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GE, Microsoft may be hurt by China's anti-monopoly law

China is drafting an anti-monopoly law which may force companies such as General Electric Co., Microsoft Corp. and China Petroleum & Chemical Corp. to give up leading market shares in the world's fastest-growing economy. Under the law, local or overseas companies with more than 50% of China's market share for any product will be investigated. Those using dominant market positions to set unfair prices will be fined as much as 10% of annual sales, according to a draft obtained by Bloomberg News. The Chinese government is strengthening laws to help local companies compete as the country prepares to remove the final trade barriers and investment hurdles after five years as a World Trade Organization member. China's government tightened control of foreign takeovers this year amid increasing criticism that overseas companies have gained dominance in some industries. „Multinationals do have legitimate reason to fear that this proposed law may affect them” more than domestic companies, said Anping & Partners' Managing Partner Guan Anping, in a phone interview.

China attracted more than $260 billion of foreign direct investments since becoming a WTO member on Dec. 11, 2001, as companies such as GE, Motorola Inc., General Motors Corp. and Siemens AG expanded to take advantage of lower wages and average economic growth of more than 9% in the past five years. Any company with more than 50% of China's market may be fined „more than 1% and less than 10% of the total turnover of the preceding year,” if it abused its dominant position, according to the draft law, which doesn't say whether the fine applies to global income or revenue earned in China. „There are some questions that we at GE have about this proposed law,” Stephen Maloy, vice chairman of GE China Co., said at an Aug. 18 American Chamber of Commerce briefing in Beijing. The law isn't clear on which penalties the government would impose on violators, he said. GE's 2005 China sales rose to $5 billion and may increase 20% to more than $6 billion this year, according to a May 29 forecast by GE Chief Executive Jeffrey Immelt. That's double the forecast gain in global revenue for Fairfield, Connecticut-based GE, the world's second-biggest company by market value. „One% of GE's global sales is $1.5 billion while 1% of GE China's sales would be $50 million. Either way, these are serious penalties,” Maloy said. He didn't estimate the market share of GE's products, which include jet engines and wind-turbine power generators, in China.

Microsoft's Windows operating system has more than a 50% share of the desktop computer market in China, according to Edward Yu, CEO of Beijing-based technology market research firm Analysys International. „The anti-monopoly law still isn't set in stone, so we can't comment,” said Brian Zhou, president of H-Line Ogilvy, Microsoft's public relations agent in China. „Microsoft believes in fair competition; that fair competition will stimulate better products and services for consumers.” Roger Chen, the Beijing spokesman of Redmond, Washington-based Microsoft, wasn't available to comment. The draft law defines abuse as when products are sold at „unfairly high” prices or bought at prices „unfairly low”, without specifying what constitutes unfair. Abuse is also defined as selling products at below cost.

China's anti-monopoly law is modeled on US and European Union antitrust legislation, though the Chinese version uses a less sophisticated method to determine market dominance, according to Guan, who worked at China's commerce ministry before his private practice. „We recommend that China not presume the existence of a market dominant position based on market share alone,” US Deputy Assistant Attorney General Gerald Masoudi said in a May 19 speech in eastern China's Hangzhou city. „Alternatively, if the Chinese Government believes that some presumption is necessary, then we would recommend that it be a rebuttable presumption, allowing the firm under investigation to show that it does not have the durable power to raise price or exclude competition.” The drafting of the law, which also bars collusion and price-rigging by companies, follows a government-commissioned report in 2004 criticizing some multinationals for allegedly forcing trade partners and consumers to accept unfair agreements.

„This law doesn't recognize nationalities,” Sheng Jiemin, author of the 2004 report and member of the law's drafting committee, said at the American Chamber of Commerce briefing. „It applies to both foreign and domestic companies.” State monopolies such as Sinopec, as China Petroleum is known, also must abide by the law, he said. Huang Wensheng, spokesman for Sinopec, Asia's biggest oil refiner, said he wouldn't comment on the draft before its passed into law. Liu Weijiang, spokesman for China National Petroleum Corp., the nation's biggest oil company, declined to comment. „These state oil companies won't be affected,” said Li Guohong, a Beijing-based analyst with Galaxy Securities Co. „Their monopolies in the domestic oil market cannot be broken unless the central government is determined to split them into smaller units.” Other restrictions in the draft include mergers involving companies with combined global annual sales of more than 12 billion yuan ($1.5 billion) or more than 800 million yuan in China, which would need approval from the government's Anti-Monopoly Law Enforcement Authority.

This means most of the 166 Chinese companies controlled by the central government's State Asset Management Commission „would need permission to merge with rivals,” Anping & Partners' Guan said. The law would also require an investigation when two companies collectively hold more than 67%, or three companies own more than 75% market share, said Zhang Xingxiang, a visiting legal counsel for GE in China. China's proposed anti-monopoly will „will deter investments there,” Jorge Padilla, the Brussels-based managing director for LECG, an EU competition consulting firm, said in a phone interview on Aug. 22. „People will be concerned about being too successful in that country.” (Bloomberg)