At a glance: automotive industry disputes in China

Disputes

Competition enforcement

What competition and antitrust issues are specific to, or particularly relevant for, the automotive industry? Is follow-on litigation significant in competition cases?

The State Administration for Market Regulation (SAMR) is empowered to exercise the antitrust-related functions that were previously exercised by the competent divisions under National Development and Reform Commission (NDRC), Administration for Industry and Commerce and the Ministry of Commerce of China. In terms of enforcement efforts, notably since 2014, we have witnessed a series of NDRC enforcement actions against automotive companies in China for both horizontal and vertical anticompetitive agreements. In August 2014, the NDRC levied record fines of 1.2 billion yuan against eight Japanese auto parts producers and four bearing manufacturers for fixing prices of certain components sold to the joint ventures operated by three world-leading automakers and original equipment manufacturers in China. Later in September, the provincial counterparts of NDRC in Shanghai and Hubei fined three other top automakers and their distributors for vertical price restraints pertaining to spare parts and repair services. In April and September 2015, the provincial counterparts of the NDRC in Jiangsu and Guangdong respectively fined another global auto manufacturer and an auto manufacturing joint venture for vertical price restraints. In December 2017, the joint venture of Ford in China was fined 162,800,000 yuan for fixing price among its distributors. In the same month, Toyota China was fined 87,613,059.48 yuan. We anticipate the antitrust enforcement actions will continue to give the antitrust authority’s active initiative and hard stance against monopolistic practices. Also, the automotive industry is likely to remain a major target under stringent scrutiny.

In terms of legislative efforts, in 2019, SAMR promulgated Antitrust Guidelines (Guidelines) for the automobile industry, which grabbed the attention of potential investors in various aspects. For instance, it offers some illumination on the demarcation of relevant markets. Compared to the 2016 draft published by NDRC, the Guidelines provides more specific explanations on how to define a relevant market according to different components in sale and after-sale services. With respect to anticompetitive agreements, it establishes a ‘prohibition plus exemption’ framework, meaning agreements that substantially hinder competitions would be prohibited, but exemptions would be granted if they satisfy the conditions set forth in the Antitrust Law. Moreover, it stipulates a list of common types and thresholds applicable to presumed exemptions, which could have significant implications for vertical  anticompetitive agreements that have been crucial but also tricky to major economic entities across the world. It is also worth noting that the Guidelines make it clear that suppliers could be determined as being dominant in after-sale markets even if it may not be the case in sale markets, and conduct would be prohibited if they fall within the three categories provided regarding the abuse of a dominant position.

Dispute resolution mechanisms

What kind of disputes have been experienced in the automotive industry, and how are they usually resolved? Are there any quick solutions along the supply chain available?

The majority of disputes in the automotive industry arise as a result of product liability issues and other contractual issues, such as supply chain disruptions or other commercial disputes. Parties involved usually include automobile manufacturers, suppliers, dealers, service providers, consumers and any other third parties that may suffer injuries or losses. Employment issues and intellectual property issues are also commonplace.

These disputes will be resolved by litigation or arbitration. In some major cities in China, there are arbitration or mediation centres specifically chosen by state-run industry associations or quality inspection institutions to settle automotive-related disputes, such as the automobile industry consumer arbitration centres in Shanghai, Hangzhou, Wuhan, Nanjing, Harbin and Changchun. The government also provides personnel, contract templates and expert opinions to those who need help in this area.

The 2013 amendments to the Civil Procedure Law also introduced pretrial preliminary injunctions, allowing the party who claims damages to receive injunctive relief before a judgment is rendered.

Distressed suppliers

What is the process for dealing with distressed suppliers in the automotive industry?

There is no settled formula for dealing with distressed suppliers in the automotive industry in China. Practically speaking, some steps can be taken are as follows:

  • negotiating and documenting a security agreement with the distressed supplier; and
  • negotiating new supply agreements with prospective purchasers of the troubled supplier’s business.

 

When suppliers are likely to become bankrupt, before the court officially accepts the bankruptcy application, the manufacturer (if unsecured) can initiate an action against the supplier for debt repayment and apply for preservation measures. In practice, the court will often ask the applicant to provide security for its application for preservation measures.

Intellectual property disputes

Are intellectual property disputes significant in the automotive industry? If so, how effectively is industrial intellectual property protected? Are intellectual property disputes easily resolved?

Along with the rapid expansion of China’s automotive industry, the number of intellectual property (IP) disputes has also been on the rise. Both domestic and international automotive companies have acted as claimants in intellectual property disputes in past years.

China has a well-established IP protection legal framework and IP rights owners should familiarise themselves as to how the system operates. IP rights owners need to identify and register registrable IP rights where they can to beef up their IP portfolios in China and ensure enforceability of such rights. The China aspect should form a part of any international filing strategy. Trade secrets are another valuable asset in the automobile industry and both contractual and physical protective measures should be adopted. Periodical training of employees and suppliers also plays a key role in pre-empting leakage of confidential information.

China has been undergoing a series of judicial reforms in the IP disputes area. In particular, China has now established specialist IP courts in Beijing, Shanghai and Guangzhou to hear technical cases such as disputes over patent rights and trade secrets. Further, China also established the IP court of the Supreme Court. Since 1 January 2019, appeal of certain patent-related judgments made by the Higher People’s Courts, the IP courts and the intermediate courts nationwide shall be subject to the jurisdiction of the IP court of the Supreme Court. In addition, while specific performance and injunctions have generally been difficult to ascertain as legal remedies in China, Chinese courts have become more willing to grant preliminary injunctions and to exercise their discretionary powers to order defendants to substantiate their denials in some cases. We expect to see the reform resulting in greater consistency and increased predictability of case outcomes, as well as improved court efficiency.

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