Thailand s Competition Policy - Legal Analysis Roi Bak, Adv. 1

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1 Thailand s Competition Policy - Legal Analysis 1 1. Background Thailand s legal principles concerning anti-trust issues are set out in the Trade Competition Act, B.E (1999) [the TCA or the Competition Act ]. Previous to the legislation of the TCA, Thailand s anti-trust policy was part of the Price Control and Anti Monopoly Act of 1979 [the PCA ]. The PCA was legislated to address both the issues of price fixing and competition. As Thailand s economy was boosting during the 1990 s with increasing amount of Foreign Direct Investments [ FDI ], depression of the US dollar in comparison to other currencies, and lower petroleum prices in relation to the export of Thai goods, it was urged that the PCA was not suitable any more for Thailand s remarkable economic growth during these years. The PCA also suffered from lack of enforcement of its price control provisions, and as such, its anti-trust provisions could not be enforced. The then current Constitution mandated the Thai government to enact a competition law in order to encourage a free economic system through market force ensure fair competition, protect consumers, and prevent monopolies. It is also believed by some scholars, that the reform leading to the enactment of Competition Act took place due to the pressure of the International Monetary Fund (IMF) as a condition to its financial support to Thailand after the economic crisis of Competition Commission The TCA establishes the Competition Commission (the Commission ) as the ultimate and almost single body which is responsible for the implementation and enforcement of the Act, by the Office of the Competition Commission. The Commission is headed by the Minister of Commerce, along with other bureaucrats in leading roles. The other members of the Commission are qualified persons with related fields - both from the private and public sectors. The Commission is empowered (by the Office of the Competition Commission) to recommend with respect to issuance of ministerial regulations under the Act, notify of 1 Adv. Roi Bak, a member of the Israel Bar and its Foreign Relations Committee - East Asian Countries, holds LL.B. (cum laude) from Bar-ilan University, Israel and LL.M. (Business Law) from Chulalongkorn Univesrity, Bangkok, Thailand (in collaboration with University of British Colombia and University of Victoria - Canada, and the Kyushu University - Japan). Adv. Bak currently advises to an international law firm in Bangkok, Thailand, and can be reached by Rbak77@gmail.com The author wishes to express his deepest regards to Assistance Professor Sakda Thanitcul, Chulalongkorn University, for his assistance. All Rights Reserved 1

2 market share and mergers threshold required to implement the TCA, consider complaints, take evidences, issue rules and procedures, etc. The TCA also empowers the Commission to appoint specialized sub-committees to investigate specific cases and make recommendations to the Commission. The main flows of the Commission are its heavy political influence and therefore lack of independent judgment; The Commission is chaired by the Minister of Commerce with both Permanent-Secretaries for the Ministry of Finance and Ministry of Commerce as the Commission s Vice Chairmen. The Office of the Commission is an integral part of the Ministry of Commerce, without any independence budget or staff. The experts, qualified members of the Commission require the prior approval of the Cabinet, while their term of office is limited only for a period of two years. The Commission itself meets only rarely and on a part-time basis. Another main obstacle is overrepresentation of the private sector in the Commission. Members of major business entities usually being monopolies, would naturally object any attempt to regulate and limit the expansion of monopolists in the market, including the draft and implementation of regulations and guidelines regarding threshold of market share and volume of sales (Sections 25, 26 of the TCA). 3. Exemptions The Provisions of the TCA, aiming to limit monopolists and other market dominators steps from abusing their power, do not apply to certain parties, mainly state enterprises [ SOEs ] and public agencies. Section 4 of the TCA, exempts: Central, provisional or local administration; State enterprises; Farmers groups; and Business prescribed under Ministerial Regulations; The reason for such exemptions is that in many cases governmental agencies are natural monopolists, and there is a need to retain the control over natural resources, such as gas, electricity, etc. in the hands of the State. Hence, such SOEs control not only market share but also market power. Therefore, specific laws designated for each state enterprise, are preventing competitors from entering the playground. The TCA, as already mentioned, exempts SOEs from its provisions as well. On the other hand, a natural monopoly who controls great portion, or all of the market, might abuse its power, depriving real alternatives from the consumers who are forced to use its services. The recent policy worldwide is privatization of governmental bodies, and applying a special legal regime over such newly privatized or semi-public entities. In the case of Thailand, it appears that the newly privatized entities are still exempted from fair competition requirements under the TCA, in contrary to other private corporations. All Rights Reserved 2

