March 1, 2023
In 2022, China has finally amended its Anti-Monopoly Law. This has been more than two years in the making: the State Administration for Market Regulation (“SAMR”) first proposed amendments in early 2020 and a formal draft amendment was submitted to the Standing Committee of the National People’s Congress for a first reading in October 2021. In an effort to support and clarify the amended law, the Government released draft amendments to a number of antitrust regulations and rules for public consultation in June 2022. The Government also published its draft amendments to the Anti-Unfair Competition Law for comment consultation in November 2022.
This client alert provides an overview of China’s major antitrust developments in 2022.
1. Legislative / Regulatory Developments
Amendments to the Anti-Monopoly Law. In 2022, China finally amended the Anti-Monopoly Law (“Amended AML”) for the first time, 14 years after its introduction. The Amended AML came into force on August 1, 2022. It emphasizes the fundamental role of competition in China’s market economy and introduces substantial changes to the country’s merger review process and rules on anticompetitive agreements. It also substantially increases fines for violating the Amended AML and introduced, among other new penalties, liabilities on individuals. Here are some of the key substantive provisions included in the Amended AML:
For more detail on the Amended AML, please refer to our client alert, China Amends Its Anti-Monopoly Law, published on June 29, 2022.
Proposed Amendments to six antitrust regulations and rules. On June 27, 2022, SAMR published draft amendments to the following six antitrust regulations and rules for public consultation, which aim to support and clarify the Amended AML (together, the “Proposed Amendments to the Implementing Rules”):
Among other draft amendments, SAMR proposed to revise the merger filing thresholds through first, increasing the existing thresholds and second, introducing a new threshold that aims at catching so-called “killer acquisitions,” where an established undertaking acquires a nascent competitor to preempt potential future competition. Specifically:
There is currently no indication on when these Proposed Amendments to the Implementing Rules may come into effect.
Proposed Amendments to the Anti-Unfair Competition Law. On November 22, 2022, SAMR released draft amendments to the Anti-Unfair Competition Law for public consultation (“Proposed Amendments to the AUCL”). The Anti-Unfair Competition Law (the “AUCL”), which came into effect in 1993 and was revised in 2017 and 2019, addresses unfair and anticompetitive practices, such as misappropriation of trade secrets, trademark infringement, commercial bribery and false advertising. Consistent with China’s legislative focus in recent years, the Proposed Amendments to the AUCL expressly bring the digital economy within the ambit of the AUCL by adding a new Article 4 that expressly prohibits undertakings to take advantage of data and algorithms, technologies, capital advantages and platform rules to engage in unfair competitive behavior. The Proposed Amendments to the AUCL also include new types of prohibited conduct that concern the digital economy, such as:
Another key feature of the Proposed Amendments to the AUCL is the reintroduction of the concept of a “position of relative advantage,” which was included in previous draft amendments to the AUCL that were released in 2016 but was not adopted in the current version of the law. Under the Proposed Amendments to the AUCL, “position of relative advantage” is defined to include advantage based on technologies, capital, number of users, industry influence or the degree of the transaction counterparty’s reliance on the undertaking in transactions. The Proposed Amendments to the AUCL set out a number of prohibited conduct that effectively extend the Amended AML’s rules governing the abuse of a dominant position to undertakings with a “position of relative advantage,” but without including the defence of procompetitive effects. Thus, an undertaking with a “position of relative advantage” is prohibited from, for example, coercing its transaction counterparty to bundle goods or sign exclusive agreements.
Like the Amended AML, the Proposed Amendments to the AUCL introduce increased and new penalties for violations. For example, undertakings could face penalties of up to 5% of its revenue if the violations are found to involve circumstances or damages deemed particularly serious to fair competition or public interest, and individuals who are found responsible for the violations may be fined up to RMB 1 million (~USD 147,000).
There is currently no indication on when the Proposed Amendments to the AUCL may come into effect.
Pilot Program on the Review of Simplified Procedure Merger Filings. In July 2022, SAMR announced a three-year pilot program to take place from August 1, 2022 to July 31, 2025, during which SAMR would delegate the initial review of certain simplified procedure merger filings to five provincial Administrations for Market Regulation (“provincial AMRs”) in Beijing, Shanghai, Chongqing, Shaanxi and Guangdong. Parties to transactions that require merger clearance would continue to submit the filings to SAMR, but SAMR may delegate cases to the provincial AMRs at its discretion and inform the filing parties of the delegation. While the provincial AMRs would review cases assigned to them, SAMR remains the final decision maker on all merger filings. Given that provincial AMRs are relatively inexperienced in merger control, it is expected that the review of delegated filings may take longer than usual to complete.
