The rise of competition in Asia - Phil Taylor
IBN assesses the causes and effects of the recent proliferation of competition legislation in Asia.
The last 15 years have seen a flurry of competition law activity around Asia. Mainland China introduced its Anti-monopoly Law in 2007, and has made headlines with its enforcement decisions since then; in Singapore, the Competition Commission has made a name for itself with several significant cases decided recently; Malaysia enacted a comprehensive competition law in April 2010, and by some accounts is becoming a hotbed of competition law thinking; Cambodia and Laos are planning their own nationwide laws; and even Hong Kong, bastion of the free market, is in the final throes of passing a Competition Ordinance. Elsewhere (such as in Indonesia, Thailand, South Korea, Taiwan and Japan), competition regulation has gained a stronger foothold, with mature jurisdictions cooperating closely with regulators in the US and Europe.
When comparing the situation in 1996 to that in 2010, the nature of the changes in this field is particularly striking. The spread of competition law has been very wide when contrasted with other areas, such as anticorruption, and has not been limited to common law countries. Competition law has been embraced almost everywhere in Asia, no matter the political, economic or legal climate.
There are several reasons behind this proliferation. First, in many places competition law has been introduced as a means of assisting with the development of the market economy: the introduction of competition law in a planned or heavily government-influenced economy can be a catalyst for change. This is partly because of the inherent internationality of competition law; it requires and promotes openness and cross-border cooperation such that, once the law is introduced, it is very hard to go back. ‘Competition law comes together with the transition to a market economy, although it’s a very slow change’, says Norton Rose antitrust partner Marc Waha.
A second factor has been the external pressure applied to many Asian countries as a result of international trade considerations. ‘There is a recognition that opening a market to cross-border trade by way of a bilateral free trade agreement, or a multilateral arrangement at the government level, is only one side of the story. One needs to ensure the actions of private parties cannot serve to close markets which governments have agreed to open – and that is where competition law comes in. Typically, trade agreements feature a competition chapter for this very reason’, says Philip Monaghan, a senior associate of Norton Rose who specialises in competition and trade law.
Countries can find themselves obliged, or at least encouraged, to introduce competition law as a result of the terms of free trade agreements or membership of international groupings. Most UN members, for example, subscribe to the UN Set of Principles and Rules on Competition, which is described as containing ‘substantive possible elements for a competition law’. Accession to the World Trade Organization may also bring with it pressure to bring in competition law (this was the case with Cambodia and China). Unfortunately, there is a downside to introducing competition law as a direct result of external pressure: the law can become little more than an underused showpiece, as sometimes evidenced by low levels of enforcement.
At a regional level, the Association of Southeast Asian Nations (ASEAN) has begun to take competition law very seriously. This should lead to legislation that is well constructed and properly enforced. Bringing in competition laws is now a prerequisite for meeting the goals of the 2007 ASEAN Economic Community Blueprint, which was laid down as an important step towards economic integration within the bloc. The Blueprint states that ‘the main objective of the competition policy is to foster a culture of fair competition’. It goes on to describe key actions to be taken in the next few years, one of which was achieved in August 2010 with the publication of the bloc’s Regional Guidelines on Competition Policy. As proof of the commitment of EU nations to competition law capacity-building in ASEAN, this project was funded by a German Government-commissioned non-profit organisation along with the German Federal Foreign Office.
‘Competition law comes together with the transition to a market economy, although it's a slow change’
A third driver of competition law proliferation is protectionism, in the positive sense of the word – the need to protect markets and customers from the effect of global mergers. ‘Without competition law, buyers are put at a competitive disadvantage vis-à-vis those elsewhere who can benefit from remedies’, comments Waha. Other drivers can include domestic considerations, a desire to keep up with regional trends, or a wish to find another tool for the restriction of foreign investment.
Hong Kong differs significantly from many of its regional neighbours. The territory does not need competition law to meet international trade obligations, and certainly not to aid with the development of a market economy. Instead, as Waha says, Hong Kong needs competition law to help regulate some of the excesses of a market economy that would otherwise be completely unfettered.
