FOREIGN carmakers in China are making headlines these days for all the wrong reasons — at least as they might see it. They have been thrown into an anti-trust maelstrom by the National Development and Reform Commission. After two years of investigation, the country’s top economic planning agency, which oversees pricing, accused Audi, BMW, Mercedes-Benz, Chrysler and 12 Japanese makers of auto parts and bearings of monopoly practices.

It’s difficult, reading the saturated media coverage of this crackdown on foreign carmakers and auto-parts suppliers, to understand exactly what the Chinese government means by “monopoly.”

In a sense, the word has become a popular catchphrase in the public’s long-brewing discontent with what is perceived to be the foreign carmakers’ “special pricing strategy” for China. The yawning price gap between cars and spare parts sold in China and the same products sold abroad — which might be the result of monopoly but is not conclusive evidence unilaterally — is believed to have been the trigger for government’s investigation in the first place. Whatever the case, many facets of this issue seem to have faded into the background.

There are few serious discussions, for example, about how China’s auto industry is awash with monopolistic practices of its own that seem to go unpunished. That has led to conspiracy theories surmising the whole anti-trust crackdown is just a cover for a trade protectionist campaign against multinationals. The recent significant drop in foreign direct investment in China has been interpreted by many foreign analysts to be proof that foreign companies are being “scared off” — a charge flatly denied by the Ministry of Commerce.

To make sense of the current anti-trust sweep, I asked myself nine questions and tried to answer them as impartially as I could to try to shed some light on what is a complex set of issues.

Q1

What is the definition of a monopolistic practice?

Monopoly, as an economic term, describes the complete control over the supply of certain goods or services. Since it is very unlikely that a market is ruled by only one corporate controlling hand in the real business world, the meaning of monopoly gradually evolves to mean, in a broader sense, a dominant market position.

Holding a dominant position is not necessarily illegal. If developing a cutting-edge technology helps a company gain an unrivaled competitive edge in a market where viable substitutes are absent, then its market dominance is naturally accepted. The same might be true if unfettered competition is obstructed by man-made barriers against newcomers. In China, a company needs a government-issued license to make cars — a practice that holds true across a wide spectrum of businesses, including telecommunications, electricity, banking and oil refining.

Q2

What exactly is China’s Anti-Trust Law?

The law, effective since 2008, defines three categories of monopolistic practices: market players forming monopoly agreements, market players abusing their market dominance and market players concentrating their businesses to a point that may lead to competition being excluded or restrained.

Q3

How is the game of monopoly played in China’s auto industry?

There are two kinds of monopolies: vertical monopoly, where a company controls the whole value chain of its business, and horizontal monopoly, which involves price collusion.

Mercedes-Benz, which was found guilty of manipulating the price of after-sales services by the Jiangsu Province Price Bureau, was caught up in a typical case of a vertical monopoly. The fact that car dealerships are franchises gives carmakers a naturally dominant position to influence the prices of spare parts, repair and maintenance services in the downstream market. That position is reinforced by Chinese administrative measures related to branded vehicle sales that have been in effect since 2005. They allow carmakers to fully control the distribution of spare parts.

Horizontal monopolies also are part of the game to reduce competition and keep profits sweet. Eight Japanese makers of auto parts and four Japanese makers of bearings were found to have negotiated price agreements for products destined for China, which include coordinated price increases.

Moreover, four BMW dealerships in Hubei Province were accused of price fraud by colluding on the fees charged for pre-delivery inspections.

Q4

How big a role does collusion play in the pricing of cars and after-sales services?

It is hard to do a quantitative analysis because there are so many mitigating factors that contribute to the price gaps between foreign cars and spare parts sold abroad and those sold in China. The situation may not be as appalling as it seems.

Duties imposed on imported cars bear the brunt of price discrepancy and can, in extreme cases, make a car three times more expensive. The duties include a tariff charge of 25 percent, a value-added tax at 17 percent and a consumer tax at a rate varying from 1 percent to 40 percent, depending on engine displacement.

There are also logistics, marketing and sales costs as well as other hidden fees needed to get a foreign car through red tape and onto the showroom floor.

All up, they leave a mark-up rate of about 30 percent on average, according to market research firm Ipsos.

It is no secret that the prices of premium products sold in China also reflect a consumer craze for luxury items. Our “face consumption culture” tends to make the most expensive car the most sought after. There have been cases where deep price cuts offered by premium car brands to increase sales actually backfired.

The average sum of replacing all parts versus the price of a new vehicle, which was reckoned in China to be much higher than the level of 300 percent in the US and Europe, is not an accurate way to measure how the prices of after-sales products affect consumers’ interests.

