GM Falls Into China’s Anti-Trust Web

GM joins list of firms being probed

A widening web of anti-trust investigations has snared one of China’s biggest overseas investors, with word that General Motors (NYSE: GM) has become the latest foreign company to be probed for monopolistic practices. News of this particular investigation shows that no one is exempt from such probes, since GM is one of China’s oldest and largest foreign investors in the automobile sector and is quite chummy with longtime partner SAIC (600104), one of Shanghai’s largest companies. Thus by potentially punishing GM, China’s anti-monopoly regulator would also be punishing a leading Shanghai company, hurting its profits and potentially slowing its growth and future investment from GM.

As a longtime China watcher, I can say that this ongoing wave of investigations, some for anti-trust concerns and others for corruption, is unprecedented in the nation’s move to a market economy over the last 3 decades. GM’s ensnarement in the movement is a sort of watershed, as it shows that any foreign company could face such a probe in the current climate. As to what’s driving this wave of probes, optimists might say it represents a true effort by Beijing to stop businesses from charging unreasonable rates for their products and services. Pessimists might say it represents a new wave of anti-foreigner sentiment in Beijing.

I would say the answer is probably somewhere in the middle, though perhaps more weighted towards the former view. China has been quite lenient towards foreign companies that came to the country over the last 20 years, imposing relatively lax oversight with regard to their pricing policies as they invested heavily in the nation’s economy. So now that those companies are getting big profits from the market, Beijing leaders may simply feel it’s time for them to behave more responsibly towards consumers.

Before we go any further with the analysis, let’s look at the news that saw GM indirectly confirm it was contacted by the powerful National Development and Reform Commission (NDRC), one of 2 central government agencies that conducts anti-monopoly investigations. (English article; Chinese article) The source of the news seems to be a very roundabout statement from GM itself, in which it simply says that it has supplied data to the NDRC since 2012 about its pricing policies.

At the center of the GM investigation, and similar probes against a growing number of foreign automakers, are their pricing practices for after-sales parts and services. A similar probe against Mercedes-Benz prompted the company to abruptly slash prices for its after-sales parts by 15 percent about a week ago. (previous post) Such high prices are a common practice in many industries, where companies often sell new products like cars and airplanes at relatively low profit margins. Then they earn fat profits when customers buy new replacement parts as the products age.

This particular set of probes looks quite similar to another wave of investigations a year ago into milk powder sold in China by foreign companies. In those cases, the NDRC accused big companies like Mead Johnson (MJN) and Danone (Paris: BN) of selling their products at unreasonably high prices, taking advantage of the poor reputation of domestic dairy firms due to a series of food safety scandals. Those investigations ended after a month or two with the NDRC levying relatively small fines and the companies agreeing to lower prices. (previous post)

I suspect this latest round of probes against the big car makers could follow a similar trajectory, ending in some small fines and agreements by the companies to lower prices. Such a move may look like a peaceful resolution on the surface. But it’s likely to have a significant impact on the car makers’ profits over the next few years. That profit erosion, combined with the fear of future similar uncertainties, could prompt many to significantly slow their new investment in the years ahead.

Bottom line: A new probe against GM shows that no foreign firm is immune from such anti-trust investigations, which could expand to other sectors and is likely to hurt profits and slow investment.

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