After 10 years of negotiations, Australia and China recently signed the China-Australia Free Trade Agreement (ChAFTA), leaving ratification the remaining step for each country to bring it into force. This article looks at some of the possible implications of the ChAFTA on the application of competition laws in both countries.
Implications arising from increased import competition
The ChAFTA, like all free trade agreements, aims to encourage international trade and investment by lowering trade barriers through the reduction and elimination of tariffs and relaxation of regulatory barriers for foreign investment. Allowing cheaper goods to flow more freely across trade barriers will naturally increase import competition in Australian domestic markets and has the potential to change competition law analysis of transactions occurring within Australia.
The increase in the threshold for Foreign Investment Review Board (FIRB) approval in non-sensitive sectors (this excludes agriculture, media, telecoms and defence) from $252 million to $1,094 million is also likely to stimulate investment by private Chinese investors in Australia, bring in new competition and potentially stronger and more vigorous players. This change in dynamics could be a game-changer and pave the way for Australian or Chinese or other international competitors that compete less vigorously with one another, to explore the opportunity to merge.
Will it be easier to obtain merger clearances in Australia as import competition increases?
Increased import competition from Chinese companies has a very real potential to impact favourably on merger clearance rates in Australia. The reduction and elimination of tariffs under ChAFTA is likely to support further growth in import competition particularly in relation to manufactured goods, electronics and household products in Australia. Australian companies can also be expected to continue to look beyond Australian borders to source cheaper supply. Both these factors will support and stimulate import competition. Increased M&A activity is also predicted as opportunities for domestic companies to merge and compete more vigorously against new or stronger global competitors arise.
The current competition test for mergers recognises that Australia operates in a global economy. When the ACCC considers a proposed merger, it must take into account a range of domestic and global constraints, including consideration of actual or potential import competition.
Of the mergers cleared by the ACCC in the last eight years, only a handful of these were cleared on the basis that imports or potential imports provided an effective constraint on the merged firm. nThe cases almost always concerned the manufacturing sector.
The most recent examples include:
- Amcor's acquisition of Detmold and Detmark (2014) - the ACCC considered that Amcor would continue to be constrained by actual and potential import competition as FMCG manufacturers could credibly threaten to switch to imports for their value-added flexible packaging requirements. Importers had a growing presence in Australia and were able to offer additional services such as warehousing and technical and sales staff to assist managing the import supply chain. A couple of years earlier, the ACCC had cleared Amcor's acquisition of Aperio for similar reasons.
- BlueScope Steel's acquisition of Orrcon Steel (2013) - the ACCC considered that imports were a viable alternative to domestic supply for a number of steel and tube distributors. However, the ACCC did acknowledge that anti-dumping applications and the imposition of duties could have a chilling effect on imports' competitive constraints in the short term.
- Integrated Packaging's acquisition of certain Amcor non-stretch polyethylene film assets (2012) - the ACCC considered that actual and potential imports would effectively constrain the merged entity. Imports met a significant proportion of national demand and they had not received any evidence of any significant barriers that would hinder the growth of import competition.
- SABMiller's acquisition of Fosters (2011) - one of the key factors considered by the ACCC was the parallel importation of beer into Australia.
Import competition, if strong enough, may also support a 2 to 1 merger. In 2007, the ACCC cleared the merger of One Steel and Smorgon Steel, creating a monopoly manufacturer of certain steel products. It was cleared as the merged entity would be constrained by significant import competition.
When coupled with the fact that sourcing supply internationally has also become a lot easier over the past decade (including through the growth of ecommerce and with the success of online businesses such as Alibaba which connects Chinese exports with companies all over the world), the implementation of the ChAFTA and the sheer numbers of expected imports is likely to raise import competition to a significant factor in future merger control assessments in Australia.
Just how strong that factor will be in individual cases will depend not just on the numbers of imports but also on an assessment of the likelihood that such imports will be a realistic substitute for domestically manufactured products. The effectiveness of import competition can be softened by anti-dumping applications (restricting short term supply) or by using Australian Standards to impose additional barriers to imports. Brand loyalty may also be a significant factor, as may issues over product quality and safety.
Could formal merger authorisations become more attractive to merger parties than informal clearances?
A more remote side effect of the ChAFTA may flow from the increasingly global nature of competition, which could see Australian companies seek to merge to create efficiencies which will allow them to compete more effectively with their Chinese counterparts and on a global scale. Currently the ACCC is unable to offset merger-related efficiencies against a conclusion that the merger will result in substantial lessening of competition, when considering an informal merger clearance application. However, under the formal merger authorisation provisions of the Competition and Consumer Act, the Australian Competition Tribunal, which applies a public benefits test, may take into account matters that relate to a company's international competitiveness. This could lead to an increase in formal merger authorisations being sought as trade barriers are slowly eliminated and Australia becomes more exposed to import competition and export markets.
Implications for the Australian dairy industry
The ChAFTA will undoubtedly affect a number of Australian primary industries as tariffs of up to 30% on beef, dairy, sheep, pork, live animals, hides, skins and leather, horticulture, wine and seafood are eliminated within two to nine years. In particular, it can be expected that the ChAFTA will have a significant impact on the Australian dairy export industry.
As tariffs are slowly eliminated and demand for milk and dairy from China increases, we are likely to see greater investment by Chinese companies in Australia or in long-term agreements to secure supply (like the 50 year agreement entered into between Freedom Food Group and Shenzhen JiaLiLe Food Company for the marketing of 'Australia's Own Kid's Milk'). There is every possibility that we will see a renewed interest in the Australian dairy sector despite supply and price volatility in the global market.
