COMMISSION DECISION of 04/11/1999 declaring a concentration to be compatible with the common market (Case No IV/M.1587 - DANA/GKN) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

To the notifying parties

Dear Sirs,

Subject: Case No COMP/M.1587 - DANA/GKN

Notification of 30.09.1999 pursuant to Article 4 of Council Regulation N° 4064/89

1. On 30.09.1999, the Commission received a notification of a proposed concentration (the operation) pursuant to Article 4 of Council Regulation (EEC) N° 4064/89 whereby 1) Dana acquires GKN's medium and heavy propeller shaft businesses and 2) GKN's light propeller shaft business will be transferred to a joint venture in which GKN will have a shareholding of 51% and Dana of 49%.

2. After examination of the notification, the Commission has concluded that the creation of the joint venture, which constitutes an operation with Community dimension and therefore falls within the scope of the Council Regulation EEC 4064/89 does not raise serious doubts as to its compatibility with the common market and the EEA-Agreement.

I. THE PARTIES

3. Dana is a publicly listed company in the USA, which is active in the manufacture of components and systems for vehicle and industrial manufacturers. Dana also provides financial leasing services. The company operates plants in the USA, South America, Asia, and in several EU Member States, especially in France, Italy and the UK.

4. GKN, a publicly listed company in the UK, is an engineering group and its activities are focussed on the automotive, aerospace and industrial service sectors. The company operates plants in the USA, South America, Asia and in several EU Member States, in particular in the UK, France, Italy, Spain, Sweden and Germany.

II. THE OPERATION

5. The parties notified two transactions.

In one transaction, Dana will acquire GKN's medium and heavy propeller shaft businesses (MHP shafts).

In the other transaction, Dana and GKN will create a joint-venture for light propeller shafts (LP shafts).

The notified transactions are a part of a larger Umbrella Agreement between the parties. The consequence of the transactions in the Umbrella Agreement is that Dana is, in essence, exchanging its CVJ wheelshafts businesses for GKN's MHP shaft businesses. Dana is an established global producer of cardan-jointed propeller shafts, whereas GKN is a global leader in the CVJ driveshaft technology. The notified transactions cover thus different markets and customers with distinct economic considerations.

6. These two operations constitute two different concentrations because the nature of the control exercised by the undertakings concerned is different for Dana's acquisition of GKN's MHP shafts business and for the joint venture created by Dana and GKN. The operation involves thus the acquisition of joint control of one part of an undertaking and sole control of another part, which is in principle regarded as constituting two separate concentrations under the Merger Regulation [1]. No specific circumstances justify a deviation from this principle.

[1] Commission Notice on the concept of concentration under Council Regulation (EEC) No 4069/89 on the control of concentrations between undertakings (OJ C 66 of 2.3.1998) paragraph 16.

7. The joint venture vehicle (JointCo) will own the various GKN subsidiaries which manufacture or sell LP shafts (GKN Driveshafts Limited UK, GKN Ayra Cardan Spain). The structure of the transaction involves Dana acquiring a 49% stake of the share capital of JointCo. GKN is to own 51% of the issued share capital and entitled to nominate 3 of the 5 JointCo board directors.

III. CONCENTRATION WITH COMMUNITY DIMENSION

8. Dana and GKN will exercise joint control of the joint venture as a number of matters relating to the strategic conduct of the joint venture (such as the disposal or closing down of the main business of the JV, the approval of its capital and revenue budget and financial plans, any material change in the nature of the business of the JV, appointment and removal of directors and senior employees) are reserved for the unanimous agreement of both the share holders. The joint venture will have its own facilities and resources with which it will operate on the market. The joint venture will perform on a lasting basis all the functions of an autonomous economic entity.