2. Merger Control
In 2022, SAMR unconditionally approved more than 99% of approximately 750 deals it reviewed and imposed conditions in only five transactions.
SAMR took on average 18 days to complete its review of cases under the simplified procedure, an increase from 2021’s 14-15 days, and an average of over 450 days to complete its review of conditionally approved cases, an increase from 2021’s 288 days. The delay is likely a result of China’s surge in COVID-19 cases since the first quarter of 2022 and the geopolitical climate that has affected the review of deals involving US tech companies.
Separately, SAMR announced that they penalized parties in 45 transactions for failure to notify, most of which received the maximum fine of RMB 500,000 (~USD 72,700). While this is less than the 107 transactions that SAMR penalized in 2021, over 50% of the cases in 2022 involved internet platforms.
2.1 Conditional Approval Decisions
GlobalWafers Co., Ltd. (“GlobalWafers”) / Siltronic AG (“Siltronic”). In January 2022, SAMR conditionally approved the Taiwanese silicon-wafer manufacturer GlobalWafers’ acquisition of its German rival Siltronic. SAMR raised a number of competition concerns regarding the transaction. Among other findings, SAMR noted that the transaction would likely result in the combined entity holding 55-60% and 30-35% market shares globally and in the Chinese market, respectively, and that the reduced number of competitors would likely increase the risk of coordination. To resolve these competition concerns, SAMR imposed both structural and behavioral remedies on the parties, including: (1) to divest GlobalWafer’s zone melting wafer business within six months; (2) to continue supplying wafer products to Chinese customers on fair, reasonable and nondiscriminatory (“FRAND”) terms; and (3) not to refuse customer requests to renew contracts without reasonable justification and to ensure that the renewal conditions are not inferior to terms in the original contracts.
Advanced Micro Devices (“AMD”) / Xilinx, Inc. (“Xilinx”). In January 2022, US chipmaker AMD received conditional approval from SAMR for its acquisition of its peer, Xilinx. SAMR had competition concerns over the impact that the transaction may have on the global and Chinese markets for central processing units (“CPUs”), graphics processing units (“GPUs”) and programable gate arrays (“FPGAs”), as (1) Xilinx ranked first in the global and domestic markets for FPGAs in 2020 with a market share of 50-55%, such that the combined entity would have a dominant position in the market; (2) CPUs, GPUs and FPGAs are core components that determine the performance of servers in data centers; as such, incompatibility and insufficient interoperability among these components may lead to performance issues for servers; and (3) the combined entity would become the sole supplier in the world capable of providing CPUs, GPUs and FPGAs.
To remedy these concerns, the parties offered a number of commitments, to which SAMR agreed, including the following: (1) to refrain from bundling or imposing unreasonable condition when supplying CPUs, GPUs and FPGAs in China; (2) to continue supplying CPUs, GPUs and FPGAs on FRAND terms; (3) to ensure that the parties’ CPUs, GPUs and FPGAs sold in China are interoperable with those from third-party manufacturers; (4) to ensure the flexibility, programmability and availability of Xilinx’s FPGAs; and (5) to keep third-party manufacturers’ competitive sensitive information strictly confidential.
II-VI Incorporated (“II-VI”) / Coherent, Inc. (“Coherent”). In June 2022, II-VI, an optoelectronic components maker, received conditional approval from SAMR for its acquisition of Coherent, a lasers supplier. SAMR found competition concerns resulting from the vertical relationship between the parties, namely II-VI being in the upstream markets for supplying components and Coherent being in the downstream markets for producing and selling laser devices. To remedy these concerns, SAMR imposed behavioral conditions on the parties, which will expire automatically in five years. These conditions include: (1) to continue performing all existing contracts; (2) to continue supplying CO2 laser optics to Chinese customers on FRAND terms; (3) to continue sourcing glass-based laser optics for excimer lasers from multiple suppliers on a non-discriminatory basis; not to reduce the number of suppliers without reasonable justification or increase II-VI’s current share of supply to Coherent unless other suppliers are unable to fulfil demands in terms of quantity and quality; and (4) to keep third-party manufacturers’ competitive sensitive information strictly confidential.
