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Competition Law
Protect the little guy
2012/05/11
Hong Kong's competition bill a threat to SMEs
Shirley Yuen pushes the government to amend the proposed anti-competition law to shield SMEs, so it does not get in the way of healthy commercial conduct that supports innovation and efficiency.
After some 20 months of scrutiny, the legislative process for introducing a fair competition law to Hong Kong is set to enter the critical stage. Before long, the full house of the Legislative Council will resume discussion on the bill and consider possible amendments, before passing it into law. At this crucial juncture, the business community remains concerned about some key issues which go to the heart of the legislative exercise.
First, small and medium-sized enterprises remain vulnerable. The government has sought to address the concerns of SMEs by proposing that the law will not apply to agreements among companies with a combined turnover below a threshold of HK$200 million, as long as such agreements are outside the scope of "serious conduct", namely price-fixing, bid-rigging, market-sharing and output control. Despite the threshold, SMEs remain completely exposed when they engage in these kinds of "serious conduct", even if they are only working together to compete with bigger players.
The most effective way to address this concern is to clearly state in the law that it prohibits only conduct that "substantially lessens competition".
All along, the government has been saying that its policy intention is to tackle conduct that reduces the level of competition. The test of "substantially lessens competition" gives effect to this policy intention.
The present approach in the bill that targets conduct having "the object or effect to prevent, restrict or distort competition" is far too broad, potentially netting a wide array of contractual and non-contractual constraints on commercial conduct, as experience in the European Union shows. Specifying in the law that only conduct that substantially lessens competition is to be prohibited will ensure that small players that cannot possibly reduce competition will not be caught inadvertently.
Indeed, the European Commission applies the criterion of a substantial reduction of competition in choosing cases to investigate. A sensible approach for Hong Kong is to include it in the law itself, as in Australia, New Zealand, Canada and South Africa. This is much more preferable than leaving it to the future competition commission to decide. Otherwise, there is a grave risk that our courts will follow the outdated EU case law, thereby creating a regime that is excessively intrusive and that could chill healthy competition.
Another important issue is economic efficiency. The government has stated that where commercial arrangements produce efficiency that outweighs any harm to competition, they will be permitted - a position adopted in Australia, New Zealand, Canada and Singapore. But the present bill is not sufficiently clear that economic efficiency will provide the grounds for exclusion from competition regulation.
The regulators must consider longer-term benefits of commercial conduct that outweigh short-term impacts on some players. For example, where a company introduces a very popular product, its competitors will inevitably suffer as customers move to that popular product. Some may even be driven out of the market if they do not improve. But in the longer term, everyone needs to make their products better, and at lower cost, to win customers.
The law must expressly require regulators and the courts to give due consideration to this crucial part of the competitive process. This requirement is clearly stated for the draft provisions governing mergers, but needs to be made clearer for other business activities to be regulated by the law.
Last, but not least, reducing the penalty cap to 10 per cent of Hong Kong turnover does not go far enough to make the law proportionate. The cap should be on the local turnover in the goods or services concerned, not every line of business. For example, if a company is engaged in financial services and food retailing, and if a breach takes place in financial services, the turnover in food retailing should be excluded in calculating the penalty.
The amendments proposed here are important but also straightforward, with a view to making the competition law much clearer, as well as proportionate and consistent with international best practice. It will also meet the policy objective of increasing our competitiveness, unlike the bill as currently drafted.
A poorly drafted law will not only add a layer of expensive bureaucracy, but also increase business risk and make Hong Kong less attractive as a regional commercial hub. As for consumers, they may well have to face higher prices as businesses have to cover the inevitable cost of complying with the law. Businesses may become less willing to introduce new and innovative products because they are unclear what is prohibited. Consumers will not see all these impacts immediately. But these undesirable results are inevitable if this law is not properly drafted and implemented.
We hope that the government and Legco will take advantage of this opportunity to make the necessary changes to the bill, in the interests of Hong Kong.
Shirley Yuenis CEO of the Hong Kong General Chamber of Commerce.