Foreign companies taken for a ride in China

“宁在宝马车里哭,也不在自行车上笑”

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Recent weeks have seen China’s anti-trust efforts against foreign companies step-up a gear. Microsoft, Audi, and first to be revealed in English on Twitter by chiecon, Mercedes-Benz.

Chiecon has translated two articles this week published in the Chinese media, which offer opposing views on the anti-trust cases against foreign companies.

First, in the red corner, an article from the People’s Daily, entitled ‘Double standards spoil foreign companies’. The title is in reference to preferential tax and land treatment foreign firms have received over the years, as local governments have sort to attract foreign direct investment (FDI).

On August 6th this year, the National Development and Reform Commission (NDRC) announced evidence of anti-trust behaviour at Audi and Chrysler, and that an anti-trust investigation had been launched into Mercedes-Benz. At the same time, the NDRC has already completed investigations into twelve Japanese car makers.

Also on the same day, the State Administration for Industry and Commerce (SAIC) Beijing, Liaoning, Fujian and Hubei raided the offices of Microsoft and its auditor Accenture. Since 2013, Samsung, LG and Qualcomm have already received anti-trust investigations.

Bai Ming 白明, Ministry of Commerce Research Center International Markets Research Department Research Director said “This time it might look like the government’s investigation into Microsoft is an isolated case, yet this is symptomatic of the system of double standards cultivated by multi-national companies (MNCs)”.

For example in the automotive industry, a Mercedes C-Class Model W204 bought in Beijing has a parts-to-retail price premium of 1273% (i.e. total cost of buying parts separately / retail price). A BMW 3-series E90LCI has a parts-to-retail price premium of 661%, and others such as Chrysler, Audi and VW at least 400%.

This calculation of parts-to-retail price ratio (零整比), the main argument in the Peoples Daily article, and the data shown, was cited in April when the China Automotive Maintenance and Repair Trade Association (CAMRA) published the findings of its research into car spare parts prices. The graph below shows the results, the parts-to-retail price ratio for 18 popular car models.

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The CAMRA report also noted that international parts-retail ratios are around 300%.

However, in the blue corner, an article from China Business News takes a wry look at the same argument and asks why this is not applied to other industries?

The news of the NDRC’s anti-trust investigations into foreign car makers, championing the rights of consumers, has left many ‘tuhao’ (rich but uneducated Chinese) in tears. With one tuhao lamenting “If the price of a Mercedes-Benz falls, how can we possibly spend all our money?

The rational behind the NDRC’s anti-trust investigations is the parts-to-retail price premium on some cars. This means one could buy twelve new cars for the price of replacing all parts on a current car. A tuhao, turning pale with fright, said “This obviously means the retail price of the cars is too cheap, so why are they being fined?”.

Although tuhao don’t live in the real world, but one of the reasons they make a fortune, is for being able to see things exactly as they are.

The room for profit in selling new cars is steadily decreasing, which leads to a growing market in after sales service. If things keep going at this rate, the situation will become similar to that of selling contract mobile phones, relying on low retail prices for sales, making the profit on maintenance charges.

Yet the one thing which confuses people, is how can the Chinese car market not be classed as competitive? If the price of luxury cars violates anti-trust rules, then why don’t they chase property developers? If the car industry which has parts-to-retail price ratios of ten times is considered an anti-trust violation, then shouldn’t property, which has parts-to-retail price ratios of one hundred times, be considered in violation of anti-trust laws?

Furthermore, at least when buying a car there’s a choice. The only problem being, no matter which car you buy, you can only refuel using petrol from PetroChina. And since when have you ever seen the NDRC investigate PetroChina?

Some good arguments from CBN, and ones no doubt echoed abroad. News of the anti-trust cases has been met with complaints from the Western media at the ‘unfair’ treatment and targeting of foreign companies, without waiting it seems for the facts. This might be fair criticism, when considering the situation of car spare parts sold in developed countries.

A UK automotive industry insider noted that “in the UK and Euro area, car spare parts have always had a larger mark-up, up to ten times the cost, due to low volume replacements, and to discourage others from using the parts to build entirely new cars”.

But looked at in a greater context, and regardless of the evidence, foreign companies and media should not be too surprised by the investigations. Those familiar with the Chinese economy, know that it sits within a different political and legal framework than developed Western countries. Natural economic forces must compete with a behemoth bureaucratic structure, that’s based on different values, chasing different goals.

The MNCs that entered China after Deng Xiaoping’s 邓小平 opening up and reform policy in the eighties and nineties, knew this. In return for access to a potential market of one billion consumers, they looked the other way on other issues, even when the iron fist fell down on those same people.

But given that for most Chinese at the time, a set of wheels meant riding a bike, the MNCs could target only one market segment that had disposable income, that of government officials. Thus in recent years, the Audi A6, always in black, could be seen parked outside government offices, banquet halls and KTVs in the major cities. Hail a taxi in Shanghai or Shenzhen, colours might vary, but its always been a low-end, old style Volkswagen Jetta.

So should the MNCs worry? Perhaps not. A generation after opening up and reform, and the spread of mobile internet, Chinese consumers are much more savvy than given credit for. Sure there’s government pushed propaganda against foreign companies, see for example CCTV’s recent series of negative reports targeting Apple, but these only have an impact against the less well educated, lower income groups.

Workers at all levels living in Eastern Chinese cities, more open than their parents to the concept of credit fuelled spending, know the true difference between a BMW or a Geely. Even an old lady hit by a black saloon, could identify the foreign brand now imprinted on her forehead. And she’d much rather tell her square dancing buddies that she was hit by a ‘Beamer’ than a Chinese made ‘whatever’. As one female contestant Ma Nuo 马诺 said on a Chinese TV show “I’d rather cry in the back of a BMW, then laugh on the back of a bike”.

(Article not to be copied or reproduced without permission or citation).

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