Chinese authorities announce probes to be regular to "clean up auto market"

Anti-trust probes in auto industry

The Chinese government has begun to release the findings of various probes into the auto industry, resulting in price adjustments of vehicles and spare parts from foreign brands operating in China. The steady stream of investigations into allegations of monopolistic strategies in China has been conducted by the National Development and Reform Commission (NDRC), with various subsidiary divisions at provincial levels actively conducting the probes.

The full list of those being interrogated has not been released, but the findings are trickling in from different investigations. As the situation stands, the Bureau of Price Supervision and Anti-Monopoly under the NDRC confirmed that certain car-makers have already adjusted their prices following the probes.

• Jaguar Land Rover (JLR) has adjusted the prices of three of its models with effect from 1 August 2014, and a suggested retail price of the Range Rover 5.0 V8, Ranger Rover Sports 5.0 V8, and Jaguar F-Type Cabriolet reduced by an average of CNY200,000 (USD32,323 – see China: 25 July 2014: Jaguar Land Rover adjusts prices of models in China following probe).
• Daimler has cut the prices of 10,000 spare parts, averaging a 15% drop, with prices of windscreens dropping by as much as 29%. The new prices take effect from 1 September 2014. On 4 August, the offices of Mercedes in Shanghai were raided by NDRC-linked officials.
• Audi has brought down the total cost of its spare parts in China, with those for an Audi A6L dropping by about 30%. The investigations carried out by the Hubei division indicate that Audi and its dealers that were found guilty will be fined by 1–6% of their 2013 annual sales, state media (CCTV) has said, citing inside sources.
• BMW has announced it will further reduce the prices of more than 2,000 components by 20%, starting from 11 August 2014, in response to concerns expressed by the NDRC. BMW will also expand the number of sales centres where the company's spare parts can be bought, so that independent dealers and repair shops will be able to access them.

Wider cross-industry probes

However, there have been similar probes in other industries with serious repercussions.

• Investigators from China's State Administration for Industry and Commerce (SAIC) raided US software maker Microsoft's offices in Beijing, Shanghai, Guangzhou, and Chengdu on 28 July in what is understood to be an anti-trust investigation. Microsoft officials said that the company would "actively co-operate" with the government, but provided no further details on the nature of the investigation.
• Last year, the NDRC issued a CNY670-million fine against six primarily foreign powdered milk producers (see China: 7 August 2013: China's NDRC issues record-setting price-fixing fine against powdered milk producers).
• Over the past year, GlaxoSmithKline has been embroiled in a corruption case related to sales practices in China.

Increased scrutiny is not isolated to foreign firms; state-owned enterprises have come under fire from the national auditor this year, and last year the Ministry of Commerce announced a plan to break up local monopolies that would primarily affect locally-owned SOEs (see China: 26 July 2014: China auditor reports major malfeasance at 11 state-owned enterprises and 30 August 2013: China approves plan to break up local monopolies). FAW Group Corporation, a state-owned enterprise and Audi's joint-venture (JV) partner, is reportedly involved in the Hubei investigation.

In 2013, the NDRC announced a focus on oil, telecommunications, automobiles, and banking for anti-competitive behaviour and separate investigations into construction, telecommunications, environmental and waste management services, industry and manufacturing, firefighting, and commercial banking for charging excessive compulsory fees (see China: 15 August 2013: China's top anti-monopoly official reveals new sectors under scrutiny, focus on banking and  25 September 2013: Compulsory fees across various sectors to face new regulatory scrutiny in China).

Outlook and implications

In a statement issued on 8 August via the state-owned Xinhua news agency, the message was the current ongoing investigations into "foreign automakers are aimed at building a fair market". "These moves were taken in accordance with the Anti-Monopoly Law and are expected to clean up the auto market and safeguard the legal interests of Chinese consumers," the CAAM said in a statement, quoted by Xinhua.

The NDRC has already confirmed it has "found monopolistic practices in Chrysler, Audi, and 12 Japanese automakers, and will sanction them", the report states, adding that "anti-monopoly investigations into Mercedes-Benz dealers in Jiangsu Province and the company's Shanghai office are still under way". Chrysler was investigated by the Shanghai Municipal Development and Reform Commission, and Audi by the Hubei Province Price Bureau, while the Jiangsu Province Price Bureau separately launched an anti-trust investigation into Mercedes-Benz dealers in five Jiangsu cities.

Another report, also via Xinhua, states that the China Consumers Association (CCA) has released its report, highlighting that 327,564 complaints have been received from consumers in the January–June period, totalling CNY677.04 million and relating to consumer goods, with automobiles and parts making up a significant portion.

The NDRC launched anti-monopoly probes into the auto sector at the end of 2011 to safeguard competition in the market and protect customer rights. The rule of law that is currently being used as the main driving force behind the probes is the Anti-Monopoly Law, which came into effect in 2008 and stipulates that if production, distribution or sales of a product have been controlled in order to manipulate the final selling price, then the law has been violated. It also stipulates that enterprises found guilty of violating the law can be fined between 1% and 10% of their total sales in the period – often the previous year. The probes are expected to become a regular and ongoing feature of business operations in China, with enforcement of punishments more severe than seen in previous times. It is likely that international firms found in breach of the law will indeed receive strong sentences. Chinese firms found in breach of international regulations and trade disputes have been heavily fined in recent years, significantly affecting their revenues and margins.

The China State Administration for Industry and Commerce (SAIC) also issued on 1 August a new law, effective from 1 October 2014, which will allow dealers and franchises to register their business licence as an "automobile sales" company, thereby removing the brand name. Until now, dealers were expected to be authorised by the OEM in China. From 1 October, it is understood that the SAIC will "strengthen the regulation of auto business to protect the legal rights of consumers and ensure fair competition", a report from the China Automobile and Technology Research Center (CATARC) states. This will allow auto dealers to sell multiple brands at a single 4S store, and is said to have come into effect after extensive complaints from dealers calling for market reform.

Another government body, the China Automotive Maintenance and Repair Trade Association, released a report in April 2014 highlighting the price comparisons between vehicles and 50 affiliated spare parts in China, compared to the selling prices in other countries. The findings, as reported by the CATARC report, state that the Mercedes Benz C Class "reached an incredible 1,237%", equating to 12 times the price of the car. This was followed by the Ministry of Commerce beginning a further investigation in May 2014 with the China Automobile Dealers Association into monopolistic practices involving dealers and car-makers.

The number of government departments now affiliated with the probes shows the extent to which the authorities are going to show that this time they intend to enforce the laws and procedures introduced in the past. The sudden switch to enforcing existing regulations and laws will send shockwaves through Chinese industry. Probes, the enforcement of regulations, and the imposing of stringent fines are part of a cross-industry clean-up, with those foreign firms found to be behaving above the law likely to be made an example of. The auto industry is considered a pillar industry of China and it is this industry that is currently under intense scrutiny .

Within the Chinese vehicle market, local car brands are seeing a slowdown in sales while international brands are seeing faster growth. Meanwhile, imports of vehicles have risen over 30% in the first half of 2014 as more Chinese car-buyers look to spend their disposable incomes on vehicles built outside of the country (see China: 11 August 2014: Summary CAAM data show sales in China up 6.2% in July and 8.2% ytd). The resultant effect on the local car market, coupled with a drop in exports, has resulted in the authorities accelerating the methods by which they aim to remove practices found to be negatively affecting the sales of local brands in favour of international brands – a move that involves various government-related bodies and investigations resulting in findings of unfair and monopolistic practices in place among international car-makers in China, the authorities have claimed.