Authors: Liu Cheng, Hong Lushen, Bi Yun, Jeff Liu

Corporate & Commercial Group, King & Wood Mallesons

Introduction

On 20 February 2020, in his annual review “Dedicated to Fair Competition and Serving Reform and Development – Overview of Antitrust Work in 2019”, Mr. Wu Zhenguo, the Director of the Anti-monopoly Bureau (“AMB”) of the State Administration for Market Regulation (“SAMR”), mentioned that the Anti-monopoly Committee of the State Council has issued four antitrust guidelines including the Antitrust Guidelines for the Automotive Industry (“Auto Guidelines”).

Recently, we noticed that the four antitrust guidelines (namely the Auto Guidelines, the Antitrust Guidelines for Intellectual Property Area, the Guidelines for Application of Leniency in Horizontal Monopoly Agreement Cases, and the Guidelines for Business Operators’ Commitment in Monopoly Cases) were included in the Compendium of Antitrust Regulations and Guidelines 2019[1] compiled by the AMB, through which the four antitrust guidelines were officially released to the public.

In this article, we will review some key issues in the Auto Guidelines, including the approach to market definition for the automotive industry, vertical monopoly agreements in distribution management and the abuse of market dominance in the aftermarket.

I. Relevant Market Definition

The Auto Guidelines explain the approach to defining the relevant market and their impact on different types of monopoly cases, and for the first time, provide specific guidance to the relevant geographical market definition in relation to the automotive industry. According to the Auto Guidelines:

  • Auto distribution consists of two levels: wholesale and retail. The wholesale level is from the auto suppliers to the dealers, while the retail level is from the dealers to the end users. On a case by case basis, a relevant automotive market may need to be segmented into the wholesale market and the retail market;
  • The automotive after-sales market can be segmented into the after-sales parts distribution market and the after-sales repair and maintenance market;
  • With respect to the relevant geographical markets in relation to the automotive industry:
    1. The manufacturing market of passenger vehicles can be defined as a country wide market;
    2. The wholesale market of passenger vehicles can be defined as a country wide market;
    3. The retail market of passenger vehicles can be defined as a provincial or regional wide market.

Compared to the draft for comments drafted under the lead of and issued by the National Development and Reform Commission in March 2016 (“Draft for Comment”), the final form of the Auto Guidelines has provided additional explanations on the approach for defining the relevant geographical market in relation to the automotive industry. Although in the part of the Auto Guidelines discussing the relevant market definition, the analysis on the impact of automobile brands on the definition of the automobile aftermarket has been deleted, it is still noted in the chapter concerning the abuse of market dominance that automobile brand is an important factor that shall be taken into account when defining the automobile aftermarket in individual cases. Therefore, when investigating monopolistic practices involving the aftermarket, the AMB may still define a relevant aftermarket as a single brand market.

In particular, the Auto Guidelines point out that it is generally unnecessary to explicitly define a relevant market in practice when evaluating horizontal and vertical monopoly agreements. However, for the abuse of market dominance cases, defining the relevant market is usually the first step for identifying an abuse of dominant position. Nevertheless, where a company hopes to apply an exemption in accordance with Article 15 of the Anti-monopoly Law (“AML”), it needs to prove that the agreement does not seriously restrict competition in the relevant market, which makes defining a relevant market a necessary step for the company to prove that its agreement conforms to the requirement of the statutory exemption.

Compliance Tips: In general, the approach for relevant market definition related to the automotive industry in the final form of the Auto Guidelines is basically consistent with the AMB’s enforcement practice in the past. It is noteworthy that it is not necessary for the antitrust enforcement authorities to explicitly define a relevant market when identifying and evaluating a monopoly agreement; on the other hand, if a company hopes to prove that its agreement conforms to the requirement of a statutory exemption, it needs to define the relevant markets affected by the agreement. In this regard, the burden of proof for defining the relevant market faced by the antitrust enforcement authorities and companies facing an investigation is not necessarily the same.

