Commission Decision

of 18 January 2000

declaring a concentration to be compatible with the common market and the EEA Agreement

(Case COMP/M.1630 - Air Liquide/BOC)

(notified under document number C(2000) 62)

(Only the English text is authentic)

(Text with EEA relevance)

(2004/269/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to the Agreement on the European Economic Area, and in particular Article 57(2)(a) thereof,

Having regard to Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings(1), as last amended by Regulation (EC) No 1310/97(2), and in particular Article 8(2) thereof,

Having regard to the Commission's decision of 16 September 1999 to initiate proceedings in this case,

Having given the undertakings concerned the opportunity to make known their views on the objections raised by the Commission,

Having regard to the opinion of the Advisory Committee on Concentrations(3),

Whereas:

(1) On 16 August 1999, the Commission received a notification pursuant to Article 4 of Regulation (EEC) No 4064/89 (the merger Regulation) of a proposed concentration whereby the undertaking Air Liquide SA (Air Liquide) acquires control within the meaning of Article 3(1)(b) of the merger Regulation of parts of the undertaking The BOC Group plc (BOC) by way of a public bid to be implemented jointly with the undertaking Air Products and Chemicals Inc. (Air Products) and the subsequent division of the businesses and assets of BOC.

(2) On 16 September 1999 the Commission decided in accordance with Article 6(1)(c) of the merger Regulation and Article 57 of the EEA Agreement to initiate proceedings in this case.

(3) The Advisory Committee discussed the draft of this Decision on 5 January 2000.

I. THE PARTIES

(4) Air Liquide is an international group active in the field of industrial gases and related businesses, cogeneration of electricity and steam, engineering, welding and cutting equipment and consumables, diving and medical equipment and services related to those products. The company supplies industrial gases to various industries including iron, steel, refining, chemicals, glass, electronics, paper pulp, metallurgy, food processing, health care and aerospace industries. Air Liquide is the world's largest producer and distributor of industrial gases in terms of turnover.

(5) BOC is involved in the production and distribution of industrial gases and related equipment, distribution services and vacuum technology. The company produces and markets the main atmospheric gases (nitrogen, oxygen and argon), hydrogen, carbon dioxide, helium, acetylene, liquefied petroleum gas and speciality gases. In terms of turnover, BOC is the world's second largest producer and distributor of industrial gases.

II. THE OPERATION AND THE CONCENTRATION

A. THE NOTIFIED ACQUISITION OF PARTS OF BOC

(6) On 13 July 1999, Air Liquide and Air Products announced a joint pre-conditional recommended cash offer under rule 2.5 of the United Kingdom Takeover Code for all shares in BOC through Bidco, a corporate vehicle established for the purpose of the acquisition. Upon obtaining regulatory approval, including that of the European Commission, the companies are obliged to proceed to post an offer to the shareholders.

(7) Air Liquide and Air Products have agreed to divide the businesses and assets of BOC after completion of the bid (Agreement of 2 July 1999, as amended on 7 July 1999 (the Agreement)). In accordance with the agreed plan for that division, Air Liquide will acquire BOC's operations within the EEA (in the United Kingdom and Ireland) as well as certain operations outside the EEA. Air Products will acquire the remaining BOC operations. With respect to BOC's intellectual property, consisting of patented and non-patented technology including software, Air Liquide and Air Products intend to make arrangements to give both undertakings equal access to that intellectual property (section 9 of the Agreement).

(8) The present notification concerns only those businesses and assets of BOC that Air Liquide proposes to acquire, in particular the assets located in the United Kingdom and Ireland.

B. PREVIOUS ACQUISITIONS

(9) In January 1999, Air Liquide acquired the industrial gases businesses of BOC in France, Belgium, the Netherlands and Germany. Those acquisitions were notified to the Bundeskartellamt(4) (German Federal Cartel Authority) and the Conseil de la concurrence(5) (Belgian Competition Service). Those competition authorities cleared the acquisition. The acquisition was also notified to the Nederlandse Mededingsautoriteit(6) (Dutch Competition Authority), which issued a "no jurisdiction"-decision.

