Coca-Cola and Huiyuan: Explanation, theory, an attempt to rationalise?

In an attempt to provide clarification of the final decision, Mofcom spokesman, Yao Jian, in an interview in the People's Daily, tried to flesh out the Ministry's rationale for rejecting the bid.

Yao stated that Mofcom took the following factors into consideration: market shares, market power, and the potential influence of the concentration on entry to the relevant market for consumers and other competitors and for competition as a whole. He also emphasised that the rejection was based solely on monopoly concerns, and not nationalism or protectionism as many members of the foreign media had suggested.

In his speech, Yao acknowledged the most crucial and difficult decision is how to define the relevant market. The definition of relevant market will have great impact on regulating concentrations. Generally speaking, when concentration is between undertakings in different relevant markets, there is no restriction on competition. Therefore, the concentration is not within the scope of the AML. The most common measure used to analyse and regulate concentration is the so-called structural approach, which takes the pre- and post-concentration market structure as its benchmarks. Under this approach, market shares and the concentration state of the market are two important indexes in evaluating whether a concentration will lead to restriction of competition. Theoretically speaking, two ways may be employed in defining the relevant market. The first is substitutability of demand from a consumers' perspective. In general, if consumers are more likely to buy B as a substitute of A, then competition exists between B and A: both belong to the same relevant market. The other way is substitutability of supply, from the suppliers' perspective. If suppliers of B can easily offer a closely-related product to A with little extra risk, then B and A belong to the same relevant market.

In the Coca-Cola and Huiyuan decision, as Yao addressed, two sub-sectors under the non-alcoholic beverage sector are present. These are the juice beverages and carbonated soft drinks sectors. The relevant market in this case is the juice beverage market.

Yao further explained that Coca-Cola already retained market dominance in the carbonated drinks sector, citing local industry association estimates that it holds 60.6% of the market. Huiyuan controls more than one-tenth of the Chinese fruit and vegetable juice market and has also gained great market power in the juice beverage market. Although there is not strong substitutability between the carbonated beverage and juice beverage markets, both are non-alcoholic drinks. On this basis the two sectors are closely intertwined markets. If the deal had gone through, Coca-Cola would have leveraged influence in the juice sector and could use its position to “transfer its dominance of the carbonate beverage market to the juice beverage market”. Additionally, he said, Coca-Cola could also take advantage of its dominant position to expand its profits through tie-in arrangements (bundling its carbonated beverage with a juice beverage), or with exclusive dealing conditions. If such were to occur, competitors would suffer, competition in the juice beverage market would be damaged and consumers would have to accept higher prices and fewer options.

However, Yao's speech did not cover how Coca-Cola would transfer its dominance of the carbonated beverage market to the juice beverage market. In theory, this would be impossible to explain in less than two pages, the length of the actual decision in Chinese characters. It is well accepted that the AML does not prohibit dominant market position itself; sometimes such a position is the result of fair competition. But the law does regulate those behaviours aimed at acquiring and abusing dominant market position. Even if Coca-Cola gained a dominant position in the juice beverage market, there are numerous well-functioning measures that could be used to ensure competition is protected. Overall, these absences are reasons behind the lack of persuasiveness in the decision, leading to further arguments as to whether this transaction should have been banned.