AUO's Legal Woes
Antitrust Cloud Hangs over IT Industry
AU Optronics executives have been barred from leaving the U.S. in an antitrust case. Many other Taiwanese IT companies could face similar legal tussles. How should they respond?
Antitrust Cloud Hangs over IT IndustryBy Benjamin Chiang
From CommonWealth Magazine (vol. 454 )
On August 21, a phone call from the United States ripped through the calm of a peaceful Saturday at flat panel maker AU Optronics Corp.'s headquarters in the Hsinchu Science Park in Taiwan.
"What?! HB and Lai-juh have been barred from leaving the United States?" AUO chairman K.Y. Lee asked incredulously after being jarred by this bolt out of nowhere. He immediately took action to find ways to cope with the absence of "HB" – AUO executive vice president Chen Hsuan-bin – and "Lai-juh" – AUO president & CEO Chen Lai-juh.
Lee, who heads the BenQ Group of which AUO is one subsidiary, also has to find a stand-in for a third executive who had his passport confiscated in the U.S., former AUO executive vice president Hsiung Hui, who is now the president & CEO of electronics maker Qisda Corp., another BenQ Group subsidiary.
On June 10, the U.S. District Court in San Francisco filed an indictment against six current and former senior AUO executives, AU Optronics Corporation, and AU Optronics Corporation America for conspiring to fix the prices of TFT-LCD panels from Sept. 14, 2001 to Dec. 1, 2006.
At the end of July, Chen Hsuan-bin, Chen Lai-juh and Hsiung Hui went to the U.S. on their own initiative to explain their roles in the case, but it now appears they will not be returning to Taiwan anytime soon, after the U.S. District Court in San Francisco barred them from leaving California and ordered their passports confiscated.
Though this case is limited to flat panel makers, it has implications for many leaders of Taiwan's high-tech companies, for whom antitrust law and price collusion have become major topics of concern.
Taiwanese companies, which struggle to earn 2-3 percent net margins, are barely able to cover basic antitrust fines with their earnings, and if they are found guilty of conspiring to fix prices and fined three times as much, the burden becomes even more onerous. The Taiwanese flat panel maker Chi Mei Optoelectronics Corp. (now Chimei Innolux Corp. after merging with Innolux Display Corp.) was fined US$220 million in December, an amount that exceeded its total net income for a typical quarter.
At AUO's Investor Conference in January, Chief Financial Officer Andy Yang pre-emptively announced that the company had budgeted nearly NT$10 billion to cover legal expenses related to antitrust matters.
For an example of how cumbersome antitrust suits can be, one only need turn to a suit filed against the DRAM industry in 2002. Once the U.S. Department of Justice fired the first bullet, "the antitrust case got going and has never ended," groans a legal counsel at one of the panel makers sued in the most recent price-fixing action. With nine U.S. states having already independently sued Taiwanese flat panel makers for price-fixing, and other states expected to follow, these companies now face the prospect of a string of never-ending nightmares.
Taiwan's flat-panel makers may have thought in recent months that many of their worst nightmares were behind them, finally emerging from under the cloud of last year's economic meltdown and winning a World Trade Organization dispute on July 23 against the European Union over flat-screen panel tariffs. But just recently, word from China that its LCD television inventory was excessively high startled the market and prompted Samsung Electronics Co., one of the world's two biggest LCD makers, to slash prices to gain market share there. Being named as defendants in U.S. antitrust lawsuits only compounded the woes of Taiwan's flat panel manufacturers.
As flat panel screens grow bigger, and account for an increasing proportion of mobile phone, computer, and LCD TV costs, their producers have become primary targets among European and American judicial authorities for prosecution on antitrust charges.
Taiwan has more than 10 IT items in which it leads the world, and all of them are vulnerable to antitrust suits.
Learning the Hard Way about Obeying the Law Abroad
In the past, Taiwanese flat panel and DRAM makers were simply components suppliers hidden behind brand-name American and European vendors. But over the past 15 years, they have emerged as influential international corporations.
According to the ICT industry research firm Market Intelligence & Consulting Institute (MIC), Taiwanese panel markers held a 49-percent share of the global monitor market and 38 percent of the LCD TV and notebook markets in the first quarter of this year.
Taiwanese suppliers, however, were not prepared to assume the role of world No. 1 and continued to rely on their old model of fudging the rules. "When Taiwanese companies face an international operating environment, they must rigorously study the legal frameworks of many countries," says Jack J.T. Huang, the partner-in-charge at the Taipei office of international law firm Jones Day.
