Cheng Loong Corp., Long Chen Paper Co., Ltd., and YFY Packaging Inc.

Case:

Key Words:

industrial paper, concerted price increase

Reference:

Fair Trade Commission decision of April 14, 2010 (the 962nd Commissioners' Meeting); Disposition Kung Ch'u Tzu No.099054

Industry:

Cardboard Manufacturers (1513)

Relevant Laws:

Article 14 the Fair Trade Law

Summary:

1. Cheng Loong Corp. (hereinafter referred to as Cheng Loong), Long Chen Co., Ltd. (hereinafter referred to as Long Chen), and YFY Packaging Inc. simultaneously adjusted the prices of industrial paper between November 2009 and March 2010 and were suspected of concerted price increase. The FTC initiated ex officio investigation in accordance with Article 26 of the Fair Law.
2. Findings of the FTC after investigation:
   1. The said three enterprises occupy more than 90% of the supply of first-level industrial paper in the domestic market. They also run second- and third-level downstream operations through vertical integration. High level of chain effects between the upstream and the downstream exist because of the interrelations. Additionally, the three enterprises are involved in two markets. On the one hand, they are the buyer on the waste paper market; on the other hand, they are seller on the industrial paper market. Waste paper is important material for industrial paper, accounting for about 60% to 70% of the material sources. Therefore, the prices of waste paper will those of industrial paper.
   2. The FTC requested the three enterprises to explain the reasons for price increase and to provide the quotations to their downstream business associates. At the same time, the FTC also compared the testimonies of 19 independent second-level cardboard manufacturers with the statements of the three said enterprises.
   3. The prices of waste paper have gone up recently. The FTC sent a written request to the Bureau of Foreign Trade for information regarding the list of exporters, as well as the items and amounts exported. The data showed that the export prices were indeed lower than domestic prices in the same period. The FTC also obtained the production, marketing and import/export data of the overall market from the Industrial Development Bureau. The statistics indicated that the supply and the demand were still in balance.
3. Grounds for Disposition:
   1. Cheng Loong and the two other enterprises concertedly raised the prices of first-level industrial paper between November 2009 and March 2010:
      1) The prices of core paper provided by the offenders were compared with the invoices from the second-level manufacturers and the price increase appeared consistent. In addition, comparing the rises in waste paper cost with the offenders' industrial paper prices, the levels of price increase as indicated in the invoices all exceeded the rises in waste paper cost.
      2) In contrast, the industrial paper price fluctuations as a result of the rises in waste paper cost in the period from October 2007 to May 2008 were larger than the range of the aforesaid price adjustment. Again, when compared with international competitive prices, the range of domestic industrial paper price increase this time did appear inconsistent with international price rises. The three enterprises differ in the quantity, cost, and self-controlled percentage of their waste paper purchases. Consequently, the cost pressure and the level of cost transfer also have to vary. However, the price increase of the three enterprises was consistent.
      3) The industrial paper market is a highly concentrated one and it is not easy at all for new businesses to step in the market. The offenders have different cost structures and various self-controlled percentages, yet the price adjustment was quite consistent. It could not possibly have been independent price adjustments that happened to coincidentally. Besides, the offenders would quote in accordance with the listed prices in order to make their competitors understand the upper limits of price adjustment and other price-related information, so that the price increase would be consistent. At the same time, the fact that the offenders often met and socialized with one another was really contradictory to the normal behavior of competitors and it is not common at all in other competitive industries. Hence, combining the above, it is obvious that these enterprises established taciturn or implicit agreement to maintain increase of industrial paper prices and avoid price competition.
   2. The offenders Chen Loong and Long Chen used the advantage of vertical integration to jointly boost up the prices of second-level cardboard on the domestic market:
      1) Together, the three offenders enjoy a 54.79% share of the corrugated cardboard market. 19 other independent and sizable second-level manufacturers split the remaining 45.21%. Any of the independent second-level manufacture is undoubtedly no match to the offenders in terms of market share. In other words, the three major enterprises are able to bring a rather significant impact on the market when they raise the prices or try to undercut the prices. They run first-, second- and third-level plants under the same management. The vertical integration results in high-level solid internal control. If the offenders adopt concerted actions to uplift the prices of second-level cardboard for profit, while on the horizontal competition market the other independent second-level manufactures, limited in production scale and paper sources, will be unable to compete on the market and the joint price increase will definitely render serious damage to market competition.
      2) The domestic sales and the internal cost of second-level cardboard of the offenders Chen Loong and Long Chen are dissimilar and their processing costs and attrition rates are also subject to different factors. But for the existence of an agreement, there is really no justifiable explanation for the consistent price increase on a number of products. In addition, these two enterprises made no price competition and, on the contrary, jointly boosted the prices of cardboard, third-level cardboard box makers had no choice but to purchase from their second-level plants. Therefore, their use of vertical integration to control the sources and joint manipulation of the prices of second-level cardboard could not be any more obvious.
      3) The independent second-level manufacturers rely on the upstream suppliers to a rather high extent and their paper supply is under the control of the upstream businesses. If the three major industrial paper suppliers consolidate their resources and retaliate, these smaller businesses will have no means to stand up against them. Cheng Loong and Long Cheng have the capacity to influence the prices of the products from the second-level plants. Therefore, by lifting the prices at the second-level which increase the price pressure the third-level paper plants can withstand, these two enterprises are able to maneuver the competition on the market.
   3. Taking into consideration the financial situation of the offenders, the impact of the violation, the punishment they deserve for the violation of their Administrative Law obligations, and the profit they made as a result of the violation, Cheng Loong was fined 5 million NT dollars, Long Chen 300 million, and YFY 2 million.

Summarized by: Huang, Chia-Chi Supervised by: Yang, Chia-Hui

Appendix:
Cheng Loong Corp. 's Unified Business No.: 33085508
Long Chen Paper Co., Ltd. 's Unified Business No.: 34202841
YFY Packaging INC. s' Unified Business No.: 27719048