China’s accusations of price-fixing against foreign companies look like a clumsy attempt to delay the end of cheap goods

Unilever, Qualcomm, Mercedes-Benz, Audi, Chrysler, Microsoft, BMW, Nike, a whole bunch of Japanese car parts manufacturers and quite a few other corporations – all have been prosecuted and fined for price-fixing in China over the past couple of years. Price-fixing is a serious allegation. It stirs up political anger over companies controlling markets, and it gets the hackles of consumers and the media up over supposed exploitation of consumers. Certainly price-fixing, when it occurs, is unethical. But what do all these allegations really mean?

A few things need to be stated at the outset. Firstly, it seems foreign companies are bearing the overwhelming brunt of the recent rash of price-fixing judgements. Secondly, while price rises are easy enough to prove, collusion, or if you want the more emotive term, conspiracy, seems a lot more tricky to substantiate. One conclusion is that China is protecting local companies by targeting foreign multinationals and forcing them to cut prices to avoid fines (which can be up to 10% of annual revenues under Chinese law).

But it seems to be also about something else – the end of cheap China, something that has been the subject of a rash of books lately. Price rises in China hit people’s pockets, they arguably constrict the growth of the much-vaunted new middle class and, well, they are not what Chinese consumers have come to expect, after several decades of getting most things cheap. In actual fact prices were never all that low with many products. Mobile phones, cars, luxury goods – all were more expensive than in most other countries, due to arcane logistics, punitive taxes and importation costs.

Domestic costs are soaring in China – wages, inputs, rents, taxes and duties – while for foreign companies many long-term tax benefits linked to investment are also coming to an end. Producing anything in China at the same price you did a decade ago is impossible now, while import duties remain high on many products. Arguably, to build market share, many foreign companies staved off price hikes with the hope of larger volume sales and brand loyalty. With costs, especially wages, still rising, many appear to have reached their limit and raised prices.

Discount or be fined

But Beijing’s not happy. Fines have been high and many foreign companies have started cutting prices to avoid what they now see as the inevitable investigations against them with resultant local media anger and bad publicity. Few, if any, are publicly complaining, though off the record, many foreign companies say they feel pressured by the threats and the lack of transparency in investigations combined with little ability for them to respond. Others say they are being targeted because they cannot call on political friends, as many local firms can, to call of the dogs. Some have allegedly been told to not challenge rulings and not to bring their own lawyers to hearings.

A few have cited the more tangible rising prices of basic ingredients, commodities and wages, as well as new taxes, but this is little commented on locally. Most have stayed silent, though the European Chamber of Commerce issued a rare public complaint, calling the crackdown “intimidation tactics unfairly targeting foreign businesses”. The Chamber also noted that none of local joint-venture partners of the targeted foreign carmakers have been targeted.

Right now it seems allegations of price-fixing are being used to punish anyone raising prices and the courts feel little need to prove the essential collusion between manufacturers, distributors and retailers that is the legal essence of price-fixing. Car, pharmaceutical and tech companies seem to be most in the spotlight, all areas where Beijing would like to see more customer support for local firms.

Ultimately this could all rebound on Beijing. Does anybody really believe that all these foreign companies are colluding to fix prices in China in a host of secret meetings and cabals? Certainly proof is decidedly thin on the ground. And if foreign car brands drop their prices then surely this will only increase the price pressure on rival, local brands? Additionally, many foreign manufacturers, usually citing wage rises, have been moving production to other locations. Feeling especially put upon by the Chinese authorities may speed up this process. Certainly foreign direct investment in China is down (in July it was at its lowest for several years) but how much this is due to relocation of manufacturing, diversification of sourcing or the crackdown is unclear.

China may want to remain cheap, Beijing may want local companies (which, of course, are also faced with rising costs) to dominate, but staving off the inevitable by punishing companies with massive fines may just accelerate the process of relocation and job loss. It seems a rather bodged response to a long-term problem.

China column  collusion  price fixing 

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