In addition, the AMB may still define the relevant aftermarket as a single brand market in practice when investigating monopolistic practices involving aftermarkets or reviewing merger control filings. Therefore, automotive companies need to pay greater attention to their business practices in the aftermarkets.
II. Vertical Monopoly Agreements

The Auto Guidelines once again confirms the enforcement approach of “prohibition plus exemption” against vertical monopoly agreements. The Auto Guidelines provides for certain types of resale price maintenance (“RPM”) situations where exemptions may be applied. Meanwhile, the exemption is presumed to apply to the specific territorial restrictions and customer restrictions conducted by the companies without significant market power.

a) Individual Exemption for RPM

Considering the characteristics of the automotive industry, the Auto Guidelines identify four specific situations where companies may apply for exemptions for their RPM behaviors in accordance with Article 15 of the AML, namely:

  • Short-term RPM for new energy automobiles: within nine months from the date when the auto suppliers issue the first wholesale invoice. However, the exemption period can be adjusted according to the industrial and technological development of new energy automobiles;
  • RPM imposed on a distributor who only acts as an intermediary party (“intermediary distributor”);
  • RPM in government procurement where the auto suppliers agree on a price for a public bid with the specific intermediary distributor;
  • RPM in online sales where the auto suppliers sell automobiles at a unified price through an online platform for a certain period with unspecified users, and the distributor is only in charge of the transaction proceedings such as vehicle delivery, payment collection, invoicing, etc.

Compared with the Draft for Comments, the Auto Guidelines primarily adds the provision that the exemption period for short-term RPM for new energy automobiles can be adjusted according to the industrial and technological development of new energy automobiles, which provides for additional flexibility.

Compliance Tips: Introduction of an individual exemption for RPM imposed on intermediary distributors reflects the enforcement authorities’ practical consideration on the characteristics of the automotive industry, as well as the principle that they will conduct a case-by-case analysis on vertical restrictions and pay closer attention to behavioral effects.

However, the Auto Guidelines have not provided further guidance on how to identify an intermediary distributor. Currently, there has been no public precedent from past enforcement cases where RPM imposed on intermediary distributors was exempted. Usually, an intermediary distributor undertakes certain commercial risks during the transaction (such as the inventory or financial risks), and has obtained title to the automobiles which they are reselling since the intermediary distributor has already completed the wholesale purchase from the auto suppliers. Therefore an intermediary distributor is different from the concept of “genuine agent” under EU or US law.

On the other hand, considering its limited distribution duties and limited risks undertaken, an intermediary distributor is also different from traditional distributors. Therefore, in practice, the meaning and definition of the concept “intermediary distributor” still needs to be further clarified, especially the differences between intermediary distributors and traditional distributors. Companies need to carefully assess the specific functions and roles of a distributor in a transaction before imposing RPM on such distributors, in order to determine whether it can qualify as an intermediary distributor eligible for the individual exemption. We will continue to monitor for any further information from SAMR on its application of individual exemptions for RPM.

b) Presumed Exemption for Territorial Restrictions and Customer Restrictions

i. “Safe Harbor” Rule

The Auto Guidelines generally recognize that vertical territorial restrictions and customer restrictions imposed by companies without significant market power can usually improve service quality and distribution efficiency, and do not have the effect of seriously restricting market competition, and thus can be presumed to be exempt. Compared with the Draft for Comment, the Auto Guidelines further clarified the threshold for the application of the “safe harbor” rule, revising “25% – 30% or less” of the market share threshold in the Draft for Comment to “30% or less”, which provides added certainty for applying the “safe harbor” rule.

ii. Vertical Restrictions Presumed Exemptible

According to the Auto Guidelines, the following vertical restrictions imposed by companies without significant market power can be presumed to be exempt:

  • Restricting distributors to only supplying within their business premises, when such restrictions do not apply to passive sales or cross-selling among authorized distributors[2];
  • Restricting active sales to a certain territory or certain group of customers exclusively allocated to another distributor by the supplier;
  • Restricting direct sales by wholesalers to end users; and/or
  • Restricting the sales of auto parts to customers, to avoid auto parts being used by such customers to produce the same products as auto suppliers.

iii. Situations where Presumed Exemption cannot Apply

Meanwhile, the Auto Guidelines also explicitly point out that certain territorial restrictions and customer restrictions usually have the anti-competitive effect of restricting competition, resulting in high prices and reduction of the choices of consumers, and thus cannot be presumed to be exempt, which include:

  • Restricting passive sales by distributors
  • Restricting cross-selling among distributors; and
  • Restricting the sales of auto parts necessary for automobile repair services to end users by distributors and mechanics.

