MOFCOM reviews concentrations of business operators

By Zhang Yichi, Concord & Partners
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Since the PRC Anti-Monopoly Law came into force on 1 August 2008, the Ministry of Commerce (MOFCOM) has conducted a number of reviews of concentrations of business operators. During the review process, MOFCOM will conduct a comprehensive assessment of the following aspects to judge whether the proposed concentration has or may have an effect of eliminating or restricting competition.

Market share and control

张亦弛 Zhang Yichi 共和律师事务所合伙人 Partner Concord & Partners
Zhang Yichi
Partner
Concord & Partners

MOFCOM will first determine whether there is a horizontal overlap in the businesses and products of the parties to a concentration deal. This involves assessment of whether their respective products and services are identical or similar.

Second, it will review whether there is a vertical relationship between the parties in the upstream and downstream markets. This refers to the supply and sales relationship.

In both assessments, it will evaluate (horizontally) whether there is an overlap in the marketplace or territory of the parties; whether the combined market share would cause substantial change to the competitive structure of the market; and (vertically) whether other industry competitors would face unfair treatment with respect to supply and sales.

The acquisition of Lucite by Mitsubishi Rayon involved a review of a horizontal overlap. MOFCOM concluded that the primary overlap in the business of the two companies lay in the production and sale of methyl methacrylate (MMA). If the concentration was allowed to proceed, Mitsubishi Rayon would have a 64% market share for MMA in China: far more than that of Jilin Petrochemical, which ranked second, and Heilongjiang Longxin Chemical, which ranked third. If the acquisition was allowed to proceed, Mitsubishi Rayon would be able to eliminate and restrict its rivals in the MMA market in China.

General Motors’ acquisition of Delphi involved a review of a vertical relationship. General Motors maintains a leading position in the global and Chinese automobile markets, while Delphi is a major global supplier of automotive parts and the sole supplier to a number of car plants in China. The merger of two companies would not be beneficial to the price, quality or stability of the supplies by Delphi to other Chinese automobile manufacturers, and there was a perceived risk that Delphi might disclose to General Motors technology, model details and other sensitive information about other Chinese automobile manufacturers. MOFCOM concluded that the proposed acquisition would have the effect of eliminating or restricting
competition.

Market concentration

The degree of market concentration refers to the level of competition involving the products and businesses of both parties to a proposed merger or acquisition. Market concentration is generally related to the features of a product and the history of the formation of a market.

With respect to the acquisition of Sanyo by Panasonic, MOFCOM concluded that the retail Ni-MH battery market was highly concentrated with a limited number of competitors. If MOFCOM allowed the merger to proceed, Panasonic would enjoy a market share of 46.3% – far higher than that of its competitors – which was likely to enable Panasonic to increase prices unilaterally.

Market access and technology

Whether it is easy or difficult to gain access to a market depends on the
possibility of creating competition in that market. MOFCOM’s review in this respect covers whether a concentration of business operators would block other competitors from gaining access to a field, thus eliminating or restricting competition and affecting technological progress in that field. The ease of access to a market is also related to the features of a product in that market.

With respect to the acquisition of Wyeth by Pfizer, MOFCOM maintained that pharmaceutical R&D was characterized by high costs and long cycles. According to statistics, the development of a new pharmaceutical product takes three to 10 years and involves an investment of US$2.5 million to US$10 million. In this case, there were very high technical barriers to the market for mycoplasma hyopneumoniae. If Wyeth was acquired, Pfizer would be likely further to expand its market share in China, suppressing other competitors and restricting the development of other enterprises in that field.

MOFCOM will also assess the impact of a concentration of business operators on other business operators and consumers as well as on national economic development.

MOFCOM’s decisions

After an assessment, MOFCOM will decide whether to block a concentration of business operators, or to impose conditions to allow it to proceed.

If MOFCOM identifies any possibility of eliminating or restricting competition, it will negotiate with the business operators concerned over how to minimize the negative impact. The business operators can suggest solutions to minimize this impact. If satisfied, MOFCOM may elect not to block the deal, but may impose additional conditions which may be (i) structural (including the spin-off of some assets or businesses), (ii) behavioural (including the opening to competition of the companies’ infrastructure such as a network or platform, the licensing of key technologies or the termination of exclusivity agreements) or (iii) general conditions.

MOFCOM’s current preference appears to be to impose additional conditions rather than to block a concentration. It has applied all three sets of additional restrictive conditions mentioned above.

MOFCOM approved the acquisition of Lucite by Mitsubishi, but imposed wide-ranging restrictive conditions. As a structural condition, Lucite was required to spin off 50% of its annual production capacity and sell it to one or more non-associated third-party buyers on a one-off basis for a spin-off period of five years. This spin-off and sale was required to be completed within six months of completion of the acquisition. As a behavioural condition, Mitsubishi and Lucite were required to operate independently before the completion of the spin-off, and no acquisitions would be carried out or no new plants would be built within five years of completion of the deal.

Zhang Yichi is a partner at Concord & Partners in Beijing

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