An Overview on the Antitrust Guideline for the Automobile Industry

In early August 2020, the Anti-Monopoly Bureau (“AMB”) of the State Administration for Market Regulation (“SAMR”), in the form of a book (“Book”) titled “A Collection of Antitrust Regulations and Guidelines in 2019”, published the Antitrust Guideline for the Automobile Industry, together with three other guidelines, i.e. the Antitrust Guideline on the Abuse of Intellectual Property Rights, the Guideline on the Application of Leniency System in Horizontal Monopoly Agreement Cases, and the Guideline on Undertakings’ Commitments in Antitrust Cases (collectively, the “Four Guidelines”). According to the explanations stated in the Book, the Four Guidelines were approved by the Anti-Monopoly Commission under the State Council and took effect on 4 January 2019, however, in fact they were only disclosed to the public in August this year.

Before the Antitrust Guideline for the Automobile Industry (“Automobile Guideline”) took effect on 4 January 2019, the National Development and Reform Commission (one of the former competition authorities) published the Public Comments Sought for the Antitrust Guideline for the Automobile Industry (“Draft Guideline”) for public comments on 23 March 2016. According to the explanations stated in the Book, the Office of the Anti-Monopoly Commission made further amendments to the Draft Guideline according to the expert opinions and the public comments.

Compared to the Draft Guideline, there are no material changes in the Automobile Guideline and it still keeps the same structure as the Draft Guideline. Further, similar to the Anti-Monopoly Law (“AML”), the Automobile Guideline also covers the topics monopoly agreements, abuse of dominance and merger control filing, etc.

Below is an overview on the key aspects of the Automobile Guideline.

1. Vertical Monopoly Agreements

According to Article 15 of the AML, an exemption situation exists when companies can prove that the monopoly agreements (both horizontal and vertical monopoly agreements) they entered into are for the purposes of:

• improving technology or research and development;
• enhancing product quality;
• reducing costs, improving product efficiency or unifying product specifications or standards;
• enhancing overall competitiveness of small and medium sized enterprises; or
• aiming at achieving public interests such as environmental protection or energy conservation.

Further, the concerned companies must also prove that the following two conditions are met:

• the agreement in question will not substantially restrict competition in the relevant market; and
• it can enable the consumers to share the benefits arising out of the agreement in question.

There are no block exemptions in China yet. Further, it is not possible for a company to obtain an individual exemption for a monopoly agreement under the AML. The concerned companies must rely on their self-assessment to determine whether both the exemption situation and the two conditions (collectively, “Exemption Requirements”) in Article 15 of the AML are met. Based on the publicly available decisions of the PRC competition authorities, so far there are no monopoly agreements which have been exempted according to Article 15 of the AML.

Therefore, the stipulations on both the “Safe Harbor System” (interchangeably in this Newsletter, the “Presumption of Exemption”) and the “Individual Exemption” regarding monopoly agreements in the Automobile Guideline are very useful. These stipulations, among others, in the Automobile Guideline will provide practical guidance for both PRC competition authorities and companies in the automotive industry.

a) Geographical restrictions and/or consumer restrictions

(1) According to the Automobile Guideline, geographical restrictions and/or consumer restrictions imposed on its distributors by an automotive company without significant market power on the relevant markets will be considered to have met the Exemption Requirements in Article 15 of the AML. In other words, the restrictions under this situation will be exempted according to the Safe Harbor System stated in Automobile Guideline.

According to the Automobile Guideline, an automotive company with less than 30% market share on the relevant market will be considered as not having a significant market power.

(2) It is permissible (i.e. the Presumption of Exemption will apply) for an automotive supplier to impose on its distributors (subject to a few exceptions) the following restrictions:

(a) Distributors shall merely carry out their distribution activities in their respective business places.

However, there shall be no restrictions of either passive sales on the distributors or restrictions of cross-supply among the distributors themselves. In other words, according to the Automobile Guideline, regardless of the market share of the automobile suppliers, restrictions of passive sales and restrictions of cross-supply shall be prohibited.

(b) Distributors are prohibited from making active sales to a certain area or to a certain group of clients which are exclusively kept by the automotive supplier for its other distributors.

(c) Wholesalers are prohibited from making direct sales to end users.

(d) Distributors are prohibited from selling spare parts to consumers in order to avoid the circumstances where the spare parts are used by such consumers in manufacturing the same products as the automotive suppliers.

Please note that according to the Automobile Guideline, the PRC competition authorities shall still have the discretional powers on a case-by-case basis to decide whether the Exemption Requirements set forth in Article 15 of the AML are met (i.e. whether the Presumption of Exemption will apply) even if the market share of the supplier and the market share of the distributor each is less than 30% on the relevant market.

(3) Further, the Presumption of Exemption shall not be applicable to the geographical restrictions and/or consumer restrictions under any of the following circumstances (“Hardcore Vertical Monopoly Agreement”), including but without limitation:

(a) prohibition of passive sales on distributors;

(b) prohibition of cross-supply on distributors among distributors themselves; and

(c) prohibition of sales of spare parts on distributors or maintenance suppliers to end users necessary for car maintenance.