‘Hong Kong hardly ever had any form of planned economy. The state played a role, but in a much more opportunistic and piecemeal way. This will be the first time for Hong Kong to have an overarching piece of economic regulation which affects the whole economy’, explains Waha.
On first inspection, Hong Kong’s new law – still a Bill at the time of writing – is in line with international practice. The territory has benefited from its relative tardiness by drawing extensively on lessons learnt elsewhere. When the new cross-sector regime comes into force, it will have established what are generally recognised as the first two pillars of competition law: prohibitions on restrictive agreements and abuse of dominance.
But the Bill is not perfect, and reaction to it has been mixed. Local commentators say the Bill was drafted with one eye on getting it passed smoothly with minimal resistance from Hong Kong’s powerful pro-business groups, with many decisions deferred to be dealt with later through subordinate legislation. Although this approach is understandable considering the years of debate and discussion that preceded the Bill, it has left some key questions open.
The Bill as it stands will exempt so-called statutory bodies from the application of the competition law regime altogether, unless they are listed in regulations to be issued at the discretion of the Chief Executive. Unfortunately, the government has so far said only that it is consulting with over 500 such bodies (without listing them), leading to considerable puzzlement and debate in the local legal community.
While Singapore’s Competition Act was being developed, many similar questions were raised regarding whether the law would be applied equally to companies that were under government ownership. The Ministry of Trade and Industry made it clear that all economic activities would be subject to the law, and this seemed to be borne out in a recent and oft-cited infringement decision against SISTIC, a local ticketing company jointly owned by a large entertainment venue and a government statutory board. The Competition Commission of Singapore (CCS) decided SISTIC had abused its dominant position and imposed a financial penalty of close to S$1 million (US$750,000). According to Ee Kia Ng, a Drew & Napier competition economist, this decision reinforces the government’s position that competition law is applied equally to all companies in Singapore. ‘There is very little doubt left in the market that the CCS will go after any infringing party regardless of the ownership’, says Ng.
‘This will be the first time that Hong Kong has an overarching piece of economic regulation that affects the whole economy’
Those in Hong Kong are also concerned about the possible sanctions for infringement of the new law, which look to be more stringent than those found elsewhere: directors and senior managers can face disqualification orders, while anyone involved in an infringement, including natural persons as well as economic entities, may be fined. Lawyers have expressed worries about the extent of the powers of the new Competition Tribunal, which will be responsible for adjudicating cases brought either by the Competition Commission or members of the public.
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There is a general consensus that these issues must be discussed sooner rather than later in order to avoid risks to business if the Ordinance is brought into force either too quickly, or without enough detail.
‘The concern is about moving forward without clear guidelines and enforcement principles when you have such broadly worded prohibitions’, says Gerry O’Brien, a senior associate and competition specialist at Mayer Brown JSM. ‘There is also a danger that if you don’t have a phased introduction, you won’t have sufficient opportunity to consult and educate the business sector on their obligations under what, for many in Hong Kong, will be an entirely new area of business regulation.’ He points again to Singapore where the law was implemented and enforced in a staggered manner.
For some, the way the Bill was developed has led to inconsistencies. One lawyer describes it as ‘a product of compromise’ following ‘a lot of give and take’. ‘There was apparently quite some resistance from a selected group of people, and as a result the draft Bill is a bit distorted’, adds Allen & Overy counsel François Renard, who manages the firm’s Asia-Pacific antitrust practice. ‘But I’m optimistic that market forces will eventually make the law evolve’, he continues.
Hong Kong is introducing a competition law at a time when its domestic social scene appears to be changing dramatically. Citizens who have long accepted the role of oligarchies in society are now becoming visibly dissatisfied with the status quo. Blogger Peter Macmillan compares the situation to that in the US at the time of the introduction of the Sherman Act, while others say that at least expectations for the Competition Ordinance are high among ordinary people.