A better way to look at this matter would be to study how the time and mileage-based consumption of spare parts is relative to the vehicle price. This measure gives bigger weight to consumable parts, which account for less than 1 percent of the number of spare parts but are what consumers come to buy at dealerships in 60 percent to 80 percent of cases.

According to a report released by Insurance Association of China and the China Auto Maintenance and Repair Association in April, replacing all spare parts in a Mercedes-Benz C Class can be 12 times more expensive than buying a brand new vehicle. The difference is largely attributed to the cost of changing big key components, like powertrain and transmission, a situation encountered less often by consumers than by carmakers forced to fix faulty manufacturing execution or design.

Q5

Why is the government wielding the big stick at the auto industry just now?

The timing seems well calculated because the current anti-trust sweep is not just targeting the auto industry, but is also extending its reach to telecom and IT industries.

Besides maintaining a sound competitive order in the auto market and protecting consumer interests — as the official explanation goes — the purpose is clearly to strengthen the enforcement of China’s Anti-Trust Law, which has had the power to override China’s administrative measures for branded vehicle sales since 2005 but wasn’t exercised to stop the creation of vertical monopolies all these years.

The fact that the law is enforced by the National Development and Reform Commission and the administrative measures are enforced by the Administration for Industry and Commerce may explain their longtime co-existence. Expectations are growing that the regulation will be revised or revoked after the anti-trust campaign is wrapped up.

A horizontal monopoly is a harder nut to crack because of its much more secretive nature. The two implicated Japanese cartels managed to operate price-fixing collusion for more than 10 years. If it was not for the fact that two of the companies decided to assist the government investigation and even offered evidence of the illegal practices, the authority might never have been able to break this case.

Q6

How is retribution determined if monopolistic practices are uncovered?

According to the Anti-Trust Law, violators can be subject to fines of between 1 percent and 10 percent of their total sales revenue in the previous year. In the case of the Japanese cartels, the two companies that “turned themselves in” were spared financial penalties, while the other companies drew fines of between 4 percent and 8 percent of 2013 sales. The fines took into consideration their roles in the monopolies and the degree of their cooperation with authorities.

The combined fines, even if not the severest possible, were the biggest penalty ever imposed by the National Development and Reform Commission under anti-trust legislation.

The punishment may have been on the lenient side, but the warning was loud and clear.

In a proactive response during the investigation, Audi, Chrysler, BMW and Mercedes-Benz all announced price cuts for spare parts, after-sales service or vehicles. The gesture didn’t prevent authorities from naming names, however, which tarnished the reputations of such high-profile companies.

Q7

Why was the after-sales market such a big focus of the anti-monopoly campaign?

First, that market affects the interests of consumer over the long haul.

And, second, it is a market naturally prone to monopoly. In China, consumers are not given much choice when it comes to buying replacement parts. It is not like buying a vehicle, which may have many competitor models in the market.

Moreover, consumers don’t have the luxury of looking for spare parts outside of dealerships. That avenue can lead to the risk that dealerships won’t honor warranties if repairs are needed.

Q8

How might the anti-trust campaign change the dynamics of the car market in China?

It will gradually lead to the opening of the sales network for spare parts, which carmakers now firmly grip. To that end, car dealerships may be allowed to sell original spare parts to independent repair shops.

For original spare parts sold at the authorized dealerships of automakers and independent repair shops, the price difference could be as much as 100 percent before the recent price cuts.

In Europe, the differential is only about 20 percent, according to data provided by JSC (Shanghai) Automotive Consulting.

Freer trade will help the market take back the driver’s seat in pricing. Of course, such an eventuality needs the authority to establish a spare parts tracking mechanism first, as a hedge against fake products now flooding the market.

And China’s regulation on car warranties, which came into effect last November, needs to reconsider the accountability of carmakers, dealerships and car buyers for quality problems if dealerships are no longer the only legally recognized providers of original spare parts.

Q9

All things considered in the anti-monopoly campaign, what is in it for you and me?

The price cuts at premium car brand dealerships can be more than 30 percent, though mostly targeting top-ranging models.

The publicly announced discounts by carmakers in response to the anti-monopoly investigation are less than 10 percent.

The recent downward price adjustments for spare parts range from 15 percent to 26 percent, which, for some brands, come on top of double-digit price decreases earlier this year.

If none of this suggests any benefit for you, then the current anti-trust campaign and the populist public mood surrounding it probably has little to offer.

Or, look at it this way. It is not that profiteers are giving back the money that belongs to people, but, rather, that they are paying for a mistake they were allowed to make over a long time.

Fair play is really too much to ask if rules cannot be sorted out and strictly enforced in the first place.

What’s in it for me? As a reporter covering the auto beat, I won’t run out of topics for a long time to come!