3 4. Main Provisions Thailand s Competition Policy - Legal Analysis The essence of the TCA focuses on Chapter III, Sections (Anti Monopoly): Section 25 deals with abuse of dominant power, prohibiting any business operator with market dominance from performing the following acts: Unreasonable price fixing for goods or services. An unreasonable decrease of price can lead to predatory pricing ; a situation of which a business operator reduces the price for its goods or services below market prices and is willing to obtain big losses in order to eliminate its competitors who do not have a deep pocket enough to survive; Fixing unreasonable compulsory conditions on other business operators, preventing them or their consumers from purchase goods or obtain services from other business operators. i.e. tying arrangement; a case of which a monopolistic business operator forces the consumer, directly or indirectly, to purchase certain goods or service by using its dominant control over the market; Restricting services, production, purchase, etc. of goods or services without justifiable reason, or damaging goods in order to reduce the quantity below market demand; Intervening in the operation of business of other persons without justifiable reasons. Section 25, as the rest of the TCA, does not prohibit monopolies as is, but instead prohibits the use of such dominant power to limit competition in an unreasonable manner. Hence, the TCA uses the rule of reason, rather than a strict per-se rule prohibiting automatically the existence of any monopoly. Section 26 of the TCA deals with types of business merger, prohibiting mergers that might result in monopoly or unfair competition. The TCA recognizes three types of business mergers: (1) amalgamation between entities that results in the termination of one business (or the creation of a new business) while maintaining the status of the other; (ii) purchase of assets, in whole or part with a view to control business administration policies, administration and management; (iii) purchase of shares, in whole or part with a view to control business administration policies, administration and management. Such business mergers described in Section 26 shall be allowed for as long as the Commission permission had been obtained. Section 27 prohibits the formation of cartels between business operators in a way that amounting monopoly, reducing or restricting competition. Hence, requires more than a sole business operator to be involved in the anti-competitive behavior. Such cartels are in the virtue of certain horizontal and vertical restraints, as follows: (1) Fixing selling price of good or services, or agreeing to restrict the sale volume of such; (2) Fixing buying price of good or services, or agreeing to restrict the purchase volume of such; (3) Agreeing on market domination or market control ; (4) Collusive agreement enabling one party to win a bid or tender for goods or services in order to prevent another party to participate in such; All Rights Reserved 3

4 (5) Dividing the market geographically between each business operator to exclude other business operator from competing in such areas with respect to sale of goods or grant of services; (6) Dividing the market geographically between each business operator to exclude other business operator from competing in such areas with respect to purchase of goods or obtain services; (7) Limiting the quantity of goods or services in which each business operator may operate, with a view to restrict such quantity below market demands; (8) Reducing the quality of goods or services to a lower level than previous situation, while distribution is made in the same or higher price; (9) Appointing a sole distributor or service provider; and (10) Fixing conditions with respect to distribution of goods or provision of services in order to achieve the uniform or agreed practice. The situations described under Sub-Sections 5-10 might be permitted for a limited period of time by the Commission, subject to the criteria of commercial necessity. Section 28 was incorporated to prevent unique situations of which a business operator prevents a Thai residence from purchasing the goods or services directly from business operators outside the Kingdom. The Section refers to the then situation of Thai wealthy consumers that wished to buy luxurious cars directly from the foreign manufacture that was banned to do so by agreements with local Thai dealers. Section 28 actually protects foreign distributors or service providers by allowing those to sell directly to Thai consumers and protecting wealthy Thai consumers who wish to buy goods or services from foreign companies, while other competition laws implement the opposite policy by protecting local import companies from unfair abuse by foreign business operators. Section 29 is a catch all provision, prohibiting any act which is not free and fair competition and prevents other business operators from conducting their business. The Section is very general and vague, and does not empower the Commission to prescribe unfair competition rules required for the successful implementation of this Section. In the absence of any rules or guidelines with respect to this Section, it is unclear to determine what are the criteria and policy applying to the use of Section Commissions Rulings During the seven years of the TCA, only three cases have reached to the stage of the Commission ruling! 4.1 In the case of UBC, allegations were made to the Commission, urging that UBC, the cable company, merged between two competitors and fully dominating the TV-cables market in Bangkok, has been abusing its dominance over the market. It has been claimed that UBC has unjustly increased the prices of TV cable packages (and installation fee), and furthermore, denied from customers to effectively choose the cheaper and basic package. The Sub-Committee established to investigate the case has found that the increase of packages may considered reasonable due to the currency depreciation, while All Rights Reserved 4

