Anti-Competitive Practices in China And
The Possible Effects on Staples, Inc
By Chris Lim
OMBA 606-D
FALL 2002
Six Smart, Team 2
When a global company, like Staples, Inc., wants to forge into uncharted territories, assessment and planning for the anti-competitive practices that exist in the focus country or market is important. In this research, the focus state is China and the anti-competitive practices examined are the affects of the cartels and monopolies that exist there. There is a review of the same parallel anti-competitive practices that exist in the U.S. for the sake of comparison. The bottom line is that Staples, Inc., must research the reform that is taking in place in China that will reduce the effects of cartels and monopolies that exist there before Staples decides to forge into that state.
When a global company like Staples, Inc. is thinking of forging ahead into uncharted territories, it should be thinking of what anti-competitive practices exist in that state, economy, or market of focus and usually attached to those thoughts is what kind of cartels and monopolies exist there. The company that plays it safest is the one that makes assessments, conducts analyses, plans for the good and the bad, and concludes with effective decision-making. In the case of Staples, Inc., the retailer corporation must look at its competition and what the obstacles are.
This research and analysis will look at what lies ahead of Staples, Inc, if and when it decides to look at establishing itself in China on the basis of what it has experienced with the problems of cartels and monopolies in the U.S. The research includes the definition of what a cartel and a monopoly are. Most importantly the research includes the discussion of cartels and monopolies in both the U.S. and China, the analysis of the possible negative effects that the cartels in China might have on Staples, the possible strategies to consider and observe for, as well as the concluding recommended course of action.
A cartel, according to Merriam Webster’s Collegiate Dictionary, is “a combination of independent commercial industrial enterprises designed to eliminate competition or fix prices” (Merriam Webster’s, 2002). A cartel, according to Britannica, has a “purpose of exerting some form of restrictive or monopolistic influence on the production or sale of a commodity or group of commodities” (Britannica, 2002).
A monopoly, according to Merriam-Webster’s Collegiate Dictionary, has several meanings: 1) to have an “exclusive ownership through legal privilege, command of supply, or concerted action; 2) to have an “exclusive possession or control”; 3) and is “a commodity controlled by one party”.
Cartels exist in so many different states and as a result, they yield so many different effects on the infected states’ governments, economies, peoples, etc. In this portion of the assignment, there will be explanations of the situations in which cartels and monopolies exist in the US and in the People’s Republic of China. In both countries the presence of the cartels and monopolies have their similar basic effects on the states’ economies, as well as their dissimilarities and it is important to examine them as well as to know how their respective governments view them.
In the US the cartels are a threat to society. The quick steady growth of international foreign crime cartels has risen since the termination of the Cold War, thus presenting a threat to US national security. In response to this threat, the US Department of State, US Department of Justice, and the US Treasury Department have jointly compiled into one report “The International Crime Threat Assessment”, back in the year 2000, which serves to plan and produce a statewide tactic to battle international foreign crime and to lessen its impact on the state (NewsMax.com, 2000). ‘ “ Foreign criminals operating abroad and in the United States cost Americans their lives and cost Americans billions of dollars. They also threaten our foreign policy and national security goals for undermining emerging democracies and distorting free markets in countries around the world”’ (NewsMax.com, 2000, paragraph 3).
US federal officials describe criminal cartels as “technologically sophisticated enterprises ”(NewsMax.com, 2000, paragraph 4) associated with computer invading, foreign immigrant smuggling, illegal “drug trafficking” as well as “counterfeiting and financial fraud” (NewsMax.com, paragraph 4). Thus, the U.S. has taken different measures to battle against these cartels that happen to usually be foreign groups of the same ethnic or family background with the mission to attain money through methods of debasing government officials. For example, at U.S. borders, customs officials are more employed and working harder to seize at least 73 metric tons of cocaine being trafficked from South America, a minimum of 875 kilograms of heroin from Asia, Mexico and Colombia, etc. Another example is the U.S. against the smuggling of foreign immigrants (who are mainly women and children). As a result, U.S. officials have formed a center in the state department devoted to battle the trafficking of human cargo. The last example, the computer hacking and the money laundering, the mystery is still left unresolved.
