Clear Takeover Rules Are in China’s Interest, Too

March 24, 2009


Li Hong and Yougeng Sun of FH Beijing offer this analysis on Coca-Cola’s attempt to take over a leading Chinese company and the Chinese government’s response.

China’s rejection, on competition grounds, of Coca-Cola’s proposed $2.4bn takeover of China’s leading juice maker, China Huiyuan Juice Group, has generated considerable and yet understandable concerns abroad. Huiyuan Juice was a willing seller at a price that represented a huge premium. There were no national security considerations, nor was there a need to protect a key national industry. The deal which would have been the biggest takeover of a mainland company by a foreign entity was expected to pass official scrutiny, albeit with strings attached.

But most deal-makers and legal observers failed to reckon on new foreign-investment rules or swelling public sentiment against takeovers of homegrown national brands.

The proposed takeover was the first big test of the China’s anti-monopoly law, beefed up and enacted last August. The rejection which came in a single-page and terse statement by the Ministry of Commerce (Mofcom) with poorly explained reasons has triggered fears far and wide that protectionism and nationalism will curb deals on the mainland. At the very least, Mofcom failed to communicate clearly and satisfactorily the rationales of its decision to the vast constituencies both at home and abroad. And that failure has resulted in the perception of double standards which will do no good for China’s quest for asset acquisitions abroad.

China Huiyuan Juice is the country’s biggest juice maker. Mofcom said the deal would limit consumers’ choice. But Coca-Cola and Huiyuan together would not have breached the threshold of a 50 per cent market share, standard understandings of market-sector dominance. The ministry said its concern was that Coca-Cola might use its wider market power to compel retailers to stock Huiyuan’s juices instead of those of rivals.

The new law does give regulators broad power to block takeover deals if they might restrict competition, but the use of it needs to be clearly justified. In the case of the botched Coke-Huiyuan deal, people were bewildered on the compelling reasons for derailing it since in the minds of many there were no national-interest considerations. But the ministry’s explanation falls short. Where are Mofcom’s communications professionals when you need them?

China is far from alone in being protective of national brands. Remember China Offshore Oil(CNOOC)’s proposed takeover of Unocal? Still, China should be seen to have an anti-monopoly regime that is transparent and clearly defined. Otherwise it could easily be seen as a selective tool to foil foreign acquisitions for political reasons.

Foreign ministry spokesman Qin Gang yesterday defended the decision to reject Coke’s bid and said it was not in contradiction to Beijing’s recent calls to other countries to avoid protectionist policies. “The government’s rejection of Coca-Cola’s bid for Huiyuan is an objective decision based on the anti-monopoly law,” he said. “There is no change in China’s policy to actively utilize foreign investment.”

But many begged to differ. In an editorial, Financial Times said of the decision:

“It also provides potent ammunition to foreign governments already expressing nervousness about Chinese forays abroad. The upshot is likely to be fewer cross-border deals involving what at the moment is the world’s only large dynamic economy, and a retreat into protectionism on all sides. That is precisely what Chinese leaders have been preaching against. It is also the kind of action that contributed to the 1930s global Depression.”

At a time when United States, the world biggest economy, is broiled in challenges in what Dr. Joseph Stigilitz calls “greater” than the 1930s, protectionist tendency is indeed on the rise. Speaking over the weekend at a luncheon hosted in part by the Harvard Club of Beijing, Dr. Stigilitz criticized the “Buy American” as having a protectionist bent. Such policies fundamentally destroyed the “level plain field” of the global market. Indeed, a recent World Bank report shows that “protectionist measures” have been adopted in 17 out of the G-20 since leaders of these countries signed a pledge in November 2008 to avoid such measures. “Leaders must not heed the siren-song of protectionist fixes, whether for trade, stimulus packages, or bailouts” said World Bank Group president Robert Zoellick. “Economic isolationism can lead to a negative spiral of events such as those we saw in the 1930s, which made a bad situation much, much worse.”

Indeed, Mofcom’s decision has strengthened the opposition in Australia to state-owned company Aluminum Company of China’s planned US$19.5 billion investment in Rio Tinto Group. It remains interesting to see how events will transpire at the G-20 meeting on April 2, in London.