5 preventing the opportunity to connect to the basic and cheaper package might be considered as a violation of the TCA, as it is an abuse of dominant market power. The Sub-Committee argued that since the two business operators that were merged into UBC are still legal separate entities, then Section 27 dealing with cartels between several business operators to restrict services or fix prices, applies in this case. The Commission itself did not fully accept the Sub-Committee s opinion, deciding that UBC is actually a one entity (even if not literally) due to the similarity between the board and managements of both companies. Therefore, UBC might have abused its market dominance by preventing subscribers from connecting to the cheaper package, and by that breaching Section 25 of the TCA, rather than Section 27 (the Commission agreed with the Sub-Committee with respect to the increase of packages price). However, since the cabinet still did not authorize any guidelines and regulations regarding the threshold and definition of market domination required for the implementation of Section 25, the Commission ruled that UBC can not be further accused in violating the TCA. The Commission further transferred the case to be handled by the Mass Communication Organization of Thailand (MCOT) who regulates communications issues within the Kingdom. 4.2 In the Beer-Whiskey Tying case (Chang Beer Case), Surathip group, the liquor monopoly (the group had obtained the Thai government s license for the production of local liquor, and was actually a monopoly in the liquor market) has decided to enter into the beer market. Surathip was accused by its competitor, Singha, for implementing tying and other related arrangements with its distributors - forcing them to market Surathip s new beer, Chang Beer, as a condition to the sale of its white liquor that was popular. The special Sub-Committee appointed to investigate the claim, concluded that since both Surathip and its distributors are merely the same entity due to close relationship and management, then Section 25 of the TCA applies. However, since the Cabinet did not authorize any secondary legislation regarding abuse of market dominance, Section 25 is not implemental and the case was dropped. The Commission accepted the Sub-Committee s recommendations. 4.3 The Honda Case was the only case of which a recommendation was made to press charges. Honda Thailand (a subsidiary of Honda Japan), a very popular motorcycle manufacturer in Thailand, holding 75% of the motorcycle market in Thailand, was accused of forcing its dealers to market Honda s motorcycles exclusively, rather than any of Honda s competitors. It was claimed that Honda had threatened to cease supplying spare parts and to open competing shops near any dealer who will not cease to sell and service Honda s competitors. Honda was accused of also granting excessive rebates solely for exclusive dealers. Both the Sub-Committee and the Commission found Honda guilty in breaching Section 29 of the TCA, despite the opinion that Section 25 is the suitable provision for this case of abuse of dominance. The case was delivered to the Public Prosecutor with the Commission recommendation to press criminal action. It is currently pending for the Public Prosecutor s decision. All Rights Reserved 5

6 6. Recent development - Foreign Retailers During the financial crisis in Asia and Thailand in particular, a need for investments, especially FDI, was critical. As a result, the Foreign Business Act was enacted, allowing major foreign retailers to enter the food retail sector in Thailand. Such foreign retailers (whether as a majority foreign owned entities or whether by the use of nominees) are now consisting major part of the food sector in Thailand. The foreign retailers brought, some say, brutal competition methods causing big reduction of prices to the norm of predatory pricing. There is not doubt that such reduction contribute to the consumers welfare, at least in the short time. On the other hand, it is being constantly claimed that the foreign retailers are abusing their market dominance and bargaining power to eliminate any fair competition from other business rivals. Foreign retailers with efficient logistic and delivery mechanism and an extremely wide buying power, have replaced the role of the traditional wholesalers. The manufacturers have started selling their goods directly to the foreign retailers due to the reasons mentioned-above, instead of to the wholesalers. The fact is that the traditional small retailers (moms& pops stores) are now purchasing the goods directly from the foreign retailers due to their cheap prices, variety and efficient logistics, and then selling those to the customers = end-users. Hence, both traditional wholesalers and retailers can not effectively compete with the foreign retailers. Based upon such bargaining power, it is claimed that the foreign retails take the following non-competitive measures: Entrance fee - to be paid by any supplier who wishes to sell its products; Other fee - as for conducting sales festivals, etc; Marketing - demanding the supplier to use sales person to market its products on the premises; Private brands - foreign retailer will order huge amounts of goods, using such buying power to force Small and Medium Enterprises [ SME ] manufacturers to manufacture such products as the foreign retailer s own private label, and for the foreign retailers exclusively. Such private brands are generally sold in very low prices, or even unjust low prices, as a predatory pricing method driving other competitors out of the market, abusing SME manufacturers to sell the foreign retailer solely and in unjust low price. I.e. methods of Exclusive Dealing and Resale Price Maintenance; Computerized systems - forcing suppliers to adjust their computer purchase systems to the foreign retailer s ones. The issue of the foreign retailers certainly challenges the Thai legal system and society. Currently, the Thai government is asking the foreign retailers to sign a Memorandum of Understating [ MOU ] to limit any further expansion of the foreign retailers. So far, Tesco-Lotus, the UK based retailer, is refusing to sign the MOU, putting the whole issue on hold. Such matter needs to be addressed in several perspectives: limiting foreign retailers from further expansion and operation within Thailand, whether by MOU or amendment of Thailand s Foreign Business Act, as well as a better enforcement of the TCA, might limit FDI which are so crucial for Thailand economy. All Rights Reserved 6

