Mercedes Joins Foreign Firms Under Scrutiny

| About: Daimler AG (DDAIY)

It's a new day, which means it's time for yet another government investigation into foreign firms that are coming under increasing scrutiny for both their products and business practices. This time it's luxury automaker Mercedes-Benz (OTCPK:DDAIY) that's coming under the microscope for anti-competitive pricing in China. Word of this latest probe comes just a week after software giant Microsoft (NASDAQ:MSFT) revealed it is being probed for monopolistic business practices. (previous post)

Other major western multinationals have been probed for similar anti-competitive behavior in the latest year-long campaign, and still others have been targeted over allegations of corruption. Yet another group has been blacklisted from selling to government organizations over concerns their products could create national security risks.

Anyone who senses a little xenophobia in all these investigations is probably correct, though the source of the anti-foreign sentiment is a bit unclear. Perhaps Beijing is reacting to a growing number of moves against Chinese companies overseas, including a Washington ban on the import of Chinese telecoms networking equipment due to national security concerns, or US and EU actions against Chinese solar panels over allegations of unfair state subsidies.

A flood of media reports have emerged related to this latest anti-competitive probe into Mercedes, led by reports that the company's Shanghai offices were raided by investigators from the powerful National Development and Reform Commission (NDRC). (English article; Chinese article) Mercedes confirmed that the raid took place, and a Chinese publication says that computers were taken, a number of executives were interviewed during the visit on Monday.

The NDRC is one of China's most powerful government agencies, overseeing major economic development projects and leading a growing number of anti-trust investigations against both domestic and foreign firms. In this case, word of the investigation comes just days after Mercedes suddenly announced it was lowering the price for more than 10,000 spare parts in China by an average 15 percent. (Chinese article)

The timing of that announcement is leading many to speculate the NDRC may be accusing Mercedes of attracting buyers with relatively reasonable prices for new cars, only to charge them much higher prices for after-sales service and parts. A new editorial from the official Xinhua news agency is saying that foreign-invested firms shouldn't use different standards when operating in China from their other global operations. (Chinese article) That certainly seems to imply that the NDRC believes Mercedes is charging more for these after-sales parts and services than in other parts of the world.

This particular case looks strikingly similar to another one last year, when leading broadcaster CCTV accused Starbucks (NASDAQ:SBUX) of charging more for coffee in China than it did in many western markets. But perhaps because the investigative body was CCTV and not a regulator, the matter quickly died and things returned to normal in that case. Many Chinese even criticized CCTV, saying Starbucks should be allowed to charge whatever it wanted in the highly competitive market.

This latest case involving Mercedes looks quite similar to the one with Starbucks, and I can't really understand why the NDRC is taking its action. Mercedes already operates in a highly competitive market, and the practice of charging inflated fees for after-sales parts and services is quite common throughout the world. Just ask anyone who owns a printer, and they will probably tell you've they spent more on printer cartridges over the years than they did for the actual printer.

All this brings us back to my original point, namely that this latest case against Mercedes seems to be at least partly politically motivated. The spurt of investigations against multinationals began a year ago, when foreign makers of milk powder were first probed for charging unfairly high prices in China.

Since then, many of the world's biggest companies, including Microsoft, leading smartphone chipmaker Qualcomm (NASDAQ:QCOM) and drug giant GlaxoSmithKline (NYSE:GSK) have all been probed as well for their business practices in China. The latest probe against Mercedes is unlikely to be the last, and most many other major multinationals are likely to come under the microscope before this latest campaign against foreign firms finally starts to ease perhaps a year or two from now.

Bottom line: A new anti-competitive probe against Mercedes-Benz seems politically motivated, and is the latest in a steady stream of government actions against major multinationals that's likely to continue for a while.

Disclosure: Author has holdings in QCOM.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.