9. The creation of the JV is a concentration of Community dimension in view of the turnover generated by the parent companies. Dana and GKN have a combined aggregate world-wide turnover in excess of EUR 5,000 million [2] (Dana EUR 11,450 million; GKN 5,480 million). Each of them has a Community-wide turnover in excess of EUR 250 million (EUR 1,668 million and EUR 3,680 million) and does not achieve more than two-thirds of their aggregate Community-wide turnover within one and the same Member State. The notified operation therefore has a Community dimension. It does not constitute a co-operation case under the EEA Agreement, pursuant to Article 57 of that Agreement.

[2] Turnover calculated in accordance with Article 5(1) of the Merger Regulation and the Commission Notice on the calculation of turnover (OJ C66, 2.3.1998, p25). To the extent that figures include turnover for the period before 1.1.1999, they are calculated on the basis of average ECU exchange rates and translated into EUR on a one-for-one basis.

10. The acquisition by Dana of the MHP business does not meet the threshold of article 1(2) of the Merger Regulation as the turnover of the acquired business (120 million Euro) is below 250 million Euro nor the threshold of article 1(3) of the Merger Regulation, as the acquired business does not generate 25 million Euro in at least three Member States. Dana's acquisition of the GKN MHP business is therefore not a concentration with Community dimension.

IV. COMPATIBILITY WITH THE COMMON MARKET

Relevant product market

A. Relevant Markets

A.1 Product Markets

11. Propeller shafts are used in rear-wheel drive and all-wheel drive vehicles as the components which transmit power between a vehicle's transmission and axle. Distinction can be made between Light Propeller shafts (LP shafts) and medium/heavy propeller shafts (MHP shafts). The operation only covers light propeller shafts as they are used in passenger cars and light duty vehicles, including rear-wheel drive and four-wheel passenger cars, sports utility vehicles and light commercial vehicles such as vans and pick-ups.

12. The parties submit that LP shafts constitute a distinct product market, and that no further segmentation (e.g. in terms of application or technical specifications) is relevant. Both competitors and clients have confirmed this point of view. The parties have submitted that the distinction between MHP and LP shafts essentially lies in the different performance and use of requirements of the vehicle or equipment in which they are used. LP shafts are produced in large volumes in an automated process, whereas MHP shafts are produced in smaller quantities and according to individual requirements. According to the parties, LP shafts need to operate at higher speeds than MHP shafts (as used in e.g. heavy commercial vehicles) and have to respond to high customer demands in what concerns minimising noise, vibration and harshness levels (NVH-requirement).

13. According to the parties, there is a variety of physical and technical factors (e.g. torque range, speed capabilities, vibration control, balance requirements, safety features, materials used ...) which distinguish the performance capabilities of MHP and LP shafts, although none of these factors could be isolated as the only distinguishing feature for market definition. The joint is the main feature on the propeller shaft, controlling the transmission of power to the vehicle's axle. The parties have submitted that propeller shafts utilise either cardan or constant velocity (CV) joints. For LPs there is a growing trend in using constant velocity joints instead of cardan joints in those cases where the need for reduction of noise and vibration can outweigh the important price difference (CVJs are twice as expensive as cardan joints) and/or the vehicle configuration requires this. This is especially the case for the growing market of sports utility vehicles. MHP shafts use exclusively cardan joints.

14. Producers of LPs can not readily shift production to MHPs, and vice versa. Although estimations from competitors fluctuate, it is fair to say that shifting production would require constructing and equipping a new production plant involving 2 years and an investment of at least 5 Mio. Euro. The LP and MHP production of GKN is conducted in separate plants located in different Member States (LP in the UK and Spain; MHP in France, Sweden, Germany and Italy).

15. The parties have submitted that alongside the original equipment manufacturer ("OE") segment, an aftermarket exists. However, since light propeller shafts are designed to function without need for maintenance or replacement, the LP shaft aftermarket volumes are very small. No independent dealers exist for these products. For the purpose of this case, however, the question whether components produced for the original equipment market are distinct from products produced for the aftermarket can be left open as in the aftermarket the volumes are insignificant.

Relevant geographic market

16. According to the parties, the relevant geographic market for automotive and industrial components can be considered as EEA-wide. In previous decisions [3], the Commission considered that the relevant geographic market in the automotive components sector is at least EEA-wide.

