I actually began my legal career as an antitrust lawyer and I though there has so far been no call for that lawyer skillset on our China matters, I have very much tried to keep up with China’s slowly developing antitrust laws. So I was delighted to sit down (metaphorically speaking) with Josh Gartner Managing Editor of Publications for AmCham China for an interview on recent developments in China’s anti-monopoly law. This interview can be heard as a podcast here [link no longer exists] on AmCham’s site.
Or you can read the transcript below, stripped of all my overly long pauses and interminable “ohms.”
Welcome to China Brief Insight. This is Josh Gartner of AmCham China. I’m very excited today to be joined by Dan Harris of Harris Bricken law firm. Dan is a very well-respected lawyer. He is also well-known in China for China Law Blog, which he writes together with Steve Dickinson, who is also with his firm based out of Qingdao.
Today, Dan and I are going to talk a little bit about the MOFCOM [Ministry of Commerce] decision to block the Coca Cola purchase of Huiyuan. Huiyuan, as you know, is one of the biggest Chinese producers of juice. This case was pretty widely watched because it is one of the first tests of China’s anti-monopoly law.
JG: Dan, how are you?
DH: Good. How are you Josh?
JG: Good. Welcome to the Podcast.
DH: Thank you for having me.
JG: Alright. We are going to talk about the anti-monopoly law today. And specifically China is coming up on the one-year anniversary of the implementation. In the year since China has formally put the anti-monopoly law into place, what have we learned about it? How is China using it?
DH: Well, they are not using it all that often. The case that everyone talks about is the Coca Cola-Huiyuan purchase or the attempted purchase. And in that instance, China used the anti-monopoly law to prevent Coke from purchasing a large juice manufacturer.
JG: And when that ruling came out and the purchase was blocked, you wrote on China Law Blog that you had been anticipating that result for awhile. Why were you so convinced that was going to be the final result?
DH: Because the brand that Coca Cola was trying to buy was simply too big, and we felt that China would not allow it to go forward because that sort of purchase would be viewed as not being in China’s national interest.
JG: So are you saying that it was not on the traditional grounds that people would view monopoly cases? Or is it a combination of the monopoly law and some national sentiment as well?
DH: I’m saying that it is difficult to know. The thing about monopoly is – and this is true of many instances of the law – there are a lot of ways to look at numbers, a lot of ways to look at market share. In fact, just the other day I was at a party and somebody said the local cable company is a monopoly, and I said “no,” that it was not a monopoly because there are various ways that you can get a signal to your television. And this other person kept insisting that it was a monopoly because it was the only cable company. So a lot depends on how you define the market. The reality is that I would think most countries would not have stopped Coke’s purchase on antitrust grounds, on anti-monopoly grounds, for various reasons. First, the company Coke was buying was in the juice business. I believe that the combination of Coke and that company would have – I can’t remember exactly the numbers – it would not have increased Coca Cola’s percentage. Huiyuan, I believe, had something like 40 percent of the market, and Coca Cola had a very small percentage of the juice market, so the combination would not have led to that much of an increase in market share in the juice market alone. I also think that a lot of countries would not have confined it to just the juice market. Maybe they would have looked at it more specifically and said what about grape juice, what about orange juice, what about water, what about soda, etc. A lot has to do with the concept of elasticity of demand. If orange juice all of sudden doubles in price, people are not necessarily going to continue buying orange juice. They might switch to something like grape juice, so gaining monopoly power in something like orange juice might be very difficult because you have to deal with more than just who else is in orange juice, but also grape juice, cherry juice, soda, water, etc. So I think very few countries would have acted the same way China did with respect to the Coke deal, and I think a lot had to do with China’s overall policies regarding foreign investment.
JG: Are there any ways other than, specifically a monopoly on juice or a monopoly on specific type of juice, that a merger like this could create any specific monopolistic concerns?
DH: No, not really. The monopoly would come from Coke having such a large share of the market that it would be able to essentially price the product in a monopolistic way. And what that means is that it would have so much pricing power that it could raise prices and people would still have to, need to, or want to continue buying the product. There is another aspect to the purchase that we should talk about and that’s another reason why I think that it was denied, and that is the brand name. The fact is that Huiyuan is such a big brand name in China. I think that Beijing was concerned with appearing to cave in to foreigners by allowing foreigners to take over such a well-known Chinese brand name. And again that has to do with nationalistic sentiment. One thing I want to make clear here is – and you and I have talked about this previously – and that is this idea of decisions being made based on nationalism is very common throughout the world. It is not confined to China, and China could have made a similar argument with respect to some of the decisions made by the United States regarding foreigners purchasing American companies. I think the best example is the attempted purchase of UNOCAL a few years ago, which was denied by – I don’t remember if it was formally denied by the US government – but it was certainly made clear that the US government was not going to tolerate a Chinese company owning UNOCAL, which was viewed as important to national security interests.
