China’s Merger Policy: Patterns and Implications

China’s Merger Policy: Patterns and Implications Xinzhu Zhang JXUFE June, 2008

Outline • Background and Motivations • Description of three milestone cases • Preliminary analysis of cases • Patterns and Implications • Conclusions

Background and Motivations • After AML took effect in August 2008, more than 50 cases with relevant turnovers meeting the new notification thresholds were filed. • For the time being, most cases (more than 95%) were decided in Phase I without being challenged,. • Three cases were challenged, i.e. InBev/Anheuser Busch, Coca-Cola/Huiyuan and Mitsubishi Rayon/Lucite. • Both InBev/Anheuser Busch and Mitsubishi Rayon/Lucite were approved but with some modifications.

The Coca-Cola/Huiyuan case was blocked, the first one ever since China installed its merger control regime, that is less than 2% transactions were blocked. • Based on the information released the decision making process is not very transparent until recently, so any analysis will be speculative to some extent. • But it is still valuable to analyze these significant cases, find out emerging enforcement patterns, and draw implications to understand China’s merger enforcement policy.

Description of three milestone cases I. The InBev/Anheuser Busch Case • On 13 July 2008, Belgium based beer giant InBev and the US based brewery Anheuser Busch announced InBev’s acquiring of Anheuser Busch for US$49.91 billion. • The case was approved within 30 days limit of Phase I after MOFCOM found the transaction will NOT eliminate or restrict competition in China’s beer market.

However, since pre-merger, Anheuser-Busch had a 27% stake in Tsingtao Brewery, the second largest producer, and InBev had a 29% stake in Zhujiang Brewery, the fourth largest producer, MOFCOM imposed restrictions: • Post-merger InBev should not increase its stakes in Tsingtao Brewery and Zhujiang Brewery from pre-merger levels; • InBev should not acquire any stakes in China Resources Snow Breweries or Beijing Yanjing Brewery, the largest and third largest beer producers in China; • InBev will be obliged to notify MOFCOM of any changes in its controlling shareholders.

II. The Coca-Cola/Huiyuan Case • On September 2, 2009, US soft drinks giant Coca-Cola offered to buy Chinese juice maker Huiyuan Juice Group for US$ 2.4 billion. • MOFCOM decided to enter Phase II after 30 days the case was accepted given “the large scale and considerable influence of this concentration.” • Exactly 90 days later, MOFCOM decided to block the proposed merger.

MOFCOM ruled that • Coca-Cola would be capable of extending its dominant position in the carbonated soft drinks (CSDs) market to the fruit drink market post merger and foreclose potential competitors to enter the fruit juice market. • Coca-Cola might remarkably enhance its market power post merger by controlling two well-known brands, constituting an entry barrier to potential competitors to enter the fruit juice market.

III. Mitsubishi Rayon/Lucite • On September 11, 2008, Japanese chemical giant Mitsubishi Rayon Co. announced its acquisition of UK plastics maker Lucite International Group for US$1.6 billion. • After a four-month probe, MOFCOM expressed its concerns that the proposed merger could hurt competition given that pre-merger two merging parties have a combined market share of 64% for methyl methacralate (MMA) in China.

MOFCOM imposed divestiture plus code of conduct: • Lucite China should divest 50% of its annual MMA production capacity for a one-time sale to one or several non-related third-party buyers which have the right to buy MMA at a price just covering production cost for five years. • Lucite should operate independently from the MMA monomer business operations of Mitsubishi Rayon China until the completion of capacity divestiture. • Both Mitsubishi Rayon and Lucite are restricted on further acquisitions and new plant construction in mainland China.

Preliminary analysis of cases • InBev/Anheuser Busch • Both InBev and Anheuser have significant presence in China’s beer market as producers and equity investors. • No indication of how relevant market was defined even though terms like market (beer market) and market share were mentioned. In particular, how the geography market was dealt with was not clear. Information on market shares and concentration level was not released in the Decision. • The case was treated as a horizontal merger. In fact, the MOFCOM did not find any immediate competition harm but worried about potential collusive effect between the merged party and its rivals under some conditions in the future.

Indeed, the main competition concern was the significant interests that InBev/Anheuser Busch had in local larger producers, the second biggest stake holder in both Tsingtao Brewery and Zhujiang Brewery, the second and fourth largest producers, respectively. MOFCOM was concerned that there might be collusive effect post merger if InBev/Anheuser Busch further increased its sharholding in Tsingtao Brewery and Zhujiang Brewery or if the merged party would acquire interests in the other two large beer producers, i.e. China Resources Snow Breweries or Beijing Yanjing Brewery, the first and the third largest producers.

Presumption on collusion effect was mainly based on shareholding in rivals but no further analysis released on the structural factors that may facilitate or prevent collusion. • Interestingly, as a global merger case, the same merger had also been cleared in both the United States and the United Kingdom and DOJ imposed the divestiture of InBev’s sales force to ensure competition. • The decision was largely consistent with international practice - it is neither more restrictive nor more relaxed than other jurisdictions.

