Dominic Wai, Partner, ONC Lawyers, outlines the recent incident with Alibaba in relation to the Mainland’s Anti-monopoly Law, and provides an overview of similar legislation in Hong Kong, notably the Second Conduct Rule of Cap 619.
Established in 1999, Alibaba has become a tech giant and one of the most well-known businesses in the Mainland. Recently, Alibaba was found to have abused its market dominance, hence breaching the country’s anti-monopoly laws, which resulted in a record-high RMB18.23 billion fine.
The Mainland’s Anti-monopoly Law
The Anti-monopoly Law of the People’s Republic of China (Anti-monopoly Law) was passed on 30 August 2007. The introduction of this law was largely induced by the explosive growth of the Mainland’s economy. This rapid development made it necessary for regulations to be put in place so as to prevent monopoly, which may ultimately hinder the growth of the market.
On 7 February 2021, with a view to regulating e-commerce and digital payments industries, the Mainland’s State Administration for Market Regulation (SAMR) issued the finalised Guidelines for Anti-monopoly in the Platform Economy (Guidelines). The Guidelines were largely centred around prohibition of (1) monopoly agreements (agreements which exclude or restrict competition) and (2) abuse of market dominance.
In particular, platform operators with dominant market positions are prohibited from abusing their dominance. A dominant market position is defined as ‘a market position held by operators that are capable of controlling the prices, quantities of commodities or other transaction terms in a relevant market, or preventing or exerting an influence on the access of other operators to the market’. Apparently, this was how Alibaba found itself in trouble.
What happened to Alibaba?
The SAMR began its investigation into Alibaba in December 2020, and primarily focused on the company’s practice of forcing merchants to choose one of two e-commerce platforms. According to the SAMR’s findings, by abusing its dominance and power in the market, Alibaba had, since 2015, been prohibiting merchants from opening up branches at or participating in events of other e-commerce platforms. In order to ensure that the merchants abided by its rules, Alibaba also adopted various measures including but not limited to data-monitoring and use of algorithms, as well as award and punishment mechanisms. All this was done with the sole purpose of securing and eventually expanding its market share.
The SAMR found that such policies stifle competition in the Mainland’s e-commerce market, and infringe on the rights and interests of the merchants and consumers. In particular, the SAMR found that Alibaba had breached Article 17(4) of the Anti-monopoly Law, which reads as follows: ‘Undertakings holding dominant market positions are prohibited from doing the following by abusing their dominant market positions – (4) without justifiable reasons, allowing their trading counterparts to make transactions exclusively with themselves or with the undertakings designated by them.’
Having considered the nature of Alibaba’s breach, and its extent and duration, the SAMR ordered Alibaba to cease any illegal conduct, along with paying the RMB18.23 billion fine. The SAMR also ordered Alibaba to abide by the existing regulations, strengthen internal management, maintain fair competition, and protect the interests of merchants and consumers. Moreover, Alibaba is now required to file its own investigation report with the authority within three years to fulfil its reporting responsibility.
While the figure looks substantial, the fine actually amounts to a mere 4% of Alibaba’s domestic revenue in 2019. Hence, Alibaba appears to have not been significantly affected by the fine. That said, the incident not only sounded the alarm for Alibaba and its fellow competitors, but also shed light on the business environment in Hong Kong.
Competition regime in Hong Kong
Hong Kong has a similar piece of legislation regulating competition in the market, namely the Competition Ordinance, Cap 619 (Ordinance). This Ordinance provides for two conduct rules: the first conduct rule prohibits anti-competitive agreements and concerted practices between two or more undertakings, whereas – more relevantly in this case – the Second Conduct Rule (SCR) targets undertakings with substantial market power and prevents the abuse of such power that has the object or effect of preventing, restricting or distorting competition in Hong Kong. The term ‘undertaking’ is broadly defined in the Ordinance, covering all types of entities regardless of their legal status or the way in which they conduct their economic activities. Any conduct similar to that of Alibaba would definitely raise concerns under the SCR.
How can it be determined whether an undertaking has abused its substantial market power and would therefore be found to be in breach of the SCR? The Competition Commission (Commission), as the principal competition authority responsible for enforcing the Ordinance, uses an analytical framework that consists of defining the relevant market, assessing the substantial market power and then determining whether a conduct amounts to ‘abuse’, and provides a detailed explanation of such framework in the SCR guidelines.
In competition analysis, the term ‘relevant market’ has both a product dimension and a geographic dimension. In this context, the relevant product market comprises all those products which are considered interchangeable or substitutable by buyers, while the relevant geographic market comprises all those regions or areas where buyers would be able or willing to find substitutes for the products in question.
Without going through the technical analysis of defining the relevant product or geographic market, it is more important to know that ‘substitutability’ is the central factor in competition analysis. Simply put, the borders of the relevant market may be expanded until the Commission is of the view that there are enough customers being able to switch to substitutes.
Substantial market power
In considering if an undertaking possesses a substantial market power, the Commission will consider the extent to which that undertaking faces constraints on its ability to profitably sustain prices above competitive levels. Section 21(3) of the Ordinance gives some examples that may be taken into consideration in determining whether an undertaking has a substantial degree of market power, including the market share of the undertaking, the undertaking’s power to make pricing and other decisions, and any barriers to entry to competitors into the relevant market.
Having defined the relevant market and assessed the substantial market power, the Commission will determine whether such power has been abused. Broadly speaking, abusive conduct is potentially any conduct that has the object or effect of harming competition in Hong Kong. The Commission does not need to demonstrate that conduct has or is likely to have anti-competitive effects, as long as it is shown that the conduct has the object of harming competition. Some examples that are likely to be regarded as abusive conduct include predatory pricing, tying and bundling, margin squeeze conduct, refusals to deal and exclusive dealing.
Healthy and effective competition benefits society as a whole. While the market giants may have the ability and a great deal of power to profit from and influence the market, the authorities in the competition regime are there to find a balance between a free market and a regulated economy. On 21 December 2020, the Commission filed the first abuse of substantial market power case against Linde HKO Ltd and Linde GmbH under the SCR in the medical gases supply market in Hong Kong, in terms of being to the detriment of competition in the downstream medical gas pipeline system maintenance market.
Under Hong Kong’s competition regime, if a case similar to that of the Alibaba incident happened in Hong Kong, it would likely be prosecuted by the Commission, given the undertaking’s large market power and its ability to prohibit merchants from operating business with its competitors. Such exclusivity definitely attacks the core of substitutability and would therefore be found to be in breach of the SCR.
Dominic Wai, Partner
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