That is to say, if it is a Hardcore Vertical Monopoly Agreement, even if an automotive supply does not have a significant market power (i.e. with less than 30% market share on the relevant market), the Safe Harbor System will not be applicable in this situation.

b) Resale price maintenance and minimum resale price fixing

According to Article 14 of the AML, resale price maintenance and minimum resale price fixing are expressly prohibited. According to the Automobile Guideline, an automotive company can claim an individual exemption according to Article 15 of the AML under any of the following circumstances, including:

(1) Short-term resale price maintenance in respect of new-energy automobiles

An automotive supplier of specific new-energy automobiles may claim an individual exemption in respect of the resale price maintenance and/or minimum resale price fixing imposed within a short period of time (which is currently nine months subject to adjustment according to the new-energy automotive industry and the technological development in this industry) after the first sales invoice is issued by such automotive supplier.

(2) Resales conducted by a distributor which merely acts as an intermediary agent

Different from general distributors, the distributor in this circumstance merely works as an intermediary agent in order to facilitate transactions.

(3) Government procurement

Different from general distributors, the distributor in this circumstance merely works as an intermediary agent in order to facilitate transactions.

(4) Resales conducted through E-commerce platforms

Different from general distributors, the distributor (i.e. the E-commerce platform) in this circumstance merely works as an intermediary agent in order to facilitate transactions.

c) Recommended price, guide price and maximum price

According to both the AML and the Automobile Guideline, it is permissible to include a recommended price, guide price and maximum price for the resale of automobiles, aftersales spare parts and aftersales hourly service fees in the agreements between an automotive supplier and its distributors or maintenance suppliers. Also, such clauses shall not have a binding force on distributors or maintenance suppliers.

In other words, if all or most of the distributors or maintenance suppliers have implemented the recommended price, guide price or maximum price, as a result of pressure from, or incentives offered by, any of the parties to the agreement, it might in essence constitute a resale price maintenance or minimum resale price fixing in a specific case, which will be in violation of the AML and shall be prohibited according to the AML.

2. Horizontal Monopoly Agreement

a) According to the Automobile Guideline, the Presumption of Exemption will only be applicable to those non-Hardcore Vertical Monopoly Agreements which have been expressly mentioned in the Automobile Guideline.

Since the Automobile Guideline does not expressly state whether the Safe Harbor System will also be applicable to horizontal monopoly agreements in the automotive industry, we assume that the Safe Harbor System will not be applicable to horizonal monopoly agreements.

b) According to the Automobile Guideline, the following horizontal monopoly agreements (“Non-Hardcore Horizontal Monopoly Agreements”) in the automotive industry can be individually exempted, including and are not limited to:

• research and development agreement;
• specialization agreement;
• technology standardization agreement;
• joint production agreement;
• joint purchasing agreement; and
• research and development and production of new-energy automobiles.

However, in order for an automotive company which is party to a Non-Hardcore Horizontal Agreement to apply for an individual exemption, it shall prove that the Exemption Requirements set forth in Article 15 of the AML have been met.

3. Abuse of Dominance in the automotive aftermarket

According to the Automobile Guideline, in a specific case, the automotive brand is a significant factor which shall be considered in defining the automotive aftermarket. Although an automotive supplier is not a dominant company in the sales market of new automobiles, it may be identified to have a dominant position in the automotive aftermarket in respect of its respective automotive brands.

a) If an automotive manufacturer/supplier has a dominant position in the automotive aftermarket in respect of its automotive brands, without any justified reason, such automotive manufacturer/supplier shall not:

• prohibit manufacturers of spare parts from producing double-labeled spare parts for the initially-installed automobiles (exclusive of the spare parts produced according to the OEM agreements);
• restrict the supply and circulation of aftersales spare parts; or
• restrict the availability of technological information for maintenance, test instruments and maintenance tools.

b) Please note that if an automotive manufacturer/supplier is a dominant company in the automotive aftermarket in respect of its automotive brands, in addition to the prohibited activities specified in Items 3 a) above, such automotive manufacturer/supplier shall not either abuse its dominance by conducting other prohibited activities according to the AML, including but are not limited to:

• imposing unfair purchase or selling prices;
• selling at less than cost with any justified reason;
• refusing to deal without any justified reason;
• limiting relevant trading counterparties without any justified reason;
• implementing tie-in sales without any justified reason; and
• applying discriminating treatment, etc. without any justified reason.

4. Conclusion

As stated in the Book, the Automobile Guideline will be helpful to increase the transparency regarding antitrust law enforcement in the automotive industry, to lower compliance costs for companies in the automotive industry, to increase efficiency of the automotive manufacturers, distributors and automotive aftersales market, as well as to improve consumers’ welfare. Therefore, the Automobile Guideline will provide useful and practical guidance for both PRC competition authorities and companies in the automotive industry.

According to the Book, during the period between 2014 and November 2019, total antitrust fines in the automotive industry imposed by the PRC competition authorities amounted to approximately RMB 2.5 billion. The concerned cases involved both horizontal and vertical monopoly agreements. Therefore, it is very important for companies in the automotive industry to establish a compliance scheme according to the Automobile Guideline and other AML-related laws and regulations.

This article was authored by Aiping Bao who has now left CMS.