Fortifying the antitrust framework

In Article 4, Mofcom highlights the most commonly occurring example of a significant impediment to effective competition: the creation or strengthening of ability, incentive and possibility to prevent and restrict competition. What is worth noting is that paragraph 2 in Article 4 clarifies that, for an oligopolistic market, it is sufficient for a refusal to clear a concentration if the abovementioned ability, incentive and possibility to prevent and restrict competition are collectively possessed by two or more undertakings. In other words, the regulator is targeting the creation or strengthening of a collective dominant position.

Articles 5 to 10 are mainly detailed explanations of Article 3. Article 5 is an elaboration of Article 3.1, whereby it indicates the significance of identifying market share and market power as well as the elements the determination of market power would rely on, such as the substitutability of products or services between undertakings of a concentration. Similarly, Article 6 offers more details to Article 3.2 regarding what is the concept of market concentration degree and two instruments (Herfindahl-Hirschman Index (HHI) and the combined market share of the top N enterprises in the industry (CRn)) that are usually employed to conduct a quantitative analysis of market concentration degree.

In addition, another well-marked feature in the Provisions is that the new law pays attention to consumer welfare, in line with the revolutionary tendency of antitrust law in a lot of jurisdictions. In recent decades, more and more countries have started to add consumer welfare into the objectives of their antitrust laws. In some jurisdictions, this is even the number one objective. Articles 8, 9 and 10 mentioned that the concentrations of undertakings will promote the interests of consumers from different aspects. For example, consumers could benefit from upgraded technologies, higher quality, lower prices, etc. resulting from the concentration of undertakings. Considering this, Mofcom may also take the damage of consumer welfare as a reason not to clear a concentration.

Legal specialists ponder whether the antitrust law should only perform its economic regulatory function, or whether it should also help realise some social goals, like the guarantee of employment. This issue is still very controversial in many countries. In Europe, some scholars take the view that the antitrust law should not take on more burden than it is supposed to take, that is, focusing solely on economic aims. However, Article 12 of the Provisions specifically makes it clear that the public interest is also one factor being used to assess the competitive effects of concentrations in China. Foreign investors need to pay attention to this point. In the case that one enterprise is facing bankruptcy, the acquisition of such an enterprise may solve the potential problem of unemployment. Hence, it would be beneficial to the public interest. In this case, even though the concentration would give rise to some anticompetitive effects, a clearance is possible if the regulator considers the social impacts.

Last but not least, Article 13 provides that if a concentration has the effect of preventing and restricting competition in a relevant market, Mofcom shall not clear it unless the undertaking is able to prove the adverse effects are outweighed by the beneficial effects of the concentration and are in accordance with public interest.

All in all, these new Provisions set out standards to direct Mofcom's work in terms of assessing the competitive effects of concentration in the Chinese market. This is beneficial for both promoting the quality of enforcement and for conducting the notification process.

Waiting for a decision: Nestlé's takeover of Hsu Fu Chi

A spokeswoman from the Ministry of Commerce (Mofcom) publicly declared recently that it has officially accepted the notification on Nestlé's acquisition of Hsu Fu Chi. If Mofcom green-lights this filing, it could be one of the biggest foreign takeovers of a Chinese enterprise historically.

Founded in 1866 by Henri Nestlé in Vevey, Switzerland, Nestlé is the world's leading nutrition, health and wellness company. Nestlé's extensive product lineup covers a range of food products, beverages, healthcare nutrition, pet care, and dietary supplements, among many others. Hsu Fu Chi is China's largest listed confectionery company, with more than 16,000 sales outlets and 100 sales affiliates. Regarding Hsu Fu Chi's revenue, it raked in Rmb1.51 billion (US$234 million) in the first quarter of 2011 alone. Hsu Fu Chi focuses on chocolates, pastries and other sweets markets, and is particularly famous for a breakfast bar called “Sachima”. The company has already developed into a national brand within two decades. Due to Hsu Fu Chi's prominence in the Chinese market, voices from different communities have expressed their worry that this transaction may ignite nationalist outcries just as Coca Cola's negotiations with Huiyuan did.

From a legal and preliminary perspective, this concentration may bring about many anti-competitive effects. Firstly, both Nestlé and Hsu Fu Chi are strong market players in the Chinese market with regard to their own products. Secondly, there is horizontal overlap between their two “Mr. Big” products within the confectionery market. After further consideration, the occurrence of penetrating effects between the different markets of Nestlé and Hsu Fu Chi cannot be excluded from concerns. Therefore, Nestlé's action has triggered a concern from legal observers that it may encounter the same judgment as Coca Cola's attempted acquisition of juice maker China Huiyuan Juice Group in 2009 (Coca Cola was blocked).

Despite parallels being drawn to the Coca Cola-Huiyuan example, Hsu Fu Chi still harbours a hope of being cleared. It does not have such a powerful market position in the confectionery market as Coca Cola has in the beverages market (from 2009 statistics, it held a 6.6% share), and additionally, it has been seen that the trend of mergers and acquisitions in China's confectionery industry in recent years has facilitated cooperation on many creative levels. This has accordingly ignited more fierce competition and pressure on local players. Consequently, the proposed Nestlé-Hsu Fu Chi acquisition will give rise to many pro-competitive effects in the relevant market. All in all, it is still uncertain how Mofcom will assess and balance the concentration at issue.

Dr. Zhan Hao, Grandall Law Firm, Beijing