Toyota Falls Under Antitrust Microscope
The volume continues to grow in a war of words between China and the west over a series of antitrust probes against multinationals, including the latest reports that Beijing is targeting Japanese car giant Toyota (Tokyo: 7203) with yet another such investigation. Toyota’s Lexus division is just the latest company to fall under Beijing’s microscope for its pricing policies, following similar investigations into most of the world’s top luxury car makers. Leading US smartphone chip maker Qualcomm (Nasdaq: QCOMO) is also being investigated, and so is leading global software maker Microsoft (Nasdaq: MSFT).
Let’s look quickly at the latest reports on Toyota, before turning our attention to the wider issue of what’s going on here and whether China’s investigations are or aren’t biased against western companies. According to the latest reports, officials from China’s powerful National Reform and Development Commission (NDRC) have questioned a number of Toyota officials on the company’s pricing policies for spare parts in its Lexus division. (English article) The move follows initial inquiries from the NDRC in the matter earlier this year, though no fines have been levied against the company yet.
This investigation follows similar probes against many of the world’s top luxury car makers that manufacture in China. In one of the most advanced and high profile of those, the regulator recently fined a joint venture between locally based FAW and Volkswagen’s (Frankfurt: VOWG) Audi luxury division 249 million yuan ($41 million) for price fixing. Many believe that other luxury car makers, as well as Microsoft and Qualcomm, could soon face similar fines.
After writing about this growing series of probes for much of the last few months, and also the unprecedented wave of protests from western business groups and governments, I feel like I’m finally starting to understand what’s driving Beijing in this series of actions. Put simply, Beijing doesn’t like the way that western companies do business, and is unhappy that domestic Chinese firms aren’t able to benefit from similar practices. Thus it’s reacting to complaints from its own companies and Chinese consumers, which see the western companies as unfairly charging high prices for their products.
At the heart of the matter is a western business model where companies often charge very low prices for finished products like cars, airplanes and electronics to lure in customers. They they charge much higher prices for after-sales replacement parts and maintenance services, helping them earn big profits. This kind of model is practiced by a wide range of western firms, and I certainly agree it can be frustrating for consumers. A perfect example is computer printers, which often carry very reasonable price tags but then are very expensive for buying replacement printer cartridges.
As a consumer of such products, I personally find such pricing policies objectionable and misleading, since most people don’t think about after-sales parts and services when they buy a new car or other device. But that said, this is the business model used by many manufacturers in the west and is now accepted as a fact of life. Most of the companies China is now investigating operate in very competitive markets. So it seems somewhat insincere to accuse them of monopolistic practices when consumers have so much choice when buying their products, whether they’re smartphone chips or luxury cars.
At the end of the day, perhaps Beijing really does want to try to change the world and make these companies charge more reasonable prices for after-sales parts and services. That would probably force manufacturers to charge higher prices for new products, which might be more fair but certainly wouldn’t make consumers happy. Instead of trying to change western business models, perhaps China’s overambitious regulators would be better served by working with these companies to make them more transparent about their broader pricing policies. At least that would make consumers aware and psychologically prepared for the costs they will incur when buying new products.
Bottom line: China’s antitrust probes against foreign firms are misguided because they target western business models that are misleading but not monopolistic, and instead regulators should focus on greater pricing transparency.
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