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5. Joint ventures

What are joint ventures?

Joint ventures may refer to various types of cooperative arrangement between undertakings including, joint production arrangements, joint buying arrangements, joint selling, distribution and marketing arrangements, and joint R&D ventures. The activities of a joint venture may be carried out through a legal entity separate from the parties to the joint venture or by some or all parties to the joint venture.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.90]

 

The following are common forms of joint ventures:

a. Joint production

b. Joint tendering

c. Joint selling, distribution and marketing

 

a. Joint production

Joint production agreements take a number of forms. They may provide that production is carried out by one party or by two or more parties or the parties may establish a separate legal entity for the purposes of the joint production.

 

Where a joint production agreement allows parties to produce a product that they would not, objectively, be able to produce alone, the agreement will not likely have the object or effect of harming competition.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.95 & 6.98]

 

Joint production agreements may sometimes have the effect of harming competition, for example where:

  1. Producing jointly leads to reduced product variety in the markets where the joint venture partners competed prior to forming the joint venture;
  2. Producing jointly results in higher prices for customers;
  3. Producing jointly results in an increase in the parties’ commonality of costs with the result that the parties can more easily coordinate market prices; or
  4. The agreement leads to an exchange of competitively sensitive information beyond that which is strictly necessary for producing jointly.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.99]

 

Hypothetical example

Two leading suppliers of an industrial chemical product in Hong Kong, Company A and Company B, decide to close their existing independent production facilities, and open a more efficient joint plant solely for use by A and B. Company A and B do not agree on any terms beyond those strictly limited to the running of the new facility. There are only two other competitors, C and D in the market who arerunning their plants at full capacity. Company B already has an existing joint venture with C. Costs of production are a significant proportion of the variable costs of the companies active in the market. The market has not seen any recent entry.

 

In assessing whether the creation of the joint production facility would give rise to concerns under the First Conduct Rule, the Commission would consider:

 

  1. the existing market structure and the state of competition in the market;
  2. whether the agreement enhances the commonality of costs of Companies A and B; and
  3. whether competition (on price) would likely be softened in the market as a result of the joint venture.

 

[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 20]

 

b. Joint tendering

Joint tendering generally involves undertakings cooperating openly with a view to making a joint bid.

 

[Source: Commission’s Guideline on the First Conduct Rule Para 6.101]

 

Circumstances in which joint tendering is unlikely to raise competition concerns:

 

A joint tender can be of benefit to competition if it allows companies to participate in biddings when otherwise they would not be able to make a stand-alone bid, or if the joint tender enables companies to submit more competitive bids. Joint tendering is less likely to give rise to competition concerns when the undertakings involved pool their complementary skills or different specialties.

 

Circumstances in which joint tendering is likely to raise competition concerns:

 

It might be of concern if the parties, which could have made individual bids, decided to submit a joint tender, as such joint tendering may reduce the number of potential bidders which in turn is more likely to harm competition if there is already a limited number of potential bidders in a concentrated market.

 

Joint tendering will not generally be considered by the Commission to have the object of harming competition, rather such arrangements will be assessed for their actual or likely effects on competition in the relevant market.

 

[Source: Commission’s Guideline on the First Conduct Rule Paras 6.101 & 6.103-6.106]

 

Hypothetical example

A tender is announced for the renovation of a high-rise office building in Mong Kok. The tender requires bidders to have significant manpower to be able to complete the project in the given timeframe and also sets out a minimum financial resource threshold for the bidder – to ensure the chosen construction company has sufficient liquidity throughout the project.

 

Two small construction companies with a limited market share in Hong Kong, TungBuild and ChungConstruct, considered independently bidding for the tender. However, neither company had sufficient manpower resources or financial capital to satisfy the tender specifications and would thus individually be excluded from bidding.

 

Tung and Chung therefore submitted a joint bid which allowed them to combine their resources to deliver the required project. The bid makes it clear they are submitting a joint tender, which transpires to be one of the lower prices submitted. Six other bids were submitted by larger construction companies who in the past five years have won the vast majority of the tenders for similar sized projects.

 

Assuming the creation of the TungBuild/ChungConstruct joint venture does not amount to a merger the arrangement may be assessed under the First Conduct Rule. In that regard, the joint venture does not have the object of harming competition and appears unlikely to give rise to anti-competitive effects. The fact that Tung and Chung could not individually bid for the project is particularly relevant here – they are not in fact competitors for the project in issue. The collaboration results in enhanced choice for the party organising the tender and a more competitive bidding process overall.

 

Nonetheless, Tung and Chung would need to be careful that any competitively sensitive information they share in submitting the bid and in carrying out the joint venture is used strictly for the purposes of the joint venture and that the joint venture is not used as a vehicle for exchanging commercial information on their usual prices and costs.

 

[Source: Commission’s Guideline on the First Conduct Rule Hypothetical Example 21]

 

c. Joint selling, distribution and marketing

This type of arrangements refers to a wide range of possible joint ventures between undertakings where they agree to jointly sell, distribute or market particular products, which are known as “sales-related joint ventures”. Such arrangements range from collaboration in respect of advertising only or the joint provision of after-sales service, through joint selling involving the joint determination of key commercial parameters including price.

 

Circumstance in which sales-related joint ventures is unlikely to raise competition concerns:

 

Sales-related joint ventures can be an effective way of facilitating market entry for a new product, particularly where SMEs collaborate with a view to selling a new product they could not market individually.

 

Circumstance in which sales-related joint ventures is likely to raise competition concerns:

 

However, sales-related joint ventures can give rise to concerns under the First Conduct Rule where they lead to price fixing, output limitation, market sharing or the exchange of competitively sensitive information between competitors.

 

[Source: Commission’s Guideline on the First Conduct Rule Paras 6.107-6.109]

 

Hypothetical example

Various leading European flower producers have previously sold their products to Hong Kong through individual contracts with distributors. To rationalise their resources and reduce air freight costs, they form Bloomport JV, a joint venture arrangement under which each party agrees to make all its export sales to Hong Kong through the Bloomport brand. Bloomport will also decide on the products and volumes to be sold, the choice of customers and the prices to be charged.

 

The Commission would consider that this type of arrangement has the object of harming competition. By coordinating key commercial decisions, the parties risk contravening the First Conduct Rule by engaging in price fixing and output restriction.

 

The Commission may also consider the arrangement to be Serious Anticompetitive Conduct under the Ordinance.

 

[Source: Commission’s Guideline on the First Conduct Rule Example 22]

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