After the recent news of JD.com planning to strategically expand into Europe by acquiring Ceconomy, regulators in the EU are taking a close look at the deal. The preliminary investigation indicates that JD.com may have received foreign subsidies, thus creating an unfair advantage for the company.

This closer look that EU regulators are taking is the first in-depth investigation into a Chinese deal under the Foreign Subsidies Regulation, and may end up establishing a regulatory precedent.

JD.com Proposes an Acquisition of Ceconomy

In an effort to expand strategically into the European market, Chinese ecommerce giant JD.com is reportedly interested in acquiring Ceconomy, a German retailer that primarily sells electronics and owns MediaMarkt and Saturn, for about $2.5 billion.

This would give the company a major foothold in Europe, which is among the biggest ecommerce markets on the planet. While this move is JD.com’s latest attempt to grow its market share in the European market, it’s not the first, as it recently introduced an Amazon competitor, Joybuy, to shake up the ecommerce market in the UK.

The Deal is Facing EU Scrutiny

However, the deal may not be smooth sailing for JD.com, as it’s facing plenty of scrutiny from EU competition regulators. This is because regulators warned that the multi-billion-dollar bid may involve Chinese subsidies, and announced that they’ve opened a full-scale investigation into the deal.

This decision is the first in-depth investigation that the European Commission is performing under its Foreign Subsidies Regulation, which targets unfair foreign state aid. The move could require JD.com to offer concessions and address the regulator’s concerns.

An EU executive said that “The preliminary investigation indicates that JD.com may have ​received foreign subsidies distorting the EU internal market. These ​include preferential financing, tax incentives and grants provided by entities possibly attributable ‌to ⁠the PRC,”.

If JD.com actually received these subsidies, it may have given the company an unfair advantage and allowed it to offer a higher price for Ceconomy, which may distort competition within the EU market.

JD.com Disputes the EU’s Concerns

However, despite the claims and concerns of EU regulators, JD.com says that the proposed acquisition isn’t funded by any foreign subsidies granted by China or any other non-EU Member State. Instead, the company says it’s being financed by both available cash and external debt from a private bank.

As for the investigation, the Commission has set a deadline of October 2nd for its decision, meaning it’ll be multiple months before this is resolved and we have clarity on how JD.com is funding the acquisition, and whether EU regulators were right or wrong about their claims.

Our Take

The Importance of the Eventual Decision by EU Regulators

The result of this investigation, and what it ends up meaning for the deal, could be very important not only for JD.com and Ceconomy but also for all ecommerce brands operating in the EU, or looking to enter it.

The investigation establishes a major precedent for the Foreign Subsidies Regulation, and shows that the EU is willing to block and/or penalize acquisitions backed by foreign subsidies. This may make it more difficult or expensive for international ecommerce corporations to enter the EU market.

The presence of this regulation, and the EU’s willingness to investigate under it, may also put some power back in EU companies’ hands as they won’t be forced into unfair bidding wars or competitions with international brands backed by huge foreign subsidies.