JG: And for that particular deal, would you say that national security issues were the most important or was it more general protectionism and nationalism?
DH: My view was that it was protectionism and nationalism.
JG: Looking at more recent deals, particularly since the Huiyuan purchase was blocked, people have looked at the Rio Tinto deal to draw connections to the Huiyuan deal to see if there was some sort of fallout in Australia that even though Australia wasn’t involved in the Coca Cola-Huiyuan deal there were some questions about whether China’s reaction was enough to rouse nationalistic sentiment in Australia to block the purchase of Rio Tinto by a Chinese company. Can you talk a little about that deal?
DH: Yes. Again, there is no way to know what the rationale was for what happened in Australia. But I do think nationalism and protectionism definitely played a part. And I find it very interesting that people talk about the Rio Tinto deal being a bit of backlash from the Coca Cola deal because I don’t really see that. I think that the same thing would have happened had there never been a Coca Cola deal, just like it happened when CNOOC [China National Offshore Oil Corporation] was trying to buy UNOCAL in the United States. I think that Australia was very wary of a Chinese company coming in and taking over, essentially, one of their commodities. Call it national security. Call it protectionism. Call it nationalism. I think that is a fact of life just about everywhere in the world and so what happened in Australia didn’t really surprise me either. I don’t think that the line goes to the Coke deal in China. I think the line goes to nationalist sentiment.
JG: Since the Rio Tinto deal basically fell through there has been a new seller, which is BHP Billiton, and China’s Ministry of Commerce or MOFCOM has begun to make some rumblings about looking into the monopolistic implications of that deal. I guess I have two questions. The first would be: How much of that – from your own personal point of view – is fallout because the Rio Tinto deal with a Chinese company fell through? How normal is it for a third party country to look at the monopolistic implications of a deal involving two foreign companies?
DH: I’m going to answer the second question first. How normal is it? It’s unusual but not unheard of. I think the basis that China is giving for looking at that deal – the BHP-Rio Tinto deal – is legitimate or at least appears legitimate initially and that is that China is saying: “Look, these two companies are going to get together and control a huge portion of the iron ore industry. And we, China, are a huge purchaser of iron ore. Therefore we are entitled to look into this merger from a monopolistic perspective under our antimonopoly laws. Countries do that. The European Union has done that with respect to Microsoft. I can’t think of instances where the US has done that, but I’m sure they have. The justification is sound. I don’t really know enough about the numbers that will result from a BHP-Rio deal, and I don’t know enough about the numbers with respect to Chinese purchases of iron ore to really know whether under antimonopoly law – and when I say under antimonopoly law, I’m just talking in general, not necessarily under China’s antimonopoly law – if there is really something there. I do have no doubt that China is not happy about what has gone on in Australia. They are not happy about Chinalco essentially being pushed out of the deal, and I’m sure that their initial reaction to the BHP-Rio Tinto deal is based on anger, and it will be interesting to see how far they take it and what sort of valid basis they have for doing so.
JG: On the China side, in terms of foreign companies coming in and purchasing Chinese brands, I think the recent history shows that companies are starting to be a little more cautious about it and there is sort of an understanding that in certain cases there may be a backlash. Have you seen any developments recently that show foreign companies taking a different tact in terms of purchasing Chinese companies?
DH: From my own personal perspective, no. I should talk about that briefly. My law firm tends not to represent huge companies. I shouldn’t say “tends not to.” We do not represent huge companies in huge buyouts. We tend to represent small to medium sized companies who go into China either on their own or sometimes they buy Chinese companies. In that marketplace, these antimonopoly laws have never been a big factor, and we have never had to deal with any sort of nationalistic backlash on the scale where…. let’s say the media gets involved. There have been times when there are certain industries where we get the sense that the Chinese government would prefer that our clients not go in, but that’s probably less due to nationalism than other factors because these are not investments where they are going to make the national press in China. So from my own perspective, and that being the perspective of representing small to medium sized companies there has been absolutely no change. What I have also seen, from the perspective of an interested observer, is that there has always been and will likely continue to be the big companies who seem to understand what is going to be allowed in China in terms of purchases and act accordingly. A very recent example of that is KKR — Kohlberg Kravis and I forget what the R stands for. I was just reading that they invested $150 million in a dairy company in Anhui province. I think they are getting a 20 percent stake in that and the press has talked a bit about how this was allowed and the Coke deal wasn’t, and the reason why is fairly obvious. The reason is that this is the kind of deal has always been allowed in China. (When I say “always,” I am talking about the last five to ten years.) The Chinese government has always pretty much encouraged foreign companies to purchase non-majority interests in Chinese companies where the foreigner coming in can add a benefit to the Chinese company – maybe a transfer of technology, management skills, access to foreign markets. That’s what I see in the KKR purchase. My guess is that China is very happy with this purchase because it views this as an opportunity to bring in foreign expertise to help tighten up the supply chain in the dairy industry.