It is worth noting that, compared with the Draft for Comment, the Auto Guidelines retained the “restrictions on cross-selling among distributors” analysis which was also in the Draft for Comment, that is, it does not specially distinguish the supply of goods between authorized distributors and unauthorized distributors, but confirms the belief that restricting cross-selling among distributors would generally have an anti-competition effect. In addition, we noticed that compared with the Draft for Comment, the Auto Guidelines deleted the provision that auto suppliers shall not restrict suppliers of auto parts, repair tool and diagnostic equipment from selling such parts, tools and equipment to distributors, automotive repair shops or end users; however, the Auto Guidelines retained the analysis of such activities in the abuse of market dominance chapter, which suggests that such restrictions will be regulated primarily as abuse of dominance in the aftermarket.

Compliance Tips: Before the Auto Guidelines come into effect, the antitrust enforcement authorities have never publicly punished companies’ vertical non-price monopoly agreements. The Draft for Comments introduced the concepts of “active sales” and “passive sales” for the first time, and regulated the restrictions on passive sales while considering online sales as passive sales. This approach is basically consistent with the practice stated in the EU Vertical Block Exemption Regulation.

We understand that, for distribution management in practice, it is difficult for companies to directly distinguish whether cross-regional sales by the distributors are active sales or passive sales. It further requires that companies, when conducting regional or customer management of distributors, shall closely track the types of non-compliance activities, confirm the nature of cross-regional or cross-customer sales, and strengthen antitrust compliance in the area of distribution region management.

In addition, we noticed that the Shanghai Antitrust Compliance Guide for Business Operators and the Zhejiang Competition Compliance Guide for Business Operatorshave also pointed out restrictions on cross-regional/customer passive sales and cross-supply may have the effect of excluding or restricting competition. It seems that, although the Auto Guidelines mainly provide compliance guidelines for the operations in the automotive industry, some of the principles therein (such as the restrictions on passive sales and cross supply) may still be applicable to other industries.

c) Restricting After-Sale Services or the Supply of Parts through Warranty Clauses

The Auto Guidelines recognize that it will exclude independent automotive repair shops from participating in competition in the aftermarket, reduce the supply of parts and ultimately result in increases to prices of after-sale maintenance services, if an auto supplier enters into an agreement with distributors and automotive repair shops to impose unreasonable restrictions on after-sale services and supply of parts through warranty clauses. The situations regarding imposing unreasonable vertical restrictions through warranty clauses in the Auto Guidelines are basically consistent with those in the Draft for Comment, including:

  • Auto suppliers requiring that warranties require customers must have all their repair and maintenance work carried out by authorized repair networks;
  • For the work not covered by the warranty clause, auto suppliers require that automobile distributors and automotive repair shops use original spare parts as a condition for performing the warranty;
  • Auto suppliers restricting distributors from providing repair and maintenance service to vehicles purchased through parallel import without justifiable reasons.
Compliance Tips: Seen from the wording of the Auto Guidelines, the above mentioned “safe harbor” rule does not necessarily apply to restrictions on after-sales services or supply of parts through warranty clauses. We understand that this part of the provisions is intended primarily to ensure the availability of after-sales services in the aftermarket, in particular the effective participation of independent automotive repair shops in competition and equal access of vehicles purchased from parallel imports to after-sales maintenance services, which are not necessarily related to the companies’ market power. Therefore, when considering whether to impose certain conditions/thresholds through warranty clauses to exclude independent automotive repair shops, restrict the supply of parts, or restrict after-sales services for vehicles purchased from parallel imports, auto suppliers shall carefully assess the possible anti-competition effects of relevant restrictions in order to determine whether such restrictions may constitute a vertical monopoly agreement with the effect of eliminating or restricting competition.

