry will be published by the State Council Anti-Monopoly Commission and take effect upon publication. It is a directive opinion that has a significance of guidance for business activities, but is not legally binding.

  1. Question: What are the presumptive exemptions listed in the Consultation Draft?

Answer: In cases where an automaker does not have significant market power, the following four behaviors are presumably exempted: 1) restricting distributors from selling their products outside their business premises, but without limiting passive sales of such distributors and cross-selling between distributors; 2) restricting active sales made by a distributor to an exclusive territory or an exclusive customer reserved by the auto supplier for another distributor; 3) restricting wholesalers from selling directly to end users; or 4) restricting distributors from selling parts to customers who may use such parts to produce products competing with those produced by the auto suppliers.

  1. Question: How to interpret “significant market power”?

Answer: “significant market power” is different from “dominant market position” under the AML. The former has a lower standard, i.e. undertakings without dominant market position could still have significant market power. Pursuant to the Consultation Draft, in the case of assessing the competitiveness of vertical anticompetitive agreements, undertakings that have less than 25%-30% market shares may be identified as not having significant market power.

  1. Question: Are the behaviors exempted by the Consultation Draft totally risk-free?

Answer: Despite presumptive exemptions, the Consultation Draft clearly stipulates that “if evidence exists that the behaviors of undertakings are not in line with Article 15 of the AML, the authorities may determine that the relevant behaviors are still subject to Article 14 of the Anti-Monopoly Law”. Additionally, the application of presumptive exemptions requires that undertakings do not have significant market power. The assessment of “significant market power”, however, is preconditioned on the identification of the relevant market as well as a comprehensive analysis of market shares and other competitive factors, which may be subjective. Therefore, even a certain business arrangement falls within the presumptive exemptions under the Consultation Draft, the risk of AML violation is not completely excluded, and case by case analysis may be still necessary.

  1. Question: The Consultation Draft does not mention much about the “Authorized Distribution Model”. Can automakers still require an authorized distribution agreement entered into by distributors?

Answer: The Consultation Draft does not prohibit “authorized distribution model”. In practice, automakers can still enter into an authorization agreement with distributors.

  1. Question: Are automakers allowed to prohibit distributors from selling products of other brands or sourcing parts from other channels?

Answer: The Consultation Draft does not simply prohibit single sourcing or single-brand franchise. In cases where an automaker has dominant market position (particularly in the aftermarket of its brands), such business arrangements may be identified as abusing dominant market position. Specifically, with dominant market position in the aftermarket, automakers shall not restrict distributors and repairers from purchasing quality-equivalent parts or OEM parts through other channels (including parallel imported parts) without proper justifications. Besides, in cases where automakers do not have dominant market position but have significant market power, the arrangement of single sourcing may still be considered as severely excluding or restricting competition and therefore be identified as vertical monopoly agreement.

  1. Question: Is it allowed to prohibit authorized distributors from selling contract products to unauthorized distributors?

Answer: The Consultation Draft allows automakers without significant market power to set up certain territorial and customer restrictions, without prejudice to prohibitions on restricting cross supply between distributors. Thus, no matter with or without significant market power, automakers shall not prohibit authorized distributors from reselling contract products to unauthorized distributors. It is worth noting that in the previous consultation draft for internal discussion, only the restriction on cross supply between authorized distributors was prohibited. The provision in the prior version of the draft could be interpreted as allowing automakers to prohibit authorized distributors from reselling contract product to unauthorized distributors.

  1. Question: Are automakers allowed to set up mandatory standards for distributors’ place of business?

Answer: The Consultation Draft allows automakers to set up quality standards regarding the design, decoration and office facilities of distributors’ place of business, but prohibits automakers from designating designers or brands of office facilities for distributors.

  1. Question: Are automakers allowed to set up sales target for distributors?

Answer: The Consultation Draft allows automakers and distributors to agree on reasonable sales target through fair negotiation. However, in cases where distributors are compelled to agree on unreasonable sales target and consequently are subject to an obligation to exclusively purchase contract products, if market competition is significantly excluded or restricted therefrom, the Consultation Draft may determine such behavior as a vertical monopoly agreement.

  1. Question: Are automakers allowed to intervene with distributors’ resale pricing?

Answer: The AML in principle prohibits restrictions by suppliers on distributors’ resale pricing. The Consultation Draft provides that automakers may claim individual exemptions under Article 15 of the AML in certain specific situation, such as resale price restriction during the promotion period for new energy automobiles and resale price maintenance in sales where automobile dealers act only as intermediaries.

  1. Question: Are automakers allowed to prohibit distributors from selling outside territory that reserved for it?

Answer: For automakers without significant market power, the Consultation Draft allows them to restrict active sales made by a distributor to an exclusive territory or an exclusive customer reserved by the automaker for another distributor, without restricting such distributor’s passive sales or restricting it from reselling to other distributors.

  1. Question: In cases where a consumer had maintenance services at a non-4S store, can automakers refuse warranty services despite that the warranty has not expired?

Answer: Automakers shall not refuse warranty services on that ground. This is provided not only in the Consultation Draft, but also in the Guiding Opinions on Promoting the Transformation and Upgrading of the Auto Maintenance Industry to Improve Service Quality. Consumers are entitled to choose either 4-S stores or non-4S stores for maintenance services, even if the warranty has not expired yet.

  1. Question: If consumers want to purchase spare parts from distributors and do repair by themselves, can automakers instruct distributors to refuse selling to such consumers?

Answer: Pursuant to the Consultation Draft, the behavior of “restricting authorized distributors and repairers from selling parts for maintenance to end users” severely restricts competition, and thus shall not be presumably exempted. Therefore, regardless of the existence of significant market power, automakers shall not impose such restrictions on distributors.

  1. Question: Are spare part suppliers allowed to sell products directly to distributors?

Answer: The Consultation Draft provides for that except for products manufactured under the “genuine subcontracting agreement”, automakers shall not require spare part suppliers to sell those products exclusively back to automakers, i.e. spare part suppliers have the right to sell their products directly to distributors.

  1. Question: Are spare parts suppliers allowed to attach their own brands on the products they produced?

Answer: The Consultation Draft provides for that except for the products manufactured under the “genuine subcontracting agreement”, automakers shall not restrict spare parts suppliers from attaching their own brands on the initial assembly spare parts (i.e. dual-branded spare parts).

Note:

[1] The State Council Anti-Monopoly Commission will provide relevant guidelines in relation to specific procedures through which undertakings may claim for exemption under Article 15 of the AML pursuant to the Consultation Draft.