In the People’s Republic of China, price monopolies have, in recent years, become the center of attention and criticism from the public; moreover the source of the problem lies in adequate institutional reforms and is not incurred by natural competition. The price monopoly is realized in a number of ways. It is in China that “some operators of State monopolized industries take advantage of their monopolistic position to pressure the government into setting a high price. They even adjust price levels or create new charge items themselves” (China Daily, 2002, paragraph 6). In China, as well as in other countries such as the US, where monopolies exist, there are some monopolistic enterprises that unlawfully enlarge their range of trade or connect unfair circumstances to trading in order to procure dishonest earnings, “which jeopardizes the interests of the consumers” (China Daily, 2002, paragraph 6).
The monopolies, in China, are almost undetected by the government when they would influence changes in price setting, therefore problems exist between the monopolies and the government where negotiations are concerned. Without enough information accessible to the government to examine, the government is unable to figure the real actual prices for monopolized industrialized products; thereby, the government struggles to negotiate with the firms to decide the price level of monopolized products. Unfortunately in China, the state monopolized industries happen to be the price-setter of the costs controlled by the monopolized industrial companies including a profit margin. The controlled costs are really the individual costs of the companies, as oppose to being the average state costs, which really should be the foundation of the government’s price setting. Intensifying the problems with monopolies is the general lack of proper pricing tool in monopolized industries and the shortcomings of the control and restricting tool are to be held accountable for the rampancy of those problems. (China Daily, 2002)
Even though the government’s statewide reform is underway the Chinese government still remains in control over a large amount of the economic resources. Actually, quite a number of state companies remain the fiscal source of local governments. When state industries are unable to compete in the market, the governmental units will opt to use their administrative power to monopolize the market to attain profits. Thus, in China the mixture of governmental administration with industry is another cause for the existence of price monopolies (China Daily, 2002).
Currently, the Chinese government has initiated a legal framework to clear the way for breaking up the monopolies in the monopolized industries and markets. The Chinese government has vowed to stick to laws and regulations to implement reforms, decided by the China’s State Economic Restructuring Office after the China Development Forum of March 26, 2001. The government has set out to improve laws that govern the industries that have been monopolized or might be monopolized including those laws that pertain to regulating electric power, aviation, railways, telecommunications, oil, natural gas, etc. These laws will knock down monopolies in order to improve competition (China Daily, 2001).
Reconfiguring the monopolies is one of the most important components of the state’s “10th Five-Year Plan (2001-2005)”. The Chinese government is set out to knock down monopolies in all industries and markets, with the exception of those pertaining to state security, natural resources and a few small public service providers. Moreover, the electric power, railways, aviation and telecommunications will be the government’s first targets of reform, despite the fact that the reform hampers the development of China’s economic infrastructure reconstruction and its establishment of a firm socialist market economy. The premise of the reforms will be in separating government’s management position from private sector operations, allowing full freedom to companies to do business. However, reforms will focus on introducing more competitors into the industries/markets, permitting outside private investment, including foreign dollars to enter economic infrastructure and even the utility supply industry. The government will also permit the reconfiguring of companies’ financial systems and the installation of modern management tools. All the while the government will establish a “fair, transparent, unified and efficient supervision system” that will prohibit the big monopolies (China Daily, 2001, line 15).
The purpose of this research and analysis is to see what effects the cartels and monopolies in China can have on the possible installment of Staples in China, and so far the imaginable obstacles are fewer than imagined. First of all Staples has already started its adventure in Europe and Canada, after success in the U.S. the global company seems to be thriving. If the company forges into China, let alone into the rest of Asia, it can take its experience from its past success into its forge into China, etc. However, Staples should analyze the circumstances that come with doing in business in China, it can be like no other place in the world. After this analysis of China’s monopolies, it is apparent that monopolies are pretty formidable regardless of the rule of state’s socialist government, and they do thrive in the People’s Republic of China and could be truly a very bad anti-competitive factor against the success of the venture.