d) Other Vertical Restrictions on Distributors and Maintenance Suppliers

In addition to the above-mentioned restrictions, the Auto Guidelines also list auto suppliers’ other vertical restrictions that may restrict the sales and service capabilities of distributors and automotive repair shops (mainly those vertical restrictions imposing exclusive obligations on distributors and repairers), including:

  • Tie-in sales of automobiles, aftermarket spare parts, accessories, consumables, repair tools, detecting instruments, etc.;
  • Forcing distributors to accept unreasonable sales targets, quantities and variety of inventory;
  • Mandatorily requiring distributors to cover the cost of promotion done in the name of suppliers, including advertisements and auto shows, or force distributors to advertise in certain ways and through certain media at their own expense;
  • Mandatorily requiring distributors an automotive repair shops to engage specific paid designers or builders, or use specific brands, suppliers or supply channels of building materials, general equipment, information system and office facilities for their relevant needs;
  • Restricting distributors from dealing in the products of other suppliers;
  • Refusal to supply or terminating distribution agreements without any justifications other than due to the pro-competitive conduct of distributors or automotive repair shops.

Compared with the Draft for Comment, the Auto Guidelines have added new provisions concerning the restrictions of auto suppliers on the distributors’ operation of competing products, and further clarified that it may be deemed as a vertical agreement subject to the regulation of the AML if the auto suppliers refuse to supply or terminate distribution agreements without any justifications other than the pro-competitive conduct of distributors or automotive repair shops.

Compliance Tips: The Auto Guidelines specify that restrictions imposed by automobile suppliers’, such as tie-in sales, unreasonable sales target or quality and variety of stock of spare parts, may impose exclusive obligations on distributors or repairs, and may also constitute a vertical monopoly agreement that violates Article 14 (3) of the AML. Therefore, in the future, even if an auto supplier does not have a dominant position in the relevant market, it still needs to carefully consider and assess whether the relevant tie-in sales, setting of sales target and purchase quantity restrictions will substantially impose exclusive purchase obligations on distributors, which will restrict market competition.

On the other hand, a newly added provision in the Auto Guidelines states that if auto suppliers impose restrictions on distributors from selling other suppliers’ products, it may constitute a vertical monopoly agreement. We understand that this provision is consistent with Article 24 of the Administrative Measures for Automobile Sales and breaks the single branding sales model for distributors described in the Implementing Measures for the Administration of Automobile Brand Sales in the past.

In addition, with regard to the vertical restrictions in this part, we understand that the safe harbor rule is not necessarily applicable. Therefore, in the distribution agreements between the auto suppliers and the distributors, before setting up the above-mentioned restrictive arrangements which may constitute exclusive obligations or restrict the dealer from dealing in the products of other suppliers, the suppliers should assess in advance whether the relevant vertical restrictions may raise prices in the  auto distribution and repair channels and thus hurt the interests of  consumers, by considering the parties’ market power, market structure, and the content and scope of the relevant restrictions.
III. Restrictions on Abuse of Market Dominance

According to the Auto Guidelines, the market for the sales of new automobiles is highly competitive; therefore, it is relatively difficult for auto manufactures to obtain a dominant position in the relevant market. However, considering the compatibility issues and locked-in effect in the aftermarket, the brand of automobile is an important factor to consider when defining the relevant market for an aftermarket, which is done on a case by case basis and, as a result, may affect whether an auto supplier is considered to have a dominant position in a particular auto aftermarket.