‘The public might be feeling let down’, says Waha. ‘Their expectations are that the law will help redress the balance and protect consumers in general.’ Unfortunately, this is not the stated aim of Hong Kong’s Bill (or of most competition laws). As Waha says: ‘The Bill is about efficiency, which will lead to consumer benefits – but it’s not about consumer protection.’ Expectations will need to be managed carefully.
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As discussed earlier, there are many reasons for introducing competition law, and many competing demands on governments that are planning to do so. Those jurisdictions that are making the gradual transition from planned economies, or economies with strong government influence, to open markets are facing particular challenges. China, for example, has three main competition regulatory bodies, two of which – the National Development and Reform Commission and State Administration of Industry and Commerce – remain relatively quiet. Those institutions, which previously spent decades focusing on the state economy, effectively supporting and sponsoring market harmony among companies, have now been tasked with regulating unfair pricing and abuse of dominance.
‘It’s a schizophrenic position – the same people are now handling two systems’, says one competition lawyer. In many ways, Asia is now in the same position as Europe was a decade or two ago. In order to make a successful transition, China will need to follow Europe’s lead and develop a respectable body of precedent and practice as well as committing significant resources to their work – something that some suggest is not being done. The problem is compounded in China by the sheer number of state-owned companies and their sometimes cavalier attitude to the need to comply with new competition rules.
Singapore again makes an interesting study. It is not generally regarded as a planned economy but has experienced considerable government influence on the markets in the past, with some government-linked companies having a significant market share in certain industries. ‘The Competition Act was introduced partly to reduce barriers to entry for private and small to medium-sized enterprises, both local and foreign, to compete against the stronger market presence of governmentlinked companies’, says a partner at a leading foreign law practice in Singapore.
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The results of the spread of competition law in Asia have been numerous. One important commercial effect has come from the proliferation of merger control regimes. The regulation of mergers is the third pillar of competition law and one that is conspicuous, if not for its absence, at least for its weakness, in the Hong Kong Bill; although Schedule 7 describes a ‘merger rule’, this will apply only to the telecommunications sector. As more countries establish their own merger controls, each with slightly different filing thresholds, so global business becomes more difficult. There is a real danger of overkill in this area, particularly in contemporary Asia, where individual nations may be keen to show themselves to be sophisticated and ready to enforce the rules. This will make merger filing more complex and burdensome. In the words of one regional specialist, the rules are ‘getting to a critical mass’ in Asia. Companies must now make a series of decisions about when, where and how to file across the region.
‘This is reason enough to be pragmatic with merger rules’, says Waha, suggesting that optional systems, as used in Singapore, can be beneficial. But even with this system, companies will face difficult choices about whether to file. Problems can arise because political and economic concerns differ so much from country to country, particularly in a diverse region such as Asia, where regulators are at different levels of development. This was revealed recently when Novartis acquired Alcon, a smaller rival in the life sciences field. In the US, the Fair Trade Commission required Novartis to sell rights and assets related to an eye drug as Novartis and Alcon were the only two US providers of that class of drugs. Meanwhile in the European Union, Novartis was told to divest several businesses across various Member States. In China, the Ministry of Commerce (Mofcom) also gave its conditional approval for the acquisition, but required Novartis to stop selling a certain type of ophthalmological drug and to terminate a distribution agreement with the market leader in the area of contact lens care products. This was despite the fact that the transaction only involved foreign companies and would result in a very small increase in Novartis’ market share in China. For the first time, Mofcom cited a ‘coordinated effects’ theory when it decided the transaction. This case illustrates just how complex the considerations are for companies contemplating a merger that might affect China in some way.
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In the past, businesses have seen competition law risk as a transaction risk, but as a result of the increase in compliance requirements, including merger filing rules, they must now realise the need to look at things globally and centralise their risk management. The introduction of a new domestic competition law is often a catalyst for compliance on a global basis. It can only be hoped that regional regulators listen to the concerns of business, and make the burden of compliance as light as possible.
Phil Taylor is a freelance writer and editor. He can be contacted by e-mail at email@example.com.
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