[3] see e.g. IV/M.726 - Bosch/Allied Signal, IV/M 1245 Valeo/ITT, IV/M. 1462 TRW/Lucas Varity.

17. The parties submit that all producers supply propeller shafts to their European customers from their European manufacturing locations. In addition, there would be no significant barriers to imports and exports within Europe in terms of local technical specifications or transport costs (average is 4% of total costs). Moreover, customers source on a Europe-wide basis and invite tenders from suppliers throughout Europe.

18. The parties' assessment of the relevant geographical market is shared by most of the customers and competitors.

19. There are insignificant imports into the EEA and insignificant exports from the EEA. For these reasons the Commission considers the market to be EEA-wide.

V. ASSESSMENT

20. The parties argue that the operation does not lead to a change of the competitive situation as Dana has only negligible sales of LP shafts in the EEA. According to the figures provided by the parties, GKN has a market share of [...]% in the EEA (1998: parties' figures on the basis of value). Dana has only limited sales (to Aston Martin and Rolls Royce) which would lead to an addition of [...]%.

21. The LP market is very small (less than 80 mio EURO) and addresses mainly executive passenger car and four-wheel drive OEMs. Some 85% of European cars and light commercial vehicles are front-wheel drive and do not utilise a propeller shaft at all. The LP market shows negative growth figures as most OEM's are migrating to front wheel drive cars. The most important OEMs that are producing rear wheel drive cars are DaimlerChrysler, BMW-Rover and Jaguar. Other rear wheel designed cars are exclusive sports cars and the growing segment of sports utility vehicles (such as the Range Rover). Customers have not indicated concerns about this operation as they are self-sufficient or are content with the production capacity represented by competitors. Neither is the removal of potential competition by Dana regarded as a reason for concern.

22. Most of the potential customers for LPs (such as Daimler Chrysler, BMW-Rover) produce in-house. In total terms, their respective in-house production matches that of GKN. Daimler Chrysler also supplies LP shafts to third parties.

23. Therefore, the addition of the insignificant LP market activities of Dana does not lead to the creation or strengthening of a dominant position.

VI. ANCILLARY RESTRICTIONS

24. According to the Umbrella Agreement, The parties have agreed on non-competition clause, by which they will not compete with the joint venture in its area of activity; i.e. light propeller shafts. This non-competition clause only covers Europe and this for as long as the parties retain shares in Joint Co and for a period of two years thereafter.

25. With regard to the rationale behind this non-competition clause, the parties have explained to the Commission that the non-competition clause will ensure that the Joint Co can develop its LP activities free from any real competition from its parent companies. The clause merely reflects the fact that the parties are looking to the joint venture vehicle to develop the European LP business and that each parent is entitled to protection from competitive acts by the other parent facilitated by access to know-how or good-will transferred to or developed by the joint venture If one part were to exploit such information for its own economic benefit, this would harm the other party's legitimate interests and expected economic benefit from the joint venture.

26. In this context, and to the extent that the clause is limited to the lifetime of the JV the Commission considers that such a non-competition clause can be seen as necessary for the implementation of the concentration [4].

[4] See case No IV/M.1569- Gränges/ Norsk Hydro.

VII. CONCLUSION

27. For the above reasons the Commission has decided that the notified transaction concerning Dana's acquisition of GKN's MHP shaft business does not fall within the scope of Council Regulation (EEC) No. 4064/89 as it does not have a Community dimension within the meaning of Article 1 of that regulation. This decision is adopted in application of Article 6(1)(a) of Council Regulation (EEC) No. 4064/89.

28. The Commission has also decided not to oppose the notified operation with regard to the creation of the joint venture for LP shafts and to declare it compatible with the common market and with the functioning of the EEA Agreement. This decision is adopted in application of Article 6(1)(b) of Council Regulation (EEC) No. 4064/89 and Article 57 of the EEA Agreement.

For the Commission