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Competition and Anti-competitive Practices

Joint Ventures

The term “joint venture” can be used to describe various types of cooperative arrangement between undertakings including, for example, joint production arrangements, joint buying arrangements, joint selling, distribution and marketing arrangements, and joint R&D ventures.

Production joint ventures

Joint production agreements take a number of forms. They may provide that production is carried out by one party or by two or more parties or the parties may establish a separate legal entity for the purposes of the joint production.

Generally, agreements which involve price-fixing or output limitation have the object of harming competition. In the case of joint production, the parties might well agree to a particular level of output for the joint venture. The Commission will not consider this sort of arrangement as having the object of harming competition but will consider more generally whether the production joint venture as a whole has the effect of harming competition.

For further information on joint production, please refer to the Guideline on the First Conduct Rule (in particular, paragraphs 6.95 to 6.100).

Hypothetical example

Two leading suppliers of an industrial chemical product in Hong Kong, Company A and Company B, decide to close their existing independent production facilities, and open a more efficient joint plant solely for use by A and B. Company A and B do not agree on any terms beyond those strictly limited to the running of the new facility. There are only two other competitors, C and D in the market who are running their plants at full capacity. Company B already has an existing joint venture with C. Costs of production are a significant proportion of the variable costs of the companies active in the market. The market has not seen any recent entry. In assessing whether the creation of the joint production facility would give rise to concerns under the First Conduct Rule, the Commission would consider:

  • the existing market structure and the state of competition in the market;
  • whether the agreement enhances the commonality of costs of Companies A and B; and
  • whether competition (on price) would likely be softened in the market as a result of the joint venture.

Where a joint venture amounts to a "merger" as defined in section 2(1) of the Competition Ordinance (Ordinance), the joint venture is excluded from scope of the First Conduct Rule and the Second Conduct Rule as a result of section 4 of Schedule 1 to the Ordinance. For further information, please refer to the Guideline on the First Conduct Rule (in particular, paragraphs 6.90 to 6.94).

Joint tendering

Joint tendering generally involves undertakings cooperating openly with a view to making a joint bid. Such conduct can be contrasted with bid-rigging which more often involves collusion by competing bidders which nonetheless submit separate bids.

For further information, please refer to the Guideline on the First Conduct Rule (in particular, paragraphs 6.101 to 6.106).

Hypothetical example

A tender is announced for the renovation of a high-rise office building in Mong Kok. The tender requires bidders to have significant manpower to be able to complete the project in the given timeframe and also sets out a minimum financial resource threshold for the bidder – to ensure the chosen construction company has sufficient liquidity throughout the project.

Two small construction companies with a limited market share in Hong Kong, TungBuild and ChungConstruct, considered independently bidding for the tender. However, neither company had sufficient manpower resources or financial capital to satisfy the tender specifications and would thus individually be excluded from bidding.

Tung and Chung therefore submitted a joint bid which allowed them to combine their resources to deliver the required project. The bid makes it clear they are submitting a joint tender, which transpires to be one of the lower prices submitted. Six other bids were submitted by larger construction companies who in the past five years have won the vast majority of the tenders for similar sized projects. Assuming the creation of the TungBuild/ChungConstruct joint venture does not amount to a merger the arrangement may be assessed under the First Conduct Rule. In that regard, the joint venture does not have the object of harming competition and appears unlikely to give rise to anti-competitive effects. The fact that Tung and Chung could not individually bid for the project is particularly relevant here – they are not in fact competitors for the project in issue. The collaboration results in enhanced choice for the party organising the tender and a more competitive bidding process overall. Nonetheless, Tung and Chung would need to be careful that any competitively sensitive information they share in submitting the bid and in carrying out the joint venture is used strictly for the purposes of the joint venture and that the joint venture is not used as a vehicle for exchanging commercial information on their usual prices and costs.

Joint selling, distribution and marketing

There exists a wide range of possible joint ventures between undertakings where they agree to jointly sell, distribute or market particular products (collectively “sales-related joint ventures”). Such arrangements range from collaboration in respect of advertising only or the joint provision of after-sales service, through to joint selling involving the joint determination of key commercial parameters including price.

Sales-related joint ventures can be an effective way of facilitating market entry for a new product, particularly where SMEs collaborate with a view to selling a new product they could not market individually. A sales-related joint venture does not give rise to competition concerns where the joint venture is objectively necessary for a party to enter a market it could not have entered on its own or with a smaller number of parties than those actually involved in the collaboration.

However, sales-related joint ventures can give rise to concerns under the First Conduct Rule where they lead to price fixing, output restriction, market sharing or the exchange of competitively sensitive information.

For further information, please refer to the Guideline on the First Conduct Rule (in particular, paragraphs 6.107 to 6.114).

Hypothetical example

Various leading European flower producers have previously sold their products to Hong Kong through individual contracts with distributors. To rationalise their resources and reduce air freight costs, they form Bloomport JV, a joint venture arrangement under which each party agrees to make all its export sales to Hong Kong through the Bloomport brand. Bloomport will also decide on the products and volumes to be sold, the choice of customers and the prices to be charged. The Commission would consider that this type of arrangement has the object of harming competition. By coordinating key commercial decisions, the parties risk contravening the First Conduct Rule by engaging in price fixing and output restriction.

The Commission may also consider the arrangement to be Serious Anticompetitive Conduct under the Ordinance.

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