First obstacle would be the difference in the nature of the cartels and the monopolies between what exists in the US, even including what possibly exists in Europe, versus what exists in China. After analysis of the two states’ kinds of cartels and monopolies, it seems that the government may not control the cartels in the U.S. very well, but in China the monopolies are most cunning in their dealings and practices. Therefore, the government fails to combat all of the sneaky dealings that companies do to control prices within their industries, despite their measures taken.
Another obstacle could be the fact that China is a large state and the government cannot possibly manage every aspect of the knock down of big monopolies (like it intends), therefore implementation of its new reform laws to open up the markets to fair competition might not be there to protect Staples. Therefore, the new laws should be designed to serve as a comprehensive collection of laws that will be enforceable as well as be enforced.
After analysis of what might be in store for Staples, Inc., if it enters China’s economy, it needs to plan strategies before competing against the anti-competitive practices already present in China. One important strategy is assess if and when China has torn down its big monopolies to assist the promotion of competition, through the enforcement of a comprehensive collection of reform laws that need to be enforceable as well as be enforced. Mentioned earlier is the fact China is a large state that can challenge the government’s implementation of reform and management of every aspect of the knock down of big monopolies, moreover it is important to employ new laws that are strong, easy to enforce, and easy to understand (China Daily, 2001). If this reform doesn’t exist by next year or within two years, then maybe Staples should wait a few years or so before forging into China because this process could take the Chinese government a few years to complete and it is safer to go into a venture after the laws can provide actual protection. However, if Staples is aware of the circumstances and prepares for whatever might be ahead of them if it doesn’t wait, the company might survive the venture.
Another strategy for Staples may be to analyze when and why China opens up its monopolistic markets to domestic and international investors. With that analysis, Staples may be able to break in to the Chinese market sooner rather than later (China Daily, 2001). This will definitely break ground for the possible entry of Staples into China. China, in this case, would need to knock down all regional barriers as well as national monopolies, in order to properly open competition for all new businesses/companies looking to enter the Chinese economy (China Daily 2001). In regards to this strategy, China should also wait for this to occur too, because it is safer to go into a market that will accept you as opposed to reject you, but with risk management and planning Staples can go in prior to this milestone.
A few additional circumstances need to occur before Staples should forge into China. One is that China has to realize that they should not depend primarily on the easing of price control and must strengthen price supervision to knock down monopolies". Second is that China is severing and removing the root of the problem, which is the government’s own internal inability to manage the problem. This is key to completely resolving the negative effects of big monopolies. The administrative links between government and the companies must be cut off entirely. Third is to see that reasonable industrial prices become set as a result of changing the unreasonable mode of pricing controlled by monopolized industries and companies. “A reasonable price should be first set through a market mechanism – for example, the bidding procedure – to force down the costs of the enterprises” (China Daily, 2002). Moreover, it is important to see that there be a pricing decision-making process that is standardized (China Daily, 2002), especially within industries.
In conclusion, Staples, Inc. is recommended to be very cautious, observant, and prepared in order to achieve success with any future venture into China. The economy seems to have lots of restructuring on top having to meet its goals to breakdown the is undergoing a restructuring that will need time to successfully complete and once the reform has reached fruition the rule of big monopolies will hopefully have lessened, therefore fair competition could be possible for Staples. Staples really needs to also wait and see in order to see what the future has in store for every company within the industry/market. However very careful planning could also take care of having to “wait and see” if this global company can’t wait, for whatever the reasons are.
Crime Cartels Threaten U.S. Security. NewsMax.Com Wires. December 16, 2000. [Online] Retrieved November 18, 2002 from http://www.newsmax.com/archives/articles/2000/12/15/191623.shtml
Public Need a Say in Setting Prices. China Daily. Issue: June 7, 2002. [Online] Retrieved November 18, 2002 from
http://service.china.org.cn/link/wcm/Show_Text?info_id=34097&p_qry=cartels
Nation to Break Up Monopolies. China Daily. March 17, 2001. [Online] Retrieved November 18, 2002 from http://www.China.org.cn/English/9648.html