Shanghai Airport Group (“Avinex”) / Eastern Air Logistics (“EAL”). In September 2022, SAMR conditionally approved the proposed joint venture (“JV”) between Avinex and EAL. This is China’s first merger control remedy case that involves purely domestic entities. Avinex operates two international airports in Shanghai, Pudong Airport and Hongqiao Airport, and provides ground handling, supply chain management and logistics services for air freight. EAL offers air express shipping services and integrated ground handling and logistics solutions. The JV would provide smart airport cargo terminal services at Pudong Airport.
SAMR identified a horizontal overlap as Avinex, EAL and the JV provide air cargo terminal services at Pudong Airport, and a vertical overlap with Avinex and the JV’s upstream air cargo terminal services and EAL’s downstream air freight services. SAMR found that the JV would obtain a dominant position at the upstream air cargo terminal services market at Pudong Airport, in view of Avinex and EAL’s combined market share of over 70% and the market’s high entry barriers. SAMR also expressed concerns that China Eastern Airlines, the ultimate controller of EAL, could strengthen its market power in the downstream air freight services market by leveraging the JV’s dominance in the upstream market for air cargo terminal services. To ease competition concerns, SAMR imposed a range of behavioral remedies, including requiring the parties to provide air cargo terminal services on FRAND terms, keep separate their cargo terminal businesses at Pudong Airport and compete fairly as independent entities.
Korean Air Co., Ltd. (“Korean Air”) / Asiana Airlines, Inc. (“Asiana Airlines”). In December 2022, SAMR conditionally approved Korean Air’s proposed acquisition of Asiana Airlines. SAMR found that the transaction may restrict competition in the market of passenger air-transport services on 15 routes between China and South Korea. The parties offered a number of commitments to ease SAMR’s competition concerns, to which SAMR agreed, including the following: (1) to transfer takeoff and landing slots at specified airports to airlines seeking to commence air services on certain routes; (2) to maintain services of the Seoul-Guangzhou and Seoul-Dalian routes at the 2019 level in terms of flight frequency and number of passenger seats; and (3) to provide passenger ground services at South Korean airports to new Chinese market entrants on FRAND terms.
3. Non-Merger Enforcement
With regard to non-merger enforcement actions, SAMR and its local bureaus continue to target public utilities, healthcare, construction and platform companies. Two of the cases stood out in particular due to the scale of the business and the significant amount of fine:
Geistlich Pharma AG (“Geistlich”) – Resale Price Maintenance (“RPM”). In February 2022, the Beijing Administration for Market Regulation (“Beijing AMR”) fined Geistlich, a Swiss-owned pharmaceutical company specializing in regenerative medical devices, RMB 9.12 million (~USD 1.45 million) for engaging in RPM practices between 2008 and 2020. The fine represented 3% of the company’s revenue in China in 2020. The Beijing AMR found that the company included a resale pricing clause in distribution agreements and explicitly required, through in-person meetings, WeChat and other verbal communications, that distributors sell specified products at a price no lower than a certain percentage of its recommended prices. According to the Beijing AMR, Geistlich monitored the resale prices closely, rewarded distributors that complied with the resale price requirements and penalized those who did not follow the requirements by temporarily raising the purchase price of its products. The Beijing AMR noted that Geistlich’s conduct restricted competition in a market with high entry barriers, highlighting the fact that Geistlich is a global market leader with no local competition and thus creating an imbalance of bargaining power with distributors.
China National Knowledge Infrastructure (“CNKI”) – Abuse of Dominance. In December 2022, SAMR imposed a fine of RMB 87.6 million (~USD 12.6 million) on CNKI, which is China’s most renowned online academic database service provider, for abuse of dominance. The fine represented 5% of CNKI’s revenue in 2021. In concluding that CNKI is in a dominant position, SAMR emphasized CNKI’s market share (over 50% in the market of online database for Chinese-language academic literature), scale and coverage of users (cooperates with over 90% of universities in China) and volume and quality of content (possesses the largest number of high-quality academic journals). SAMR found that between 2014 and 2021, CNKI abused its dominant position by (1) imposing a price hike of over 10% of its average annual fees, which SAMR viewed as unreasonably excessive; and (2) signing exclusive cooperation agreements with academic journals and universities, which restricted the latter from cooperating with other academic databases.
Gibson Dunn lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Antitrust and Competition Practice Group, or the following authors in the firm’s Hong Kong office:
Sébastien Evrard (+852 2214 3798, [email protected])
Bonnie Tong (+852 2214 3762, [email protected])
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