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Three reasons behind China's crackdown on foreign firms

A Toyota Lexus luxury car is on display at the Beijing International Automotive Exhibition in April.

BEIJING -- It was no off-the-cuff response.

     It came during a regular press conference by the National Development and Reform Commission in Beijing on Aug. 6. The commission is in charge of formulating and implementing macroeconomic policy and other functions. The theme of the day's press conference was productivity improvement in service industries and adjustment of industrial structure. But halfway through, the subject abruptly changed.

     Out of the blue, a reporter asked for information on China's antitrust probe into foreign automakers, an issue completely unrelated to the preceding discussion. Li Pumin, the NDRC's secretary general, responded to the question not only calmly but with materials in hand. He said he had learned about the antitrust probe on the Internet that morning and wanted to provide some information.

     Chrysler of the U.S. and Germany's Audi, Li said, are under investigation. It is "clear" they violated China's anti-monopoly law, and they will be punished accordingly in the near future, he said.

     Li had one more thing to add: Chinese authorities had also investigated 12 Japanese companies on suspicion of violating the anti-monopoly law in connection with the pricing of spare parts and bearings, and they too will be punished in accordance with the law.

     The widening antitrust scandal now involves many major foreign automakers, including Japan's Toyota Motor, Honda Motor and Nissan Motor, as well as Audi, Chrysler, Germany's Mercedes-Benz and General Motors of the U.S.

     The NDRC suspects that those foreign automakers have set prices for replacement parts at unfairly high levels, seriously hurting the interests of Chinese consumers.

     According to the English-language China Daily newspaper, the antitrust investigation has now spread to include over 1,000 auto-related companies such as dealerships and parts suppliers, as well as car manufacturers.

     According to the NDRC's Li, the organization embarked on the antitrust investigation into foreign automakers at the end of 2011.

     The NDRC stepped up the probe around the summer of 2013, when China's state-run media, including the People's Daily, the mouthpiece of the Communist Party, launched a barrage of criticism against foreign automakers.

     The state-run Chinese media have condemned foreign automakers for selling cars at too high prices and discriminating against Chinese consumers.

     Many auto-related companies are expected to be punished. There is speculation that Audi alone will face a fine of over 1.8 billion yuan ($292 million).

     There is a growing possibility that China's current auto-industry probe will become its largest-ever antitrust crackdown on companies in terms of fines.

     In China's largest antitrust crackdown so far, six domestic and foreign food companies, including France's Danone, were fined a total of 670 million yuan in August 2013.

     China's antitrust authorities started cracking down on major foreign companies in earnest in early 2013, when six South Korean and Taiwanese LCD panel makers, including Samsung Electronics, were fined a total of about 350 million yuan for allegedly forming a price-fixing cartel.

Antitrust knowhow

There are probably three main reasons for China's crackdown on foreign companies. The first is that "China's antitrust authorities have accumulated experience, gotten accustomed to screening and law enforcement, and become able to target foreign firms," a Japanese lawyer stationed in China said.

     The Chinese anti-monopoly law was enacted in 2008, modeled on a European Union scheme. Under the law, the NDRC initially targeted mainly domestic companies engaged in price-fixing cartels.

     The second reason lies in the "Chinese dream," the slogan of the top Chinese leadership, led by President Xi Jinping.

     Since its formal inauguration in March 2013, the current leadership has put a particular emphasis on the development of domestic information technology, auto and other industries.

     The leadership is said to be encouraging the use of domestically made smartphones, luxury cars and other products. China is shutting foreign IT products and cars out of its government procurement market.

     China is now the world's second-biggest economy after the U.S., and its consumer market is continuing to grow. The government is probably confident that no matter how severely it bashes foreign companies, they cannot afford to withdraw from the huge Chinese market.

     Some observers also said that China's current large-scale probe into major foreign automakers is aimed at putting pressure on them to transfer technologies to China by making it difficult for them to import core parts.

In-house competition

The third reason is that the NDRC, which is mainly responsible for cracking down on price-fixing cartels, and two other antitrust organizations are competing to achieve better results.

     The two other organizations include the Ministry of Commerce, which is in charge of screening applications for corporate mergers and acquisitions. In June, the ministry turned down a proposed alliance among three major European shipping firms, including Denmark's A.P. Moller-Maersk.

     The ministry said at the time that the alliance's high market share on the Asia-Europe route would hamper competition and adversely affect the public interest. But the Chinese decision highlighted the fact that the country's antitrust authorities make their judgments quite differently from their U.S. and European counterparts, which had given the go-ahead to the proposed shipping alliance.

     Some observers say that the NDRC has acted against major foreign automakers to score points after seeing the two rival domestic antitrust organizations performing well.

     But the NDRC's antitrust crackdown on foreign automakers is an embarrassing development for many of them.

     Shanghai GM acknowledged on Aug. 12 that it is now under investigation by China's antitrust authorities, but it strongly denied allegations that it had illegally inflated prices for its auto parts.

     Attention is now focused on what punishments China's antitrust authorities will mete out to foreign automakers in the near future.

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