JG: To clarify KKR is Kohlberg Kravis & Roberts. I won’t pretend that I knew that, but I was able to look it up while you were talking through that. So you’re basically saying that when it’s a smaller stake and the foreign enterprise is able to bring in the expertise and essentially add something to industry and the economy in China that is something that tends to be more welcomed as opposed to something that might be seen as a foreign enterprise coming in and taking over a national company or a famous brand in China.
DH: Absolutely. Yes. In fact, one of the reasons I am willing to take some credit for having foreseen what happened with the Coke purchase is that in the article we wrote we talked about – and I say “we” because it was with one of my partners, Steve Dickinson, who is based in China – the policies that China has with respect to foreign M&A, and we set out what we saw as the kinds of purchases that would be allowed. The Coke purchase did not fit in there. We said that foreign companies would be allowed to purchase small Chinese companies that the central government is not interested in managing and those tend to be the kind of deals in which my law firm is involved — small companies that frankly the government does not have much interest in. We said that they would be allowed to purchase large state-owned companies that are suffering from financial difficulties, provided that the foreign investor can restructure and save the Chinese company, and thereby save jobs. There were a lot of those purchases going on three or four years ago. That has seemed to die down a bit, but I remember a number of our clients would come back from China and talk about how some government official was telling them about some great company that our client should buy. Our reaction to that was always “If a Chinese government official is telling you about a great company to buy, it’s either because this Chinese government official has some friend who owns it or more likely this company is probably on its deathbed and they are hoping you can save it.” So those deals have always been encouraged by the Chinese government. Another deal that has always been permitted is – like the KKR deal – where a foreign company comes in and buys a non-majority share in a successful Chinese company but will bring some added benefit to it. But the one purchase that has generally not been allowed is – and will not generally be allowed is – buying a majority interest in a large and financially successful Chinese company. Another kind that tends to not be allowed is a smaller company that is financially sound that has what China considers a critical technology or in a really important field like military related or something like that.
JG: Would that latter category be under anti-monopolistic grounds or national security grounds?
DH: Not monopolistic grounds. Something more along the lines of national security grounds. As far as I know, just about every country has similar grounds. I know the United States does, China does. Countries tend not to like foreign companies buying into their airlines, buying their ports, etc. I know, for instance, in the US there are limits on foreign ownership of airlines. There are even limits on foreign ownership of fishing vessels.
JG: Moving back to the AML. We have had almost a year of the lobbying in place. We had a few landmark cases but not that many yet. Looking ahead, what are the kinds of deals you are looking for in terms of giving you road markers for the future?
DH: What I am looking for is to see somebody bring an action against some giant state-owned entity accusing it of being a monopoly because there are definitely some of those out there, none that immediately come to mind, but it’s very interesting – the idea of having an antimonopoly law in a country where some of the biggest companies are owned by the government, so I’m looking forward to a case like that. There have been some cases brought involving price fixing. I don’t know what the results of any of those cases have been. I’m not sure there have been any results. Based on the facts, and I’m only getting the facts from the media, but based on what I’m getting from the media is that some of those cases are fairly strong. There are some companies in China that have engaged in price fixing. One of things that fascinates me about China’s antimonopoly laws is that it is essentially plopped down as it ought to be, but it was plopped down without there being any history on which lawyers and judges can go on and so that’s always going to make things difficult and what’s also going to make things difficult is that not only is there no body of case law, which will tell people what they can do and what they can’t do, but there can only be very few judges in China who are knowledgeable about antitrust law because how can such judges have been developed when the law wasn’t in existence? I think there is going to be a lot reliance on foreigners in trying to figure out how to handle the law. I personally find that very exciting. I remember many years ago we sent over a first year associate to Sakhalin Island in Russia to represent one of the creditors in a bankruptcy case there, and it was one of the first bankruptcy cases in Russia. Our first year associate was not an experienced lawyer and he was not a bankruptcy lawyer. He had taken one bankruptcy course in law school and all these very experienced Russian lawyers and the judges were asking him how they should handle various things. I can see that same sort of thing happening – to a somewhat lesser extent – but happening in China with respect to the antimonopoly laws.
JG: One last question before we let you go. You just mentioned that you are going to be watching out for cases where some Chinese companies standing as potential monopolies would be challenged. Do you have any predictions of what the outcome of those cases might be?
DH: Tough question. Tough question because I haven’t thought about it much. But I guess the answer is that I suspect that because of the newness of the law and the lack of comfort that the judges will have with the law and perhaps even the fact that they will not necessarily understand the benefits of chopping up a company or preventing a merger…. I would guess, and it’s nothing but a guess, that we are not going to see much enforcement of the antimonopoly laws against domestic companies for another five years.
JG: Alright. Thanks so much for taking the time to talk with us, and as these cases do come to court and do get resolved. We would love to have you back on the podcast to talk about them.
DH: That sounds good to me. Thank you for having me.