Opening up the potential for Australian firms to do more business in China and for Chinese firms to do more business in Australia exposes those firms to the competition laws of both countries. For many, knowledge of the laws operating in each country will be unfamiliar, leaving them exposed to the risks of non-compliance.
Increasing number of merger filings in China involving Australian companies
Under China's Antimonopoly Law (AML) mergers and acquisitions (including joint ventures) which reach the specified notification thresholds must be notified to Ministry of Commerce (MOFCOM). Without MOFCOM's clearance, such transactions cannot be closed or completed. A company failing to notify a transaction can face penalties of up to half a million RMB (about AUD110,000 or €73,000) and a filing will still be required. In the worst case scenario, where completion has taken place without clearance, the parties can be ordered to return to the pre-transaction situation.
To date there have been very few merger filings in China involving Australian companies, due to the small size of revenue earned by those companies in China, but this may change should business activities of Australian companies increase in China after implementation of the ChAFTA.
Once the ChAFTA comes into effect, it is possible that Australian companies will seek to merge with their Chinese counterparts or enter into joint ventures with them. Coupled with the potential for increased exports from Australia to China, it is possible that more Australian firms will reach Chinese merger filing thresholds. Currently, a transaction which reaches either one of the following two thresholds needs to be notified to MOFCOM:
- Total worldwide turnover of all undertakings greater than RMB10bn (approx. AUD 2.2 billion) and PRC turnover of each of at least two undertakings greater than RMB400m (approx. AUD 87 million);
- Total PRC turnover of all undertakings greater than RMB2bn (approx. AUD 436 million) and PRC turnover of each of at least two undertakings greater than RMB400m (approx. AUD 87 million).
Australian companies will need to be aware of their potential notification obligations to MOFCOM and of the potentially lengthy waiting period for a decision. The review period after formal registration of the filing is divided into three phases:
- Phase I - 30 calendar days,
- Phase II - 90 calendar days, and;
- the Extension of Phase II - 60 calendar days.
In practice, it takes more than 50 calendar days to register a notification and, although more than 50% of transactions have been cleared within 90 calendar days of registration, there are some cases in which it took MOFCOM more than a year to clear the transactions.
Increasing the risks of being investigated in China
The AML prohibits dominant companies from abusing their dominant position, including by way of charging excessive prices. Australian companies which have traditionally held strong market positions, particularly in natural resources sectors, such as iron ore, may be exposed to potential antitrust investigations in China, should their pricing be considered excessive. Although the risks of pricing being considered excessive might presently be remote, due to current global economic conditions, it could become an issue once the global economy improves.
During the last three years, Chinese competition authorities have become very active in enforcing the AML. One of the latest examples is the Qualcomm case, in which the National Development and Reform Commission (NDRC), which is responsible for non-price related anti-competitive matters, imposed a fine of RMB 6,088 billion (approx. AUD 1.328 billion) on Qualcomm for abusing its dominant position with regard to its standard-essential patents (SEPs). In its decision, the NDRC found that Qualcomm holds a dominant position in several markets, namely the license of SEPs for the CDMA, WCDMA and LTE wireless communication standards, as well as the supply of baseband chipsets. Qualcomm was found to have abused its dominant position in three ways:
- Excessive pricing: charging unreasonable royalties on Chinese mobile device manufacturers;
- Bundling: forcing licensees to accept the licensing of Qualcomm’s non-SEPs in order to obtain a license for its SEPs;
- Imposing unfair conditions: forcing Chinese licensees to accept a non-challenge clause which prohibits them from challenging the validity of Qualcomm’s patents.
The Qualcomm case demonstrates that Chinese competition authorities are active in enforcing the AML and willing to take on big companies, including foreign companies. With the expected increase in business activities in China from Australian companies, such companies need to take steps to ensure that they are aware of their obligations under the AML and the risks and consequences of breaching the AML.
Increasing the risks of being investigated in Australia
With the expected increase of business activities in Australia from Chinese companies, it is inevitable that more Chinese companies will be subject to Australia's Competition and Consumer Act (CCA). The CCA prohibits a range of anti-competitive conduct, including, among other practices, cartel conduct (such as price fixing, market sharing and tender rigging between competitors), the making and/or giving effect to agreements which substantially lessen competition in a market in Australia, and the misuse of market power by companies which have a substantial degree of power in an Australian market. Mergers and acquisitions (including joint ventures) which have the purpose, effect or likely effect of substantially lessening competition in a market in Australia are also prohibited.
The Australian competition regulator, the ACCC, has extensive powers to investigate suspected breaches of the CCA and to prosecute such breaches through Australian courts.m The penalties for breach of the CCA can be substantial (up to the greater of AUD10 million (approximately 4.6 million RMB), 3 times the benefit gained from the offending conduct or 10% of annual group turnover in the preceding year), and, in the case of cartel conduct can involve jail sentences of up to 10 years for the individuals involved. The ACCC also has power, through an informal merger clearance process, to review and clear (or oppose) mergers and acquisitions and to authorise conduct which would otherwise breach the CCA. mA recent example is the ACCC's review of the proposed Qantas and China Eastern joint coordination agreement in which it has given a preliminary decision to deny authorisation of the agreement due to concerns of a detrimental effect on competition on the Sydney to Shanghai route.
As with their Australian counterparts, Chinese companies seeking to do business in Australia would be well advised to undertake now the necessary steps to ensure compliance with their obligations under the CCA.