Correction Appended: March 24, 2009
China has picked a strange time to lay down a marker in defense of economic nationalism and an even stranger industry in which to do it. Amid a global recession, with Beijing's state-owned companies fanning out across the globe trying to invest in or buy foreign producers of minerals, precious metals, oil and gas, China's Ministry of Commerce on March 18 formally blocked what would have been the largest acquisition by a foreign company in China, a $2.4 billion deal.
The denied suitor: Coca-Cola, the iconic American brand that has 35 beverage factories in China, producing everything from soft drinks to milk tea. The industry in question: the fruit-juice business, heretofore never thought of as strategically vital in China or anywhere else. (See pictures of trade between China and Africa.)
Coke on Sept. 3 announced a deal to buy Beijing-based Huiyuan Juice Group, a privately owned company started by a Chinese entrepreneur 17 years ago. Huiyuan, whose stock is traded on the Hong Kong exchange, is the largest producer of pure orange juice in the country, with over 40% of the market. Although Huiyuan's founders and major shareholders endorsed the sale, the government blocked it on antitrust grounds, arguing that the acquisition would have hurt small orange-juice producers in China and led to higher prices for consumers.
The deal was widely seen as the first big test of an antitrust law that Beijing enacted last August. In the eyes of foreign investors, that test is now officially a failure. Together, Coke and Huiyuan's combined share of the orange-juice market itself just a sliver of the overall nonalcoholic-beverage market would have been around 20%. The segment Huiyuan dominates undiluted OJ is for pricier products and is relatively small. Coca-Cola's Minute Maid brand plays in the less expensive, larger segment of the market. (Read a TIME story on Coke.)
Antitrust lawyers in Beijing were befuddled by the Ministry of Commerce's ruling. "From a purely competitive point of view, this would not have affected the [nonalcoholic-beverage] market," says Michael Gu, a lawyer specializing in corporate finance with the Zhong Lun Law Firm. Before the ruling, a source close to the deal from the Coca-Cola side said, "There is just not a competition issue, no matter how you look at it." He called the proposed acquisition a "marriage made in heaven."
But Beijing was plainly taking into account considerations other than market share. Huiyuan is a high-profile national brand, and its sale to Coke had become a hobbyhorse for nationalists who often dominate popular Internet chat rooms in China. Zhu Xingli, founder and CEO of Huiyuan, famously said that he had "raised the company like a son" but was "selling it like a pig" that is, at the market, for the highest price available. Blogger Zhang Xianfeng retorted, "The problem with selling to a multinational company is that it's no longer Chinese deciding which part of the pig you get to eat." A survey by Xinhua, China's state-owned news agency, found that more than 80% of Internet commentary on the deal was negative. (See the 50 best websites of 2008.)
China's new antitrust law contains provisions allowing the government to protect national brands. And it's true that Beijing is hardly the first government to kill a foreign acquisition for political reasons, even in defense of less-than-strategic industries. The French rescued yogurt company Danone from the clutches of PepsiCo a few years ago. But Beijing didn't justify its decision on "national economic development" grounds, the part of the law that allows protection of popular brands. It cited the need to protect consumers, an unconvincing reason to some legal experts.
That perceived disingenuousness may come back to bite Beijing, in two ways. "If they're seen as just inventing reasons to prevent big Chinese companies from being acquired, that's going to have a chilling effect on foreign investment," says a senior Hong Kong investment banker. It will also hurt China's own economic interests abroad. The Australian government is reviewing the proposed $19.5 billion investment from Chinalco China's huge state-owned aluminum company in Rio Tinto, the world's second largest mining company, as well as a couple of other, smaller deals in the mining sector. But opposition in Australia has been increasing. There are TV ads now running that in effect say, "China will not allow us to buy one of their mines, so why should they be allowed to buy ours?" (See pictures of Australia rescuing its koalas.)
It's a reasonable question, and now it becomes even more pointed: Why should Chinese state-owned companies be permitted to go on a buying spree abroad, when a foreign company indeed, perhaps the world's most famous foreign company can't even buy a fruit-juice maker in China, one owned and run not by the government but by an old-fashioned entrepreneur who wanted to do the deal? Beijing's explanation aside, there's really no good answer to that question. In a world now beset with more than enough economic problems, including diminished international flows of both goods and money, China just added to the list.
The original version of this story misstated where the lawyer Michael Gu works. He left the firm Allen & Overy last year, and is now at the Zhong Lun Law Firm.