In context

Tetra Pak receives record fine for abuse of market dominance in China

December 8, 2016
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In context

The Chinese State Administration for Industry and Commerce (SAIC) has imposed a fine of approximately EUR 91 million on Swiss – headquartered company Tetra Pak International S.A. and its five Chinese group companies for their abuse of dominant position in the Chinese market from 2009 to 2013. The fine is a record amount imposed by SAIC in its enforcement of China’s anti-monopoly law.

 

SAIC’s thorough investigation took almost five years and included the involvement of foreign experts. The carefully reasoned decision is in line with anti-monopoly concepts applied in other jurisdictions. As enforcement of Chinese market abuse prohibitions becomes more sophisticated, we recommend that companies with large market shares in China closely monitor whether their conduct remains compliant with anti-monopoly laws.

SAIC is the competent authority for enforcement of non-price related competition rules in China. SAIC initiated the investigation into Tetra Pak in January 2012 following a whistleblower report. This was the first publicly announced investigation by SAIC into abuse of market dominance since the Anti-Monopoly Law (AML) took effect in 2008.

 

SAIC identified three types of abusive conduct by Tetra Pak in the following three  markets: (i) liquid-food packing equipment, (ii) technical services for packing equipment, and (iii) cartons for liquid-food packaging.

 

The first type of abusive conduct identified by SAIC concerned imposing tie-in sales on Tetra Pak customers. Tetra Pak required its packaging machinery purchasers to use Tetra Pak cartons, cartons approved by Tetra Pak, or cartons of similar quality to Tetra Pak cartons, in order to rely on the machines’ performance validation periods and warranty periods. Tetra Pak also made technical services for the machines subject to this condition. SAIC reasoned that the tie-in sales had an effect on the competition in the carton market.

 

The second type of abusive conduct concerned exclusive obligations imposed on Tetra Pak’s Chinese supplier of brown paper, a raw material for cartons. This specific brown paper was jointly developed by Tetra Pak and the supplier, and the parties subsequently agreed that the supplier would produce the paper exclusively for Tetra Pak. SAIC reasoned that Tetra Pak does not own the technology and know-how used in the brown paper and cannot prevent its competitors from obtaining the paper.

 

The last type of abusive conduct identified by SAIC consisted of providing loyalty discounts to customers. This is the first time that the Chinese competition authorities have applied the concept of “loyalty discount” in establishing a violation of the AML. According to SAIC, Tetra Pak’s loyalty discounts made it less attractive for customers to switch to other suppliers. Loyalty discounts are not always anti-competitive and can actually have pro-competitive effects. But if a dominant player offers loyalty discounts resulting in exclusive dealing or bundling of products, there is a risk that this will be perceived as abusive conduct.

 

Interestingly, this is not the first penalty imposed on Tetra Pak for anti-competitive behaviour. In 1991, the European Commission found that Tetra Pak abused its dominant position in the market for liquid and semi-liquid packaging machinery and cartons and imposed a EUR 75 million fine on Tetra Pak.

 

The recent Tetra Pak China case shows that SAIC is becoming more sophisticated in its enforcement approach. At the same time, some concepts, such as loyalty discounts, will require further discussion and clarification to provide companies with a dominant market position in China with a clear understanding of the do’s and don’ts in connection with AML compliance.

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