A Study on the Competition of the Industrial Paper Industry in Taiwan

1. Background of the Study

Domestic prices of industrial paper escalated drastically at the beginning of 2010. The major upstream suppliers, namely Cheng Loong Corporation (hereinafter referred to as Cheng Loong) Yuen Foong Yu Paper Manufacturing Co., Ltd. (hereinafter referred to as YFY), and Long Chen Paper Co., Ltd. (hereinafter referred to as Long Chen) raised the prices of industrial paper several times in a row and created discontentment among the midstream and downstream businesses. Both sides met to negotiate a few times at the Industrial Development Bureau of the Ministry of Economic Affairs but reached no conclusion. The level-3 businesses even called up 800 people and took to the streets. They ended up making their protest outside the upstream suppliers' headquarters and the once peaceful supply-demand relationship fell to pieces instantly. Immediately, the FTC took the initiative and started to investigate the suspected concerted price maneuver on the industrial paper market, insisting that any cartel conduct would not be tolerated. The structural completeness of the industrial paper market and the maturity of the industry have drawn a lot of attention in recent years. In spite of the FTC's sanction against the concerted action of the three major suppliers, there remain further disputes and this study is aimed to reexamine the related issues.

During the investigation, the FTC encountered mounting difficulties in collection of evidence. Above all, as individual industries make progress, the ways of communication businesses employ are different and the patterns of concerted actions have grown more and more complex. Raiding and tapping have become infeasible investigation approaches. At the same time, businesses have learned to be more sensitive and cautious because of the Fair Trade Law and leave no traces of evidence. In reality, naked cartels are rarely seen. Domestically, the industrial paper industry has matured, with Cheng Loong, YFY, and Long Chen leading the pack.

Over the years, doubts about concerted manipulation of industrial paper prices by these three enterprises have long existed, yet evidences such as contracts or agreements have never been found and precedents of cases related to industrial paper have been impossible to apply to determine the acts of these enterprises as illegal. Hence, the FTC resorted to its experiences with handling the case involving China Petroleum Corporation and Formosa Petrochemical Corporation, where the approach adopted was recognized by the Supreme Court, and, instead of providing direct evidences like contracts or agreements, adopted solid indirect evidence to support the disposition in April 2010 against the three enterprises for their concerted increase of industrial paper prices. The defense presented by the offenders for the appeal currently under deliberation indicates that these said enterprises appear to lack sufficient understanding of the argument of consistent behavior in concerted actions. Therefore, this study is intended to provide a complete overview of the aforesaid argument so that a reference for future law enforcement can be produced.

2. Scope and Methods of the Study

Scope of the study
The products of the paper industry can be divided into household paper, industrial paper, and printing paper. The corresponding raw materials, marketing, sales channels, and industrial structures also differ. The first section of this study will be a summarized description of the overall status of the paper industry and the types of products produced. The transaction approaches vary with the types of products but the controversies in recent years have mostly been related to industrial paper. In both 2008 and 2009, the FTC also initiated investigation on whether paper businesses had adopted illegal concerted actions. In early 2010, the case was established and the three major enterprises were sanctioned for concerted actions in violation of the Fair Trade Law. Based upon this case, the second section of this paper will explain the industry chain and status of industrial paper businesses. Data, figures and tables will be provided to give detailed information about the market development and show the practices and complexity of how industrial paper is priced.
Finally, in section three, the outlines of the cases involving industrial paper that the FTC has processed over the years are depicted, with the focus set upon concerted actions and a few examples of restriction on mergers and vertical transaction are provided to illustrate the controversies and opinions about the market competition regulations and to establish references for future law enforcement.
Methods of the study
The investigation conducted to get a comprehensive understanding of the trend in the industrial paper industry includes interviews with key businesses, visits to industrial paper plants and related product price information websites, as well as study of information from the RISI database, statistics, news reports, and publications from the Taiwan Paper Industry Association. Furthermore, the results of investigations on the industrial paper industry the FTC has conducted over the years are scrutinized. The case types, time of occurrence, and disposition are analyzed to establish the foundation for empirical study. The methods employed include:
1. In-depth interview: Individuals from the industry are interviewed to ascertain their perception and opinions toward related issues or incidents in order to establish a deeper understanding of the trade, including transaction practices, how supply and payment are conducted, and the interrelation between the upstream and downstream businesses.
2. Case study: The cases the FTC has handled are reviewed to identify the correlation between the changes in trading behavior and the data are categorized, compared, and analyzed.
3. Literature analysis: Related literature is collected and sorted out to compared new and old data and market developments to understand the long-term tendency.