Coca-Cola/Huiyuan • Coca-Cola and Huiyuan overlapped in fruit juice market and Huiyuan was dominant in high concentrated fruit juice. It seemed that when defining the relevant market, the MOFCOM was concerned mainly by whether fruit juice with different concentration levels should be treated as within the same relevant market. • From the Decision the fruit juice market was defined as the relevant product market. The MOFCOM mentioned that definition of relevant market was based on substitutability analysis but no details on how it was done.

It was puzzling that the MOFCOM did not reveal any information on market shares and the concentration level in the fruit juice market. • Marker shares in the fruit juice market were different depending on sources. For instance, one source show that top three fruit juice producers, Uni-President, Coca-Cola and Huiyuan had market shares of 18.69%, 15.04%, 13.95%, respectively, in 2007. Therefore, post merger Coca-Cola/Huiyuan would have a marker share of 28.99 and become the largest fruit juice producer. Indeed, all sources indicated that post merger Coca-Cola/Huiyuan’s market share is less than 30%. http://www.eeo.com.cn/industry/med_consum_goods/2008/09/13/113584.html

According to AML (Art 16), with such a market share the merged party would not possess market power in the fruit juice market post merger so the MOFCOM cannot establish a prima facie case on horizontal effect. • MOFCOM also calculated that Coca-Cola has a market share of 60.6% in the CSDs market and thus it was presumed to have significant market power in this market. • MOFCOM presumed further that the merged party would leverage its market power to the juice market and use tying, bundling or discriminatory pricing strategies to foreclose competitors in the fruit juice market and thus hurt consumers.

Interestingly, because market definition focused on overlapping businesses, the merger seemed to be treated as a horizontal merger. But since the Decision was mainly concerned with cross-markets competition effect, the MOFCOM actually established a conglomerate merger case. Indeed, MOFCOM was not concerned at all by either collusive effect or unilateral effect in the fruit juice market.

MOFCOM mentioned the strong brand effect as entry barrier to the fruit juice market to satisfy its burden of proof. • Otherwise, the MOFCOM did not prove that the merging parties have both the incentive and the ability to bundle and tie the products in order to leverage market power from one market into another, i.e. to foreclose competitors to enter the juice market. • No indication of how the rebuttal from the merging party was considered

It sounds that MOFCOM has crafted a narrow market definition to address competition concerns with foreclosure effect but did not pay attention to the fact that it entails more burden of proof. • In fact, a narrow market definition is not necessary for antitrust authorities to address anticompetitive concerns. Since government claimed that there were strong brand effect, however, a presumption of unilateral effect might be possible if pre-merger there was sufficient local competition between the two brands.

Mitsubishi Rayon/Lucite • The MOFCOM defined MMA as the relevant product market and calculated the post-merger market share of the merged party as 64% and thus presumed that post-merger Mitsubishi Rayon/Lucite has significant market power. Indeed, the MOFCOM strongly depended on this high market share to establish a prima facie case. • An interesting issue related to calculation of market share was that a German producer was due to production in late 2009 but this new capacity was not taken into account. If so, market share would be less than 40%.

The MOFCOM presumed two competition concerns: one was horizontal effect, that is the merged party might eliminate or restrict competition unilaterally due to its market power in the MMA market. • The MOFCOM was also concerned by vertical effect: the merged party might leverage its market power in the MMA market to the downstream markets and foreclose competition in these markets. • Again the Decision provided no evidence to proof both the unilateral effect and the foreclosure effect and no indication of the rebuttal process.

Patterns and Implications • To establish a prima facie case, the MOFCOM tended to rely on high market shares to presume market power (Art. 16 of AML). There was no indication whether other evidence such as concentration level and other structural factors were considered (Art. 15 of AML). This is not necessarily bad given its enforcement capability. But such an enforcement strategy implies that significant part of the burden of proof will shift to the merging party. Therefore, a due procedure is important allowing proper rebuttal process.

The MOFCOM has dealt with both horizontal (collusive effect in the InBev/AB and unilateral effect in Mitsubishi Rayon/Lucite) as well as non-horizontal mergers, but it presumed more often foreclosure effects (Coca-Cola/Huiyuan and Mitsubishi Rayon/Lucite) without realizing the necessary and heavy burden of proof for such presumptions of competition harms.

Both behavior and structural remedies were imposed by MOFCOM, which might be a problem from enforcement perspective because behavior remedies are usually more difficult to enforce. • MOFCOM has obviously consulted the decisions of other jurisdictions but in the meantime addressed local competition concerns. Indeed, so far decisions are largely consistent with international practice even though the decision process needs to improve.

The MOFCOM is obviously developing its capability to deal with cases verypromptly, e.g. reasoning is becoming more solid with increasingly more economic analysis, more and more information was released and so on. • Of course, information disclosure is one aspect that China’s antitrust authorities should and can improve in a short-term period. More generally, building a due process with a proper rebuttal process is particularly important.

Thank you!

China’s Merger Policy: Patterns and Implications