China: China Conditionally Approves Google’s Acquisition Of Motorola Mobility

Last Updated: 30 May 2012
Article by Peter Wang and Yizhe Zhang

On 19 May 2012, the PRC Ministry of Commerce ("MOFCOM") approved the acquisition by Google Inc. of Motorola Mobility, Inc. under the Chinese Anti-Monopoly Law ("AML"), but imposed conditions to require that Google continue to license the Android operating system and the patents acquired from Motorola in the same manner as Google currently does.

MOFCOM's decision once again demonstrates China's increasing influence on merger review of global transactions. Indeed, other regulators around the world, notably in the U.S. and the EU, approved the transaction without imposing any remedy. This is the third recent decision in the IT industry, after Western Digital/Hitachi and Seagate/Samsung (see our March 2012 Alert, Lessons from China's Merger Review Decisions Learned in Recent Hard Drive Acquisitions), in which MOFCOM came to a different conclusion than other antitrust authorities despite the global nature of the markets at issue.

Competition concerns raised by MOFCOM

MOFCOM defined the relevant product markets as those for smart mobile devices and the operating systems for such devices, finding that such markets are worldwide in scope. It recognized that Google has a high market share in such operating systems (79% of the China market at the end of 2011). Considering the high dependence on Android by device manufacturers, and Google's strong financial resources and R&D capability, MOFCOM concluded that Google has a dominant market position in smart mobile operating systems. MOFCOM found the device market to be highly competitive, with Motorola possessing no apparent competitive advantage. MOFCOM also recognized that many of the Motorola patents that Google would acquire as part of the transaction are essential patents that device manufacturers must use in order to produce their products.

Despite the worldwide nature of these markets, MOFCOM explicitly indicated that its analysis placed an emphasis on the dynamics of these markets in China.

The first concern raised by MOFCOM is that, post-transaction, Google could license Android to its Motorola division under conditions more favorable than those offered to competitors, thereby putting the latter at a competitive advantage. This contrasts with the conclusion reached by the European Commission (and presumably also other antitrust authorities), after questioning of numerous market participants, that Google would not have the incentive to engage in such discrimination.

MOFCOM's second concern was that Google would be able to abuse its dominant position – presumably in the mobile operating system market – for example by imposing unreasonable terms and conditions in the licensing of Motorola's patents. This also contrasts with the different conclusion (requiring no remedy) reached by the European Commission and presumably other authorities – notably relying on Google's public pledge to continue Motorola's policy to license such essential patents under FRAND terms.

Conditions imposed

In order to alleviate such concerns, MOFCOM agreed to clear the transaction only under the following conditions:

  1. Google will license Android free of charge and in open source, consistent with its current commercial practice.
  2. Google will treat all original equipment manufacturers (i.e., mobile terminal manufacturers) in a non-discriminatory manner with respect to the provision of Android.
  3. Google will continue to comply with the obligations Motorola currently undertakes with respect to its (presumably only essential) patents to license them on fair, reasonable and non-discriminatory (FRAND) terms.
  4. Google will appoint an independent supervising trustee to supervise its performance of these conditions.

The first two obligations are imposed for a period of 5 years, although Google may request MOFCOM to change or terminate them before the expiry of that period. After 5 years, MOFCOM may continue to evaluate the market conditions of China's smart mobile device and operating systems markets, and may make further decisions based on the result of its evaluation.


This is not the first time that MOFCOM has reached a different conclusion with respect to a major global M&A transaction, imposing remedies where other regulators have not done so (e.g., InBev/Anheuser-Busch; General Motors/Delphi) or that go beyond those imposed by other antitrust authorities (e.g. Western Digital/Hitachi, Seagate/Samsung).

There are several possible explanations for MOFCOM's more aggressive approach.

The first reason is that MOFCOM's mandate for merger review under the AML goes beyond pure antitrust concerns. In particular, MOFCOM must take other factors into consideration, such as the impact of the proposed transaction on China's national economic development. In this case, it is possible that MOFCOM was concerned that Google would be able to harm Chinese handset manufacturers post-transaction, thereby hampering a major Chinese industry and impacting national economic development. Similar concerns affected a number of recent decisions including the Western Digital/Hitachi and Seagate/Samsung mergers and the Russian potash merger.

A second reason might be that MOFCOM is less experienced with vertical mergers and therefore tends to rely on less developed antitrust theories. In particular, MOFCOM might be less experienced with analysis of a dominant firm's ability and incentive to foreclose competition in a vertical merger. In this respect, it is striking that the current decision provides little explanation regarding Google's ability and incentives post-transaction to foreclose competition.

Thirdly, MOFCOM also seems to be less comfortable with "informal" remedies such as those that were on the table in this transaction, notably Google's pledge to continue licensing Motorola's patents. MOFCOM seems to prefer that such commitments be set in stone as formal remedies. MOFCOM also did not seem to take at face value the parties' argument that they lack the incentive to discriminate against other terminal manufacturers with respect to Android, preferring that Google offer a commitment in this respect (and probably assuming that if Google claims it has no incentives to discriminate, it should not be an issue to offer a commitment).

The Google/Motorola decision also further highlights what appears to be MOFCOM's pattern of seeking ways to maintain the competitive status quo when confronted with potentially problematic transactions. This sometimes manifests itself in conduct remedies essentially requiring parties to maintain their pre-transaction course of conduct, such as in GM/Delphi (non-discrimination commitments in vertical deal) and the Russian potash deal (commitment to continue supply to China), as well as in the Google-Motorola transaction. At other times it takes a more complex turn, as in the recent HDD cases, where the parties were required to maintain themselves as independent competitors post-closing.

Finally, the decision raises an interesting issue regarding the division of jurisdiction between MOFCOM (in charge of merger review) and the two non-merger antitrust agencies (NDRC and SAIC). Indeed, the type of behavior that MOFCOM is targeting (excessive prices, discrimination, refusal to license, etc), typically would fall under the abuse of dominance provision of the AML, which are under the jurisdiction of the other agencies. MOFCOM may more systematically impose behavioral remedies on vertical mergers involving dominant undertakings, even if the merger does not change the dominant firm's incentives.

MOFCOM's decision can be found in Chinese at the MOFCOM website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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