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News & Events

[ 19-09-2013 ]
Helping SMEs understand competition law

THIS will be the last of the series of articles for this year. I have kept this piece on small and medium enterprises (SMEs) to the end as it provides an opportunity to draw together issues raised in my previous articles, focusing on how they apply to SMEs.

The SME community in Malaysia has raised numerous concerns about the application of the Competition Act 2010 to their businesses. The concerns range from a claim that the Act should not apply to SMEs at all, to complaints that the Act is too complex for small businesses to understand.

The MyCC appreciates that 97% of the total number of businesses in Malaysia are SMEs. We, therefore, recognise the importance of addressing SMEs’ concerns.

The position taken by Malaysia in relation to SMEs is not uncommon. SMEs are subject to competition laws in many jurisdictions around the world including Australia, the United Kingdom, Singapore and India. This article explains why the Act should also apply to SMEs in Malaysia, what SMEs should be doing to ensure compliance and suggests some areas where help may be available.

Why should the Competition Act apply to SMEs?

SMEs often operate in quite different ways to conventional large modern corporations and face different challenges when competing in open markets. However, this does not mean that SMEs should not be subject to competition laws. In fact, the Act can be used by SMEs to help them compete against these larger corporations. I will discuss this further below.

Many people have argued that the Act should not apply to SMEs at all because, by virtue of their size, they will not affect competition in any market. However, the Act covers the commercial activities of ALL entities, large and small, and there is no exclusion based on the size of a business.

The most serious breaches of competition law are price fixing, market sharing, limiting production and bid rigging. These are known as cartels. Cartels are prohibited around the world because ANY cartel will always affect competition as prices usually increase as a result of these types of agreements which ultimately means harm to consumers.

It is a bit like the criminal offence of stealing. Anyone who steals, regardless of the amount stolen, commits an offence. In competition law, anyone who agrees to fix prices, divide up markets, limit production or rig bids will commit an offence, regardless of how large the businesses involved.

The focus of Malaysia Competition Commission (MyCC) will be investigating cartels, regardless of whether the agreement involves large multinational companies or small family-run businesses. The Cameron Highlands Floriculturist Association case, the MyCC’s first price-fixing case, involved SMEs.

Other cases involving SMEs have also come to the forefront of MyCC’s attention. These include price-fixing arrangements by the barber associations, coffee shop associations and the association for matrimonial services.

These cases demonstrate that many SMEs, and their trade associations, really do not understand that discussions or agreements about prices are NEVER permitted.

SMEs can take comfort from the fact that the Act will apply differently to small businesses in other cases. This is because some agreements are only prohibited if there is a significant effect on competition. If competitors together hold less than 20% market share or if non-competitors each hold less than 25% market share then there will not be a significant effect on competition.

It is, therefore, likely that a large number of the arrangements entered into by SMEs will not have a significant effect on competition because the market shares of the businesses involved will be so small.

For example, many joint buying or selling arrangements and exclusive distribution agreements are likely to be permitted because of the low market shares of the parties involved. These types of arrangements are helpful to SMEs as they facilitate business activity.

One area of concern for the MyCC is information sharing. The sharing of commercially sensitive information, especially regarding prices, is highly likely to infringe the Act. All businesses, big and small, must independently determine their selling prices. In this way, a competitive market can exist.

If Trader A decides to reduce his price lower than Trader B, he is likely to gain more customers. Trader B will need to respond either by reducing his price or improving his product. This is the sort of competitive market that the Act seeks to achieve.

If information is shared between SMEs regarding proposed selling prices, it is likely this information will influence each SME’s decision about pricing. This is how competition in the market is affected and why this sort of exchange is anti-competitive.

The MyCC is aware that often this type of information sharing is conducted through associations. This does not make it’s okay. It will normally be okay for SMEs to share historical pricing information or general industry data and statistics. Seek advice to ensure what is permitted and what is not.

As discussed in my previous article, another area of concern for the MyCC is bid rigging and this invariably involves the sharing of commercially sensitive information. Bid rigging is a very serious breach of the Act and any SME found to have engaged in bid rigging will be subject to serious penalties.

What should SMEs be doing to ensure compliance? Since its inception, the MyCC has been advocating a need for compliance by all businesses in Malaysia with the new competition laws. The MyCC has made it clear that what will be required for SMEs will differ to what is needed for a larger business.

As an SME, you should ensure that your employees understand that the Act applies to your business and that no one can engage in price fixing, market sharing, bid rigging or limiting production. Your employees should also understand any other risk areas faced by your business. You should require all of your staff to attend a simple training programme.

In addition, your staff will benefit from a list of “Dos and Don’ts” which could be put on display in a prominent place at your business premises. You must ensure that whatever compliance steps you put in place in your business are tailored to your risks.

How the Competition Act can help SMEs?

As small players in their markets, SMEs are likely to benefit considerably from the introduction of the Competition Act. Certain types of behaviour by large players (known as “dominant” enterprises) are prohibited.

For example, dominant players cannot impose unfair conditions on you as an SME. Unfair conditions would include obliging you to re-sell a product at a certain price or only supplying you with the product you want, if you purchase another product that you do not want.

If you think any large players in your markets are not acting fairly in their dealings with you, you can lodge a complaint with the MyCC.

What help is available? The MyCC has already conducted numerous workshops and roadshows and will continue to do so throughout 2013. In addition, the MyCC recently published a brochure of Frequently Asked Questions for SMEs which is available on the website.

Many SMEs may also find their associations are able to provide assistance with compliance. SMEs in the same industries are likely to face common competition law risks. However, if you are taking advice from an association, you must still consider your own business and whether the advice offered deals with all of the risks you face.

It is understandable that the level of knowledge of competition law is low among the SMEs in Malaysia. This is also common in other jurisdictions. Many SMEs consider that competition law acts as a hindrance, rather than a help, to marketplace competition, as previously permitted discussions about price fixing and market sharing are now outlawed by the Act.

This misconception often leads to SMEs being unaware of not only their obligations but also their rights. As an SME, the new competition laws can be used to your advantage. Open, free and fair markets provide the ideal environment in which small businesses can compete against other firms, both large and small, domestically and internationally.

Shila Dorai Raj (shila@mycc.gov.my) is CEO of Malaysia Competition Commission (www.mycc.gov.my).