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China: Chinese antitrust authority gets ready to take action on internet platform economy

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In brief

On 10 November 2020, China’s State Administration for Market Regulation (SAMR) published draft Anti-Monopoly Compliance Guidelines for the Platform Economy (“Draft Guidelines”) for public consultation.1

The Draft Guidelines clearly signal that stronger antitrust enforcement in China’s tech sector is likely. This appears to be driven by a desire on the part of the Chinese government to rein in the growing strength of internet platforms, and to encourage a more diverse market structure.

The Draft Guidelines are expected to be finalized by the end of this year or early next year.

Contents

  1. What is new
  2. Recommended actions
  3. In depth

What is new

The Draft Guidelines cover an extensive range of issues related both to merger control as well as antitrust enforcement.

Merger control

  • VIE structures are expressly stated to be subject to merger control in China in the normal way. Parties to concentrations involving such structures now need to assess whether their transactions meet the relevant thresholds.
  • SAMR may investigate tech deals ex officio, even where they fall outside of the normal thresholds for notification, particularly where transactions involve emerging players/start-ups, where the party/parties fall below the turnover threshold due to free pricing models, and/or where the markets are concentrated.

Anticompetitive agreements

The Draft Guidelines flag various potential infringements:

  • Interactions between competitors, including the use of platforms by competitors to exchange competitively sensitive information, algorithmic collusion and hub and spoke agreements
  • The use of technology to implement resale price maintenance
  • Price parity/most-favored nation clauses (stated to be subject to effects based analysis)

Abuse of dominance

In addition to restating conventional forms of abuse, the Draft Guidelines flag potentially novel conduct which may be considered abusive:

  • Exclusivity obligations, or restrictions precluding counterparties from dealing with rival platforms (“either or”/ “one from two” type arrangements)
  • Personalised pricing (i.e., discrimination) on the part of dominant platforms without justification
  • Data as an essential facility and refusal to supply
  • Tying or bundling conducted through technical means
  • Penalizing certain operators, e.g., via search downgrades, traffic restrictions, technical barriers, etc. to force the business operators to accept the platform’s services or terms

International parallels

Many features of the Draft Guidelines have obvious parallels with developments globally2, where we have seen regulators:

  • Assess whether their merger control regimes are adequate to catch significant transactions
  • Explore the role of data to competition in online sectors, and the interface between antitrust law and data privacy
  • Taking action against perceived exclusionary conduct by internet-based operators

Recommended actions

Platform operators in China should take the opportunity to assess their conduct, put in place robust compliance programs (and refresh existing programs if necessary)3.

Parties to VIE structures going forward will need to assess whether the thresholds are met in the normal way. Parties to transactions involving platforms and tech start-ups will also need to weigh the risk of ex officio investigations, even where a transaction falls outside of the normal revenue thresholds.

In depth

The internet sector in China has been a significant driver of growth in recent years.  SAMR and its predecessors have followed a “tolerant and prudential” approach and this was widely seen as the reason why the sector had not been subject to heavy-handed enforcement.

Since 2018, SAMR leadership has been increasingly at pains to point out that a “tolerant and prudential” approach does not mean laissez-faire, but rather taking a more holistic regulatory approach.  We have observed various efforts adopted in this sector:

  • Circumspect investigations – Several antitrust probes have been launched, though kept intentionally low key.
  • Strengthening competition advocacy – SAMR has carried out on-site visits, workshops and meetings with leading online business operators. Since 2019, SAMR and its local branches have rolled out greater advocacy efforts around antitrust compliance, including issuing Antitrust Compliance Guidelines for business operators and by emphasizing the importance of corporate compliance at various public workshops on e-commerce and the platform economy.
  • Closer study of the industry – SAMR launched an antitrust competition inquiry by circulating generic questionnaires to internet platforms and other leading market players in the second half of 2019.
  • Resetting the tone – In early 2020, through a series of directive opinions issued on industry development, China’s State Council called for a strengthening of AML enforcement to ensure a fair competitive environment for the IC and software industries and platform economy.  In July 2020, 20 domestic e-platform companies, at the direction of SAMR, jointly signed a voluntary convention to commit to ensuring fair competition and avoiding anticompetitive conduct.  Around the same time, a merger filing involving parties to a VIE structure was reviewed and cleared by SAMR, representing a material policy shift.

1 For a full Chinese version of the draft guidelines, please see http://www.samr.gov.cn/hd/zjdc/202011/t20201109_323234.html

2 For more details, please refer to Digital Antitrust: A Global Snapshot of Latest Developments.

3 SAMR has also issued guidelines on setting up an antitrust compliance program recently; please see our alert at https://insightplus.bakermckenzie.com/bm/antitrust-competition_1/china-chinese-antitrust-authority-releases-antitrust-compliance-guidelines-for-companies-operating-in-china.

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Author

Stephen Crosswell is a partner in Baker McKenzie's Competition practice in Hong Kong, where he oversees competition matters in Hong Kong, China, Vietnam and Korea. He is consistently recognized as a leading lawyer for competition/antitrust by Chambers Asia. He wrote the Hong Kong chapters of Sweet & Maxwell's Competition Law in China & Hong Kong and the Oxford University Press Global Antitrust Compliance Handbook. Mr. Crosswell regularly speaks at leading antitrust events in Asia. He is also involved in capacity building with regional regulators and antitrust policy work. Prior to joining Baker McKenzie, Mr. Crosswell headed a Magic Circle firm's antitrust and competition practice in Hong Kong and coordinated their overall practice in Asia.

Author

Bao Zhi is a partner in Baker McKenzie's Beijing office.

Author

Tom Jenkins is an associate in Baker & McKenzie's Hong Kong office. Tom’s practice covers a wide range of China and EU competition law issues, including merger control, competition investigations, distribution systems, abuse of dominance, joint ventures, issues relating to intellectual property and competition law and general competition compliance. He joined the London Office of Baker & McKenzie as a trainee solicitor in 2008, and qualified into the European & Competition Law Practice in Brussels in March 2010. Since January 2015, he has been on secondment to the Hong Kong office.

Author

Laura Liu is a partner with Fenxun Partners. Her practice focuses on China antitrust legal issues, including merger control filing, antitrust compliance, antitrust investigations and antitrust litigation. Ms. Liu has extensive experience in merger filings, having assisted numerous clients with antitrust filings before the China competition authority, including some of the most significant merger clearance cases to date. Ms. Liu also has very extensive experience advising clients on deal structure and filing strategy to achieve commercial outcomes while avoiding gun-jumping risks. Laura's practice focus on antitrust and competition (advisory and litigation).

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