An Analysis of Competition in Domestic Tobacco and Alcoholic Markets after Lifting of Market Entry Restrictions and Discussion of Precedents

1. Background of Study
After it was created in 1992, the Fair Trade Commission has announced businesses considered monopolistic and the tobacco and alcoholic industries unquestionably belong to this category. The monopoly system adopted during the Japanese Rule period was continued for the said industries after WWII. All production and marketing were conducted by the government. Private production and importation of tobacco products and alcohol were prohibited and the industries were placed under government control. Despite the government was forced to open these markets as a result of the Sino-US Agreement on Tobacco and Alcohol signed in 1987, the then Taiwan Tobacco and Wine Monopoly Bureau remained strong in sales of alcohol and cigarettes and imported products only accounted for a small percentage of the market shares.
When the Tobacco and Alcohol Tax Act was being drafted in 1999, media reports triggered fear for price increase and artificial demand led to a supply-demand imbalance. Hoping to earn differences up to several fold, speculating businesses started to stock up, making rice wine used for cooking become difficult to get. The FTC worked with prosecuting and police agencies and the Tobacco and Wine Monopoly to investigate the situation. It was not until 2002 when Chinese Taipei became a WTO member and the Tobacco and Alcohol Tax Act was implemented did the psychological anticipation disappear. On top of that, Tobacco and Wine Monopoly was reorganized to become Taiwan Tobacco and Liquor Corporation which increased its production. As a result, the rice wine event that lasted three years finally came to an end. However, it was also the time when the tobacco and alcohol markets changed completely and the heretofore government-controlled monopolistic markets were totally opened.
Meanwhile, as foreign-made alcohol started to be imported into the country in 1987, false labeling of place of origin, years of aging and quality level grew common, leading to unfair competition and jeopardizing the interests of consumers. Apparently, when the Provisional Statutes for Tobacco and Alcohol Monopoly was enacted, it was never expected that there would be tobacco and alcoholic imports in the future; therefore, no regulations were stipulated to define the competent authority and penalties when inappropriate advertising and false labeling for such products occurred. Before related regulations on tobacco and alcohol administration were enforced, the FTC stepped in at the right time and straightened up the chaotic situation of the markets. Then, after accumulating enough investigation experience, the FTC sorted out and announced the various types of violations. When the Tobacco and Alcohol Tax Act was implemented, the temporary mission of the FTC was concluded and the experience accumulated was passed on to the new competent authority of tobacco and alcohol industries, the Ministry of Finance. The tobacco and alcohol administration system in the country thus became more complete and the FTC was able to invest its efforts to handle serious violations in the tobacco and alcohol markets, such as practices carried out by tobacco and alcohol businesses to restrict competition.
In the past, due to government consideration of imposing taxes on tobacco and alcoholic products for financial purposes and the principle of special laws prevailing over ordinary laws, the FTC would normally respect the decisions of the competent authority of tobacco and alcohol industries when competition restrictions, such as tie-in sales and division of marketing regions, occurred. After government control was removed, despite fierce competition in the alcohol market, Taiwan Tobacco and Liquor Corporation, a state-owned enterprise, and Kinmen Kaoliang Liquor Inc., a county government-run enterprise, remained two leaders in the market. Meanwhile, multinational tobacco groups came fully prepared. In particular, Japan Tobacco International could already rival Taiwan Tobacco and Liquor Corporation in market share and this also resulted in certain competition restriction practices. Today, cross-strait exchange is growing increasingly frequent. Whether there will be any impact on the domestic tobacco and alcohol market, further observation is required.
It has been over two decades since the FTC was created in 1993 while the Tobacco and Alcohol Tax Act, passed in 2002, has been enforced for over ten years. The cases the FTC has processed spanned over the periods before and after the current tobacco and alcohol administration system was established. It is necessary for the FTC to arrange these cases systematically and, besides analyzing current competition in the tobacco and alcohol markets, also describe the division of labor between the tobacco and alcohol authority and the FTC as well as sort out important violations and cases where no sanctions were administered to come up with suggestions accordingly and provide them for reference in future law enforcement.

