Competition Law Developments in East Asia - August 2012

This month’s editors: Julienne Chang, Zhao Jingjing, Pearl Yeung, Jeffrey Lee and Lydia Fung.

Below is an excerpt from our monthly Competition Report. More detailed commentary on these issues and other recent competition law developments in the Asian region is to be found in this month’s edition of our report available on a free subscription basis (see further below).

Four years ago this month, China embarked on a new era of competition merger control with the entry into force of the Antimonopoly Law. While the Antimonopoly Bureau of the Ministry of Commerce was very quick to establish efficient administrative processes and has continuously improved on them since 2008, progress in the transparency of the substantive aspects of its decision-making has been more haphazard.

Numerous implementing measures and guiding opinions are now available on the procedural aspects of Chinese merger control, with more to come. However there is only one short implementing regulation on matters of substance, and it does little more than paraphrase the factors already set out in Article 27 of the Antimonopoly Law. The lack of substantive guidance also results from the absence of publicity in relation to the Antimonopoly Bureau’s merger control decisions. It has reviewed more than 400 transactions since August 2008, but only announced the results of its review in 16 cases. The law only requires that prohibitions and conditional approvals be announced.

Further, the Bureau has a broad discretion in deciding how detailed these announcements are, as the Antimonopoly Law does not require that the full text of decisions be published. Some announcements provide explanations on such important matters as market definition and market shares, and clearly identify the conditions that are attached to the clearance decision. But often - and it was again the case with the announcement this month of the decision adopted in relation of Wal-Mart’s acquisition of Yihaodian - the announcement fails to refer to the facts and economic data that support the theory of harm.

On 13 August, the Chinese Ministry of Commerce (MOFCOM) conditionally approved the proposed acquisition of an additional 33.6 per cent stake in Niuhai Holdings by American retailer Wal-Mart. The notification was filed on 16 December 2011 but only accepted as complete two months later, on 16 February 2012, at which time the review procedure formally began. On 16 March, considering that the transaction could have restrictive effects on competition in the Chinese B2C online retail market, MOFCOM decided to open a second-phase review. The review was extended by an additional 60 days on 13 June after MOFCOM obtained the parties’ consent to do so.

According to MOFCOM’s announcement, as a result of the transaction Wal-Mart would increase its stake in Niuhai Holdings from 17.7 per cent to 51.3 per cent. Niuhai Holdings controls Yishiduo Electronic Commerce, which operates Yihaodian. Yihaodian is the largest online supermarket in China. It is active through both direct sales and through “telecommunications value-added services”. MOFCOM’s announcement is unclear on this point, but these regulated services appear to be relate to the operation of an online marketplace, where independent suppliers can find buyers. These services can only be operated under licence from the Government.

In its competitive analysis, MOFCOM identified Wal-Mart as a key player in the market for supermarket chains in China and worldwide. MOFCOM was concerned that Wal-Mart would leverage its competitive advantages (such as its sophisticated system of warehousing and distribution, extensive supply channels and strong brand name) to the newly acquired online retail business, which relies heavily on logistics and service systems. MOFCOM’s investigation revealed that if the merged entity was to enter the “telecommunications value-added services market” (i.e., the operation of an online marketplace) through Yihaodian, it would have the ability to quickly expand its business and achieve a dominant position through its increased bargaining power.

To address the above concerns, MOFCOM approved the transaction subject to the condition that Niuhai Holdings should limit its acquisition to Yishiduo’s online retail business and should not use that platform to provide “telecommunications value-added services”. While the conditions set out in the announcement are not entirely clear, this may effectively limit Wal-Mart’s use of Yihaodian as its own online retail channel, preventing it from continuing its operations as an online marketplace. Interestingly, MOFCOM specifically prevents Wal-Mart from investing in Yishiduo’s “telecommunications value-added services” through a variable interest entity, a structure often used by foreign investors in China to gain influence over a business while only acquiring a minority interest.