7 On the other hand, it is alleged that local Thai SMEs, as the main pillar of the Thai business sector, are being constantly abused by the anti-competitive measures taken by the foreign investors. The Thai government had enacted the SME Act on the year 2000 for the promotion of local SMEs, as well as SME Development Master Plan. In this regards, the conflict between the foreign retailers and local Thai SMEs can be analyzed not only in the legal (i.e. fair competition) and business (i.e. promotion of SME business sector) perspectives, but also in a political one, of which national interest are in conflict with foreign influence. In another perspective, one needs to analyze the spirit of the Competition Act; Does the TCA aim to retain free competition for the protection and welfare of the consumers, or should it aim to protect competitors as its main goal? Section 37 of the TCA specifies the interests of general consumers among the criteria to be considered by the Commission when granting an approval to limit competition (by merger or cartel). Section 87 of the then current Constitution which empowered the Thai government to enact the TCA mentions the goals of both free competition and protect consumers. While currently the consumers enjoy the results of this fierce competition in the virtue of cheap prices than ever, there are Thai scholars who claim that this golden era will last for short time only. The long term consequences of such predatory pricing will be the elimination of other competitors (i.e. wholesalers, traditional retailers and also SME manufacturers in a vertical aspect) that does not have deep pockets enough to compete with the foreign retailers prices. Thus, leaving both consumers and SME manufacturers totally dependent on the mercies of the monopolistic foreign retailers; which then might raise their prices without any fair alternative. As already explained, the lack of comprehensive definition made it impossible, in the past, for the Commission to implement Section 25 with cases relevant for market domination, as the UBC Case and the Chang Beer Case. However, after several years of attempts to prescribe the market share and total sales which constitute market domination, the Cabinet has recently approved on January 9, 2007, the latest proposal made by the Commission. The latest proposal made by the Commission in this regard, requires a market share of fifty percent (50%) or more and a total sales revenue greater than Baht 1 Billion; or in case that three (3) business operators have an aggregate market share of 75% or more and total sales revenue greater than Baht 1 billion, they shall be considered to have "market dominance", provided that the market share of each business operator is at least ten percent (10%). The said proposal shall come into force in the near future, upon its publication in the Government Gazette. Please note that such prescription does not cover the abuse of power dominance made by SME that are not covered by the criteria of the newly definitions. Furthermore, the Commission did not decide yet whether to apply the newly approved threshold as the criteria for pre-merger approvals under Section 26 of the Competition Act. All Rights Reserved 7

8 7. Conclusions To conclude: the author holds the opinion that the main flows of the Competition Act are the lack of any regulations, rules or guidelines that are crucial for the successful implementation of the TCA in general, and the market domination in particular (Sections 25, 26 of TCA). Heavy political pressure, the lack of independency and qualified members - all contribute to the non-efficient function of the Commission. There is no doubt that Thailand and the TCA are facing interesting challenges that will require a clever and appropriate implementation and enforcement of the Competition Act. Perhaps the newly approval of the market domination criteria will sign the beginning of new era in Thailand s competition policy. The need to define and clarify the concepts of the TCA as well as its enforcement will clearly influence the Thai economy and society in the near future. All Rights Reserved 8