Taiwanese enterprises have aggressively expanding around the world, but still rarely understand the laws and regulations they face in their new countries of business. They tend to believe, "I've done it, but nobody will know." What they do not realize is that when they do act illegally, a trace is unavoidably left behind.
"Standing on the wrong side of the law, gambling that they won't catch me" is the typical cavalier attitude of Taiwanese businesses overseas, Huang observes. In their minds, he says, violations of antitrust laws do not seem to be serious.
Taiwanese companies have not begun breaking laws in foreign countries only recently. When they first began moving offshore, they often violated local labor regulations, which then extended to tax evasion and problems with corporate governance. In the past three years, the United States and Europe have begun to strictly probe the commercial practices of Asian companies. Conspiring to set monopolistic prices has been the land mine that has rattled Asian enterprises the most, with Samsung Electronics, Chi Mei Optoelectronics, Chunghwa Picture Tubes Ltd., and AUO all suffering severe blows.
"As long as an industry is an oligopoly, there is a temptation to engage in price fixing," observes an analyst at a foreign securities firm in Taipei. With fewer than 10 large flat panel makers around the world all sharing pricing information, they were able to manipulate and jointly fix the sales prices of flat panels.
In addition, Taiwan's government does not strictly enforce the Fair Trade Act. It focuses mainly on investigating false advertising cases and rarely addresses acts of collective price-fixing, spawning an attitude among Taiwanese companies that they can get away with anything.
The antitrust cases that have taken a toll on Chunghwa Picture Tubes, Chi Mei Optoelectronics, and AUO are reminders to Taiwanese companies operating in any sector in which Taiwan enjoys worldwide prominence that "you are no longer the small company of old," says Jones Day's Huang. "If you want to be a big, global company, you first must obey the laws of each country."
Translated from the Chinese by Luke Sabatier
Taiwan's Major Antitrust Cases
Recent history of antitrust cases against Taiwanese flat panel, DRAM makers:
U.S. Department of Justice investigates five DRAM companies, including Micron Technology and Samsung. Four vendors paid US$729 million in fines.
♦ Dec. 2006
U.S. Department of Justice launches an antitrust investigation of eight flat panel makers from Taiwan, Japan and South Korea (Taiwan's AUO, Chi Mei, Chunghwa Picture Tubes, and HannStar Display; Korea's Samsung and LG Display Corp.; and Japan's Sharp Corp. and NEC). Samsung turned state's witness, and all other companies aside from AUO pleaded guilty.
♦ End of 2008
LG Display, Chunghwa Pictures Tubes and Sharp agree to pay US$585 million in fines. LG's US$400 million fine was the second-highest criminal fine ever imposed by the Justice Department's antitrust division.
♦ Oct. 2009
U.S.-based AT&T sues Samsung, LG Display, AUO, Chunghwa Picture Tubes, and Sharp in federal court in San Francisco for price-fixing.
♦ Dec. 2009
Nokia sues Samsung and AUO in federal court in San Francisco for colluding to fix the prices of mobile phone displays.
♦ Jan. 2010
AUO announces at its investors' conference that it has budgeted nearly NT$10 billion for potential legal expenses.
♦ Feb. 2010
Former Chi Mei Optoelectronics president Ho Jau-yang arrives in the U.S. to serve his prison sentence.
♦ March 2010
Dell sues HannStar Display, Sharp, and others over LCD price fixing.
♦ May 19, 2010
The European Union formally announces its verdict in a DRAM antitrust case. Ten companies, including Samsung, Infineon, Elpida, Micron, NEC, Toshiba, and Taiwan's Nanya Technology Corporation, are fined a total of 331 million euros. Nanya agrees to pay 1.8 million euros to settle the case.
♦ May 2010
U.S.-based Tracfone Wireless sues AUO, Chimei Innolux, Chunghwa Picture Tubes and HannStar Display for LCD price-fixing.
♦ June 2010
A San Francisco federal grand jury decides to indict six executives in the BenQ Group (including AUO) for conspiring to fix TFT-LCD prices.
♦ August 2010
New York State, Florida, Illinois, and Oregon all file antitrust suits against eight flat panel makers, including Samsung, AUO and Chi Mei, for conspiring to fix TFT-LCD prices.
♦ Aug. 21, 2010
AUO vice chairman Chen Hsuan-bin, AUO CEO Chen Lai-juh and Qisda Corp. president & CEO Hsiung Hui are barred from leaving California.