China Probes Criticized as Europe Executives Cry Foul

Aug 15, 2014 4:32 am ET

(Removes erroneous reference to Caterpillar in 11th paragraph of story published yesterday.)

Aug. 14 (Bloomberg) -- Tensions in China’s foreign business community escalated to new highs after European companies protested that local authorities involved in an antitrust crackdown are abusing their power through intimidation tactics.

Chinese investigators are picking on foreign companies, pressuring them into accepting punishments and depriving them of full hearings, the European Union Chamber of Commerce said yesterday in a statement, without naming anyone. Representatives at the chamber, which has about 1,800 members in the country, declined to elaborate on any specifics beyond the statement.

Business sentiment is deteriorating in China as dozens of foreign companies, including Germany’s three biggest luxury carmakers, are being targeted in the country’s broadest antitrust investigation since the nation’s anti-monopoly law went into effect six years ago. The probes, focusing on the car industry, have also involved Japanese automakers and General Motors Co.

“Foreign companies in China used to enjoy a lot of incentives but there’s a sense that this era is gone,” said Kelly Liu, a consultant at the law firm of Carroll, Burdick & McDonough LLP in Beijing. “China is still a good investment in the mid-to-long term, versus mature markets, but the rules of the games have changed, and the environment is no longer as loose and incentives-driven as before.”

The National Development and Reform Commission, China’s main economic planner, has taken the lead in investigating possible antitrust violations in the auto industry. While the NDRC didn’t respond to a faxed request for comment sent yesterday, the regulator has said the probes are aimed at maintaining market order and protecting consumers.

‘Alarming Anecdotes’

Still, the European chamber said it received “alarming anecdotal accounts” across industries about intimidation tactics being used. Some are being told not to challenge investigations, bring attorneys to hearings, involve their respective governments or chambers of commerce, it said.

Concerns are also mounting that foreign companies are being disproportionally targeted because domestic businesses haven’t been investigated for similar violations and sometimes, only the foreign partner of a Chinese joint venture was probed, the chamber said.

Volkswagen AG’s Audi, Bayerische Motoren Werke AG, Daimler AG’s Mercedes-Benz, Tata Motors Ltd.’s Jaguar Land Rover, Fiat SpA’s Chrysler, Toyota Motor Corp. and Honda Motor Co. have announced price cuts of vehicles or spare parts since July in the wake of the probes. General Motors Co. said Aug. 11 that its joint venture with SAIC Motor Corp. has been responding to regulator requests since 2012.

1,000 Companies?

While only a handful of auto-related companies have acknowledged they’re under investigation, the China Daily has put the number at more than 1,000, including domestic companies.

It’s not just auto companies under scrutiny.

Authorities raided the offices of software maker Microsoft Corp. last month. Qualcomm Inc., Mead Johnson Nutrition Co. have also fallen under anti-monopoly scrutiny in China since last year.

The issue is drawing concerns across industries as the probes signal a new era of regulatory scrutiny in the country and threatens to erode profitability. Starbucks Corp., the world’s largest coffee-shop operator, had an operating margin of 35 percent in Asia the year through September, compared with 5.5 percent Europe, the Middle East and Africa, according to data compiled by Bloomberg.

Following revelations by former government contractor Edward Snowden of the extent of U.S. surveillance programs, state-owned Chinese media have urged a shift toward domestic suppliers of information technology, such as Shenzhen-based Huawei Technologies Co., and away from U.S. companies such as Cisco Systems Inc.

Cyber Hacking

The U.S. has indicted five Chinese military officials for allegedly hacking into the computer networks of U.S. companies to learn trade secrets, effectively accusing China of a vast effort to steal technological innovations. The Chinese government has accused the U.S. of hypocrisy.

The investigation of Qualcomm, disclosed by the company in November, may be an effort to help Chinese competitors such as Spreadtrum Communications Inc., Cody Acree, then an analyst at Williams Financial Group in Dallas, said at the time.

China has said concerns of a coordinated attack are unfounded.

“Fears that China, once the hottest growth market for Western firms, is turning chillier are totally misplaced,” China’s official Xinhua News Agency said in an unsigned commentary on July 30. “No company is allowed to break laws with impunity in China, be it Chinese or foreign, state-owned or private.”

Past Fines

The Hubei Province Price Bureau said yesterday that it fined four BMW dealers a combined 1.63 million yuan ($265,000) for setting a unified price for pre-delivery vehicle inspections. Audi said on Aug. 12 that some of its dealers in the province were found to have violated anti-monopoly law, and the German carmaker accepted that there will be a penalty involving its Chinese joint venture.

A year ago, the Chinese government fined six dairy companies including Paris-based Danone for fixing the prices of infant-formula products.

The fine, a combined 669 million yuan for companies including Mead Johnson, was a record for violating anti-monopoly laws. A government investigation led Danone to cut prices for its main infant-formula products in China by as much as 20 percent.

China has targeted foreign-brand pricing in the past. Unilever, the world’s second-largest consumer-goods maker, was fined 2 million yuan in 2011 for telling the media about plans to raise prices, which the Chinese government said led to hoarding in some cities.

Bribery Case

GlaxoSmithKline Plc is also under scrutiny in China regarding allegations that the leader of its unit in the country ordered sales teams to bribe hospitals and doctors to boost drug sales.

While antitrust cases are pursued by the Justice Department and the Federal Trade Commission in the U.S., and the European Commission in that region, oversight in China has been split into three since its anti-monopoly law went into effect in 2008. Cases involving pricing fall under NDRC jurisdiction, the Ministry of Commerce assesses the legality of mergers and acquisitions, and other anti-competition cases fall under the State Administration for Industry and Commerce.

--With assistance from Tom Lavell in Frankfurt, Paul Jarvis in London and Elisabeth Behrmann in Munich.