Therefore, the provisions regarding the abuse of market dominance provided in the Auto Guidelines mainly focused on the auto aftermarket, including the production, supply and circulation of aftermarket spare parts, as well as the availability of repair technical information, detecting instruments, and repair tools. In general, compared with the Draft for Comment, the Auto Guidelines mainly further expand on and clarify the aspect of availability of the repair information. Specifically, the following behaviors may be deemed as abuse of market dominance:

  • Restrictions on the manufacturing of dual-branded spare parts: Except spare parts manufactured under subcontracting agreements, auto suppliers with dominant position in the aftermarket of its branded automobiles should not restrict suppliers of original spare parts from manufacturing dual-branded spare parts without justification.
  • Restrictions on distributors and repairers from purchasing outsourced after-sale components: auto suppliers with dominant position in the aftermarket of its branded automobiles should not restrict distributors and repairers from purchasing matching quality spare parts or purchasing original spare parts from other channels (including parallel imports);
  • Restrictions on spare parts suppliers, distributors, and repairers from selling spare parts: Auto suppliers shall not require spare part suppliers to sell those products exclusively back to themselves, or restrict cross-supply between distributors, between automotive repair shops and between distributors and automotive repair shops, or restrict distributors and automotive repair shops from selling the spare parts needed for automobile repair and maintenances service to end users.
  • Restrictions on availability of repair technical information, detecting instruments, and repair tools: Auto suppliers shall not restrict automotive repair shops from acquiring channels and rights, restrict suppliers from providing information, instruments and tools to distributors and automotive repair shops, and shall not impose excessive prices which substantially restrict the service providers’ access to relevant technical information.

Compliance Tips: In addition to the Auto Guidelines, the Administrative Measures on the Publication of Auto Repair and Maintenance Technical Information issued by eight central ministries including the Ministry of Transport on January 1, 2016 also put forward requirements on the availability of the automobile repair and maintenance technical information for the aftermarket, such as requiring auto suppliers to disclose  repair and maintenance technical information about the automobile models sold thereby to all maintenance providers and consumers in an indistinctive, non-discriminatory and non-delayed manner, in available forms, via available information channels and at reasonable prices.

Auto aftermarket has long been under scrutiny by antitrust authorities. Considering the compatibility issues and locked-in effect in the aftermarket, auto suppliers are more likely to be deemed to have dominant position in the auto aftermarket. The Auto Guidelines provide comprehensive and detailed regulations against common restrictions in the aftermarket, in terms of aftermarket spare parts, repair and maintenance information, testing tools and instruments. In the future, automobile suppliers should, before imposing restrictions on the aftermarket, carefully assess the possibility that it is deemed to have a dominant market position, and the possibility that the relevant restriction is deemed as an abuse of its dominant market position.
IV. Others

In addition to the above key issues, the Auto Guidelines point out that there is no significant difference in the competition analysis for horizontal monopoly agreements and concentration of undertakings for the automotive industry and for other industries. Furthermore, the Auto Guidelines also lists typical administrative monopolistic behaviors, which mainly involve behavior affecting the free circulation of automobiles (including used automobiles.)

V. Conclusions and Recommendations

The Auto Guidelines are China’s first issued industry antitrust guidelines targeting the automotive industry’s business model.

Since China Automobile Dealers Association began to carry out inquiry and research on antitrust issues in the automotive industry in 2012, antitrust issues in the automotive industry have attracted the attention of various government departments. Since August 2014, the antitrust authorities (including the Anti-monopoly Bureau under the former National Development and Reform Commission and the current SAMR) have fined several automobiles manufacturers and auto parts suppliers for a total amount of CNY 2 billion.

So far, antitrust enforcement cases involving the automotive industry have focused on cartel and RPM. With the promulgation of the Auto Guidelines, non-price monopolistic practice and after-sales arrangements may become new areas of focus, and authorities may pay greater attention to the automotive industry. Given the new Auto Guidelines in place, there is an urgency for companies in the automotive industry to review whether their antitrust compliance arrangements for production, sales and aftermarket needs to be further improved according to the Auto Guidelines.

[1] See the Compendium of Antitrust Regulations and Guidelines 2019, the Anti-monopoly Bureau of the State Administration for Market Regulation, China Industry and Commerce Press, 1st edition, June 2020, which shows that the four antitrust guidelines were issued on 4 January 2019.

[2] Compared with the Draft for Comment, the Auto Guidelines changed the wording of this provision that “such restrictions do not apply to cross-selling among distributors” to that “such restrictions do not apply to cross-selling among authorized distributors”.