Competition law developments in East Asia - November 2016

This month’s editors: Maxime Vanhollebeke, Pearl Yeung, Michael Kim, Sophie Chen 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).

This month the Antimonopoly and Unfair Competition Enforcement Bureau of China’s State Administration for Industry and Commerce imposed close to $100 million in fines on Tetra Pak for violating the prohibition on the abuse of market dominance under the Antimonopoly Law. Aside from the high fine, the decision is remarkable in several respects.

The decision was adopted after a long period of investigation during which the authority collected a significant amount of information and economic data. The decision is very detailed, showing the authority’s intent to set out clear legal principles that would serve as guidance for other companies with market power. It is particularly relevant in respect of rebates policies, as it is the first decision under the Antimonopoly Law that sanctions loyalty-inducing rebate schemes. The decision clearly adopts the same interpretation as the European Commission in respect of similar provisions under EU law. The approach reflected in the Tetra Pak decision however appears to put less emphasis on the need to establish actual foreclosure effects; it appears sufficient that potential foreclosure be established, without the need to show that competitors were effectively prevented from competing or that they were forced to exit the market.

While enforcement of the Antimonopoly Law in relation to pricing conduct falls within the jurisdiction of another authority (the National Reform and Development Commission), the Tetra Pak decision considers both non-pricing and pricing conduct. As a result, one of the leading decisions on pricing conduct under the Antimonopoly Law has now been adopted by the State Administration for Industry and Commerce. This reveals a pragmatic approach to the authority’s exercise of its jurisdiction.

On 9 November, the State Administration for Industry and Commerce (SAIC) adopted a very detailed decision sanctioning Tetra Pak, a European supplier of food packaging machinery and products, in respect of a series of abuses which occurred between 2009 and 2013. The decision was published on 16 November.

According to the SAIC, during the relevant period, Tetra Pak occupied a dominant position in three markets in China: (a) the market for the supply of paper-based aseptic packaging equipment; (b) the market for the supply of technical services in respect of paper-based aseptic packaging equipment (including complementary spare parts and maintenance services); and (c) the market for the supply of paper-based aseptic packaging materials. In addition to considering its market share, which ranged from 50 per cent to 80 per cent, the SAIC took account of a number of other considerations to reach this conclusion, including Tetra Pak’s pricing freedom, its yields, the quality and competitiveness of its products and the unique nature of its services, the terms and conditions imposed upon its customers, the high degree of dependence of its customers and its importance as an unavoidable trading counterparty, the lack of substitutable suppliers, cost advantages enjoyed by it, as well as high financial and technical barriers to entry. In respect of the market for the supply of paper-based aseptic packaging materials, the SAIC also took note of Tetra Pak’s unique competitive edge conferred by its ability to sell an offering combining equipment and packaging materials, its procurement advantages, and the fact that it is the only supplier able to meet purchasing demands of the two largest dairy product providers in China. Having established Tetra Pak was dominant in the said markets, the SAIC proceeded to find that Tetra Pak had engaged in various forms of anticompetitive conduct contrary to Article 17 of the Law.

The decision first considers Tetra Pak’s violation of Article 17(1)(5) of the Law, which prohibits tying arrangements and the imposition of unreasonable trading conditions without legitimate reason. Tetra Pak had, firstly, tied the sale of its packaging materials to the sale (and rental) of its packaging equipment by requiring customers to use only Tetra Pak material, Tetra Pak-approved material or material of “equivalent quality”, and secondly, tied the sale of its packaging materials to the provision of technical services by fixing the price of these services based on the quantity of packaging materials used by a customer, a practice which deviated from accepted industry practice. Warranties with respect to the packaging equipment were also subject to conditions relating to the customer’s use of Tetra Pak’s packaging materials (and spare parts). On account of the fact that Tetra Pak’s equipment, technical services and packaging materials each constituted independent products, such tying conduct could not be justified, whether for technical (or efficiency) reasons, or health and safety considerations. While customers remained at liberty to use material of “equivalent quality” when purchasing (or renting) equipment from Tetra Pak, the latter had failed to volunteer assistance rendering it impossible for customers to determine on their own, whether a third-party material could meet such description. Viewed in combination, these factors gave customers little choice but to use Tetra Pak’s packaging materials – Tetra Pak had in effect leveraged its position in the equipment and technical services market to restrict competition in the packaging materials market.

The decision then considers that the imposition by Tetra Pak of exclusivities on one of its suppliers infringed Article 17(1)(4) of the Antimonopoly Law, which prohibits the imposition of exclusivities without appropriate justification. The said supplier sold essential raw materials used in the production of paper-based aseptic packaging materials; and the exclusive practices took two forms. First, pursuant to the terms of a memorandum of understanding, the supplier committed to devote its production capacity exclusively to produce raw materials for Tetra Pak for a three-year period. Despite the fact that this exclusivity was not implemented in subsequent contractual documentation, the exclusivity (as found in the memorandum) was sufficient to deter the supplier from contracting with third parties. This view was also supported by evidence that the supplier had continued to refuse procurement requests from third parties even though its production capacity far exceeded demand from Tetra Pak alone. Secondly, Tetra Pak had prevented the supplier from using Tetra Pak’s technical specifications or process information in its production of raw materials for third parties. According to the SAIC, as this information did not constitute proprietary information, and restrictions on its use hindered the activities of third-party manufacturers. On this basis, Tetra Pak was found to have leveraged its position and restricted competition in the packaging materials market.

The decision also identifies a third infringement by Tetra Pak. The SAIC found that Tetra Pak had, in implementing various types of loyalty discounts to boost the sale of its packaging materials, carried out “other acts of abuse” contrary to Article 17(1)(7) of the Antimonopoly Law. The SAIC found that Tetra Pak’s discounts took the form of annual retroactive rebates and individualised target rebates (offered in respect of single products and a combination of two or more products) which rendered it impossible for competitors to compete on the same cost base. The SAIC took the view that the restrictive effects on competition resulting from loyalty discounts were significant. In addition to the fact that Tetra Pak’s unique product offering and capacity capabilities meant that it enjoyed a high degree of customer reliance and a large portion of its customer demand could already be attributed as “non-contestable”, this portion was further enlarged by the fact that Tetra Pak had tied the sale of its packaging materials to the sale of technical services in respect of its equipment. In combination with the use of discounts, these practices had the effect of “locking-in” a minimum procurement amount, converting the “contestable” portion of demand into an even larger “non-contestable” portion. In other words, to compete for a customer, competitors would have to offer very low prices that would compensate for discounts offered by Tetra Pak in respect of both the “contestable” and “non-contestable” portion of demand. Although the SAIC acknowledged that customers were able to benefit from such discounts in the short term, it noted that these discounts would lead to foreclosure effects leading competitors to exit the market. In the longer term, loyalty discounts could also be expected to restrict profits and lead to low utilisation of production capacity, ultimately affecting consumer interests. On this basis, it was concluded that Tetra Pak had leveraged its position and restricted competition in the packaging materials market.

In view of Tetra Pak’s remedial initiatives implemented during the SAIC’s investigation, a fine of RMB667 million ($97 million), equivalent to seven per cent of Tetra Pak’s 2011 turnover (comprising six group entities), was imposed, together with cease and desist orders in respect of its practices of tying, imposing unreasonable trade conditions, and implementing loyalty discounts.