3. Conclusions

The industrial paper trade is an important link in Taiwan's daily commodity industries and an indispensable part in our economic development. The entire industry chain has an effect on the upstream waste paper industry and the downstream packing material demand. The impact of price fluctuations in the upstream on the overall industrial economy cannot be overlooked. This study begins with a reflection on the past development and the current status of the paper industry in Taiwan and explains how the products of this industry are classified. Secondly, by interviewing related businesses, examining past cases, studying the information from databases on the industry, and reviewing the records of meetings held between the FTC, the Industrial Development Bureau and industrial paper businesses, the context of the trade, its unique price quotation approaches, the difference between invoice prices and actual prices, as well as the price quotation approaches of the level-2 and level-3 businesses are analyzed.

In-depth analysis conducted by the FTC reveals the tendency of higher industrial concentration toward the upstream. After several secondary level-1 plants closed down, presently the market of the industry is dominated by three major enterprises, which account for over 90% of the entire market share. These level-1 industrial paper suppliers adopt integrated production. In addition to base paper, they also produce corrugated cardboard, level-2 paper products, and paper utensils, level-3 products. Besides these three major manufacturers, there are also around twenty other businesses operating on the corrugated cardboard market. They have to compete with the three major players and, at the same time, they also rely on these three dominating enterprises for raw material supply. The simultaneous vertical dependence and horizontal competition make an unusual phenomenon. Most corrugated cardboard manufacturers also produce paper utensils and, in doing this, they face competition from over 3,000 paper utensil makers in the downstream. Competition in the paper utensil industry is extremely tough because of the enormous number of businesses as well as low start-up threshold and capital, and they are highly price-sensitive. If any slight price fluctuations occur, these businesses can feel the influence. When the FTC interviewed certain corrugated cardboard businesses, most of them made the same comment that it was not easy to maintain long business relations with paper utensil makers due to their high price sensitivity. Corrugated cardboard makers have to make cost adjustments in line with the prices of industrial paper and if they don't absorb part of the cost and just transfer it to level-3 businesses, it is difficult to retain these clients.

During the investigation, the FTC realized that concerted actions had grown more and more complicated and direct evidence was harder and harder to obtain. In the industrial paper case in 2010, the FTC used indirect evidences to deduce that the three major suppliers had instigated a concerted action. It was like the depiction in the movie "The Informant" of the lysine international cartel case in which participants of the concerted monopoly release and exchange information at frequent gatherings. Such threatening or enticing information they release is rather significant for law enforcers. Consumers become the victims of their taciturn agreement on non-competition. To quote some of the dialogs from the movie: "How can we be sure ADM will abide by the agreement? We would rather believe they there is complete trust between us." "If anyone lies, we'll hire the mafia to take care of you!" "The point is that if we don't trust each other completely, the agreement will be meaningless." Participants of concerted actions often make taciturn agreements. The industrial paper suppliers in this case had contacted each other frequently and kept a close relationship. While the context of this case and related issues are reviewed, continuous watch on the overall developments and competition in the industrial paper trade is needed. Only by taking cautious steps from the beginning to find out where precisely the problems are will it be possible to reduce the cost of law enforcement and avoid making the wrong decision or letting offenders get away with their illegal conduct.

Judging from the precedents and the direction of the industry, mergers in the paper industry mostly happen between level-1 and level-2 plants, with the intention to deepen the effects of vertical integration. The market in Taiwan has reached saturation and some secondary level-1 base paper mills have pulled out of the market. As a result, industrial concentration is becoming more and more obvious in the upstream. The three major enterprises control almost all the raw material sources. When the raw material prices go up and the upstream suppliers do not give the downstream businesses enough buffer time to react, the grievances of level-3 businesses can be expected. They often use their trade association as a channel to voice their opinions. In 2010, the association even called up 800 people to take to the streets and protest against the price rises. The FTC suggests that, during investigation, the characteristics of the industry and the advantaged and disadvantaged sides in transaction deals must be fully examined. The changes of raw material prices must be watched on a long-term basis, in order to have a firm grasp of the market condition in case there are drastic price fluctuations or transaction condition changes as a result of seasonal factors or natural disasters. At the same time, the pricing methods adopted in the upstream and downstream of each industry as well as the price quotation approaches and transaction conditions, etc., must also be understood, so that when investigation is required, the core can be completely mastered right away.