As mentioned in our article about cartels (one we encourage you to read by clicking HERE before continuing with this one), competition isn’t always perceived as amazing by business owners in light of the fact that one step at a time, their bottom line is affected until some kind of a niche-wide balance of minimum profitability is reached. As such, business owners are forced to either accept gradually declining profit margins or innovate so as to alter the status quo (launching a new higher margin product, for example, oftentimes easier said than done).
But is it really an “either-or” situation?
Or, to be more precise, it might be if businesses are determined to play fair. However, we need to understand that businesses are not run by robots or angels but rather people. As such, the temptation to find let’s call them “grey area” solution is hard to resist.
Cartels represent a textbook example to that effect, an example which revolves around complex or at least relatively complex structures being built to facilitate sustained fixing of prices, production quota implementation and so on.
Comparatively, collusion represents something that doesn’t necessarily have to become permanent or quasi-permanent. Instead, entities may choose to simply collude temporarily for very specific and pragmatic purposes. For example, if a new and potentially promising competitor enters a certain industry, established market participants might decide to collaborate rather than compete so as to drive the newcomer out of business. How? Perhaps by setting very low prices (below reasonable profitability) temporarily and playing the waiting game, hoping that the new company will have no choice but to give up.
To put it differently, cartels as well as the concept of collusion revolve around entities that should be competing against one another doing the exact opposite, with one of the main difference being that cartels frequently represent long(er)-terms endeavors, whereas collusion (while it can end up becoming a long-term arrangement as well) is more frequently limited in scope, as per the previously mentioned example.
Is collusion tolerated in Western jurisdictions?
No, with powerful antitrust laws being enforced to ensure collusion-related scenarios are discouraged.
Is collusion tolerated in China?
As mentioned in our article about cartels, the “official” answer is no, in light of the fact that the (in)famous Chinese Anti-Monopoly Law (AML) has been approved in 2007 and started generating effects as of 2008. Furthermore, even prior to the Anti-Monopoly Law, other legislative initiatives that were meant to keep collusion at bay existed, from the Anti-Unfair Competition Law of 1993 to the more recent Law on Bid Invitation and Bidding (2000).
As such, from a strictly legislative perspective, it is difficult to the point of impossible to paint the picture of collusion somehow being tolerated.
Unfortunately, more so in jurisdictions such as China than let’s say the United States or European Union, the legislative dimension alone cannot make problems go away. In other words, the simple existence of laws is not nearly enough to be considered a foolproof deterrent, with it being equally important to actually… well, enforce the laws in question.
As such, we are back to the formulation found in the title of this post:
Is collusion TACITLY tolerated in China?
In other words, of course there will never be a large sign at the Chinese border which states something along the lines of “Welcome to China, where collusion is tolerated!” and of course laws along those lines will not be enacted. The informal dimension, however, is key, with the elephant in the room in terms of questions being whether or not there is some kind of an informal code of conduct which revolves around collusion being tolerated to a certain extent.
In our view, there are two broad perspectives:
- Law enforcement effectiveness in China, a topic we have covered through a dedicated article. From this perspective, let’s just say law enforcement is nowhere near effective enough in China for us to be able to state that the AML represents as much of a deterrent as it should. This is especially true in rural regions of China as well as less developed ones, with there just not being enough of a law enforcement infrastructure in place for the AML to represent a believable enough deterrent. Furthermore, as explained in the article about cartels, the net results after over ten years of AML existence are not compelling enough to paint the picture of a “legislation + law enforcement” duo potent enough to be able to meaningfully put an end to collusion
- The political initiative dimension, with significant efforts of the Xi Jinping administration making it clear that the current powers that be over in China are determined to actually tackle core issues which have been left unaddressed by previous administrations, including issues pertaining to cartels and collusion. While similar attitudes have been observed with previous administrations as well, breakthroughs when it comes to issues such as large-scale corruption have been significant enough to “sell” the idea that this time, we are looking at more than just rhetoric
At the end of the day, those who embrace perspective #1 or let’s say skepticism in general will be tempted to state that despite the AML in particular or let’s say legislation in general being prohibitive enough to be painted as a deterrent, law enforcement ineffectiveness acts as an anchor which prevents meaningfully noteworthy progress and as such, collusion is effectively tacitly tolerated in China. Those who embrace perspective #2 on the other hand, while admitting that nothing is perfect and that tackling tricky issues such as collusion represents a Herculean endeavor, will make it clear that the Xi Jinping administration has proven enough in terms of “real world” results for it to be given the benefit of credibility. Time will ultimately tell which side is right, how you as an investor position yourself is unfortunately a decision that cannot be outsourced.