2. Conclusions and Suggestions
The violations the FTC has processed in the past two decades include hoarding of rice wine, counterfeit alcohol, imitation of celebrated logos on alcohol packaging, tie-in sales of tobacco products and concerted actions. However, these practices happened when the new tobacco and alcohol administration system was already implemented while the number of tobacco cases where sanctions were imposed was rather limited, including only the inappropriate tie-in sales by Taiwan Tobacco and Liquor Corporation and the joint price increase by 31 distributors affiliated to Japan Tobacco International. As for the number of violations by alcohol businesses, it was next to nothing.
The reason was that the tobacco and alcohol markets have been completely opened for more than ten years since 2002 and the changes therein have been insignificant. Taiwan Tobacco and Liquor Corporation remains dominant in the beer market, accounting for 80% of the market share, whereas Kinmen Kaoliang Liquor Inc. is still the leader in the non-beer market, claiming 25% of the market share, way ahead of the 8% of Edrington Group, the multinational liquor company, in second place. Since Taiwan Tobacco and Liquor Corporation and Kinmen Kaoliang Liquor Inc. are respectively state-owned and county government-run enterprises, besides revenue considerations, they also serve the purpose of stabilizing prices. As long as supply and demand are stable, there should be no competition restrictions or unfair competition.
As for the tobacco product cases in which sanctions or warnings were issued, they were mostly the result of policy adjustments. For instance, after the Legislative Yuan approved the increase of health and welfare tax on cigarettes and before the tax was imposed, the public began to stock up and market supply and demand lost balance. Also, cigarette manufacturers and retailers took advantage of the health and welfare tax increase and raised the prices. Meanwhile, as a result of the government’s policy to increase the costs of cigarettes to reduce consumption which led to decline in sales and profit, distributors reached the mutual understanding to raise cigarette prices. During this period, the FTC kept a close watch to see if any cigarette businesses took the opportunity to engage in competition restriction or unfair competition practices while Legislative Yuan is planning to increase the health and welfare tax.
After the Tobacco and Alcohol Administration Act was implemented, cases involving false labeling of alcohol became the responsibility of the competent authority of tobacco and alcohol industries as they should be. Nevertheless, no regulations against counterfeit alcohol or packaging imitation can be found in related tobacco and alcohol regulations. Therefore, there is still room for the FCT to intervene in cases involving unfair competition.
Chinese Taipei became the fifth largest scotch whiskey importer in the world in 2011. In 2012, the Scottish government started to plan for the minimum unit pricing (MUP) system for its liquor products. The intention was to raise alcohol prices and lower health hazards from alcohol. The FTC will continue to observe subsequent developments to see if it will bring a wave of alcohol price increase when the decision is approved by the EU Commission.
The structure of the tobacco and alcohol industries has transformed over the years. Marketing strategies are many and competition has intensified. Since these products are not daily life commodities that everyone needs, the price sensitiveness or the frequency and intensity of expression of public concern therefore vary. However, the competition issues likely to be involved are outside the types of competition restrictions established. This can be proven by illegal hoarding or false labeling cases the FTC processed in the past.
In recent years, the smoking population in the country has decreased as a result of health and welfare tax increase, leading to the decline of the tobacco industry. To maintain their profit, tobacco businesses therefore resorted to concerted actions. They were unusual cases of competition restrictions. In consequence, there has been the tendency of adoption of stricter restrictions in different countries. On the one hand, tobacco and alcohol businesses are bound to experience a greater sense of crisis. On the other hand, they will also innovate and develop new products to keep themselves from getting pushed out of the market. Under such circumstances, competition practices or patterns will also evolve. Competition authorities must understand and stay familiar with the industry and keep track of the development of competition in the market to prevent factors disadvantageous to competition from surfacing. In addition, it should not be overlooked that foreign companies have delegated local businesses for production and can do the same again. Can illegal competition result from such cooperation The gray area between cooperation and concerted action has to be assessed on a case-by-case basis. Over the years, transformations and changes in tobacco and alcohol industries have always brought new challenges for competition authorities.