Rejection of the application filed by the Chinese Petroleum Corporation to combine with gas stations and "Guidelines for Rejection of Possible Newly Established Domestic Oil Refiners to Combine with Local Gas Stations Before Chinese Taipei Allows Free Importation of Petroleum Related Products"

Chinese Taipei

Case:

Rejection of the application filed by the Chinese Petroleum Corporation to combine with gas stations and "Guidelines for Rejection of Possible Newly Established Domestic Oil Refiners to Combine with Local Gas Stations Before Chinese Taipei Allows Free Importation of Petroleum Related Products"

Key words:

Chinese Petroleum Corporation, regional competition, combination, privatization, liberalization, streamlined process

Reference:

The Fair Trade Commission Decision of November 5, 1997 (the 314th Commission Meeting); Letter (86) Kung Erh Tzu No. 04181

Industry:

Oil and Coal Products Manufacturing Industry (2120)

Relevant Laws:

Articles 6 and 12 of the Fair Trade Law

Summary:

  1. Background of the case: The Chinese Petroleum Corporation (CPC) filed an application to the Fair Trade Commission for combination with landowners in building and operating gas stations. However, as liberalization of oil products is an established policy upheld by the government, the Fair Trade Commission (FTC) has conducted a research project regarding the issue so as to prevent the CPC from taking advantage of its residual monopoly power, and thus causing a hindrance to free competition in the petroleum products market.

  2. Evaluation of the application made by the CPC for the purpose of building gas stations in the form of enterprise combination: The local oil product market is still highly concentrated, which along with the following reasons makes the combination initiated by CPC an even greater obstacle to entry into the market by latecomers.

(1) The impact on regional competition of gas stations built in the form of enterprise combinations: Due to the difficulty associated with land acquisition in urban areas and the strong opposition expressed by local residents, it is extremely difficult to build new gas stations in such areas. If permission is given to the establishment of new gas stations by means of such combinations, new manufacturers, importers in this industry and operators of gas stations are bound to face a bleak future in terms of their further development.

(2) The impact on conglomerate competition: If conglomerates formed through enterprise combination enter into competition before the market is completely opened and liberalized, an oligopoly of oil product supply by local enterprises is bound to emerge in the market. As a result, strict control should be maintained over the combination between manufacturers and operators of gas stations so that there is room for more competition, which should facilitate the oil product market's move toward a sound state of competition between conglomerates.

(3) The impact on the suppliers of oil products: As the cost of building new gas stations is rising, the time for new oil suppliers to build their marketing systems becomes more pressing. The higher the percentage of enterprise combinations in the market, the smaller their chance of obtaining marketing channels and the higher cost they must bear, which is not fair to new oil suppliers.

(4) The impact on the opening of the market: i) Members of the oil industry will join with the employees and shareholders of the CPC in obstructing the liberalization of the particular market. ii) The approval of the application would prove a contradiction to the purpose of the policy to liberalize the operations of gas stations. iii) The roles played by the CPC, whether it be manufacturer, wholesaler or retailer, will be even more confusing, and the CPC will be in a position to exert more control over the market.

  1. Where the approval of applications of this nature is concerned, consideration should be given not only to the detriments resulting from restrictions on free competition, but also to the benefits to the overall economy, and a decision shall be made based on the comparison of the potential detriments and benefits. In accordance with experiences in other countries, the applicant shall be responsible for providing evidence in support of the overall economic benefits resulting from approval of its application. The following is the summary of the overall economic benefits cited by the CPC and the evaluation conducted by the FTC:

(1) To enhance convenience for the residents in the nearby community: There is no causal relationship between the local residents' convenience and the establishment of gas stations by the CPC by means of enterprise combination, so this argument can hardly serve as a convincing reason for approval.

(2) To increase the CPC's sales volume and thus reduce the production cost of oil products: Once a local oil refiner begins to supply oil in the market, no matter from which oil company the gas station purchases, the refiner's sales volume may increase and then its production cost decreases, which is irrelevant to whether enterprise combinations take place.

(3) To resolve newcomers' problems related to the hardware facilities, management and safety issues: As soon as other local refiners or importers enter the market, it is believed that they will place great emphasis on the issues mentioned above, and try their best to reach high standards in this regard. So, it is true that this particular benefit does exist, but it is a short-term one and is not an exclusive outcome resulting from the combination between CPC and newcomers in the industry.

(4) To create the greatest comprehensive benefits with the lowest social cost and the least economic resources: No specific evaluation of the benefit is possible because it is vaguely defined.

  1. Based on the evaluation results, the FTC in its 314th Commission Meeting decided that, before the free importation of petroleum related products in Chinese Taipei, no approval would be granted to any combination through either joint operation of gas stations or the establishment of new corporations to operate gas stations by CPE or other newly established domestic oil refiners.

Summarized by Lin, Hsiao-hung
Supervised by Lee, Yen-Hsi

Appendix:
Chinese Petroleum Corporation's Uniform Invoice Number: 03707901

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