(10) Given that the transactions referred to in paragraph 9 all took place within a two-year period between the same undertakings, they will be treated as one and the same concentration under the present procedure pursuant to the second subparagraph of Article 5(2) of the merger Regulation.

III. COMMUNITY DIMENSION

(11) Air Liquide and BOC have a combined aggregate worldwide turnover of more than EUR 5000 million(7) (EUR 6146 million for Air Liquide(8) in 1998 and approximately EUR 1949 million for BOC(9) in 1998). The aggregate Community wide turnover of each party exceeds EUR 250 million (EUR [...](10) million for Air Liquide(11) in 1998 and EUR [...]* million for BOC in 1998) and neither of the undertakings concerned achieves more than two-thirds of its aggregate Community-wide turnover in one and the same Member State. The notified concentration therefore has a Community dimension.

IV. ASSESSMENT UNDER ARTICLE 2 OF THE MERGER REGULATION

A. RELEVANT PRODUCT MARKETS

1. INDUSTRIAL GASES

(12) The businesses of Air Liquide and BOC mainly overlap in the production and distribution of industrial gases. Industrial gases are all gases used in manufacturing processes, research, healthcare and related applications. The parties produce and distribute atmospheric gases (air gases) and non-atmospheric gases (gases produced from sources other than air).

(13) Atmospheric gases are nitrogen (around 78 % of the air), oxygen (around 21 % of the air) and argon (around 0,9 % of the air). The rare gases Krypton, Neon, Xenon together account for around one thousandth of the air. The production of air gases is mainly based on cryogenic air separation technology, which involves a multi-step and relatively complex process. Air is liquefied at very low temperatures and then separated into its components, which are removed at different levels in distillation columns. Other air separation processes include pressure swing adsorption (PSA) and vacuum pressure swing adsorption (VPSA). Both processes produce either oxygen or nitrogen. Membrane separation is used mainly for the production of nitrogen.

(14) Hydrogen is abundant in hydrocarbons (petroleum and its by-products) and is mainly produced by steam reformation of natural gas, or naphtha or by other chemical means (usually hydrocracking). Hydrogen is also manufactured by oil and chemical companies. Carbon dioxide is mainly produced from natural wells or from the combustion of hydrocarbons. Thus, industrial gases companies often buy carbon dioxide from chemical and petrochemical companies. Acetylene is a gaseous hydrocarbon generally produced from the reaction of calcium carbide with water or extracted from chemical sources.

(15) Helium is obtained from natural gas with a helium content of 0,3 % or more (helium rich natural gas). The production process includes the extraction of crude helium (which contains approximately 65 % helium and 35 % nitrogen) and the purification (refining) in order to obtain pure helium (99,995 % or higher purity). The notifying party considers that a separate market exists for the wholesale of helium. The Commission's investigations have confirmed that there is a wholesale market for the supply of refined helium to retailers for resale.

(16) The parties to the concentration also sell so-called speciality gases, which comprise mainly refrigeration, electronic and lighting gases. Speciality gases contain various chemical molecules required by the electronics industry to manufacture semiconductors to be used in the different steps of the manufacturing process (so-called electronic speciality gases - ESGs): for example Silane (SiH4) is used for deposition of a layer of pure silicon or silicon oxide on the surface of the wafer, Arsine (ASH3) and Phosphine (PH3) for doping (addition of dopants on the surface of the wafer in order to change semiconductor properties), Nitrogentrifluoride (NF3), Hexafluoroethane (C2F6) and Carbontetrafluoride (CF4) for etching (in order to remove materials on the surface of the wafer to create the integrated circuit pattern), Tungstenhexafluoride (WF6) for metal deposition and Hexafluoroethane and Nitrogentrifluoride as cleaning agents.

(17) The principal uses of industrial gases are set out in table 1.

Table 1

>TABLE>

Source:

NatWest Securities, "Industrial Gases 2000".

(18) The industry generally shares the view that each gas constitutes a separate product market. Certain gases can, in principle, be substituted by others for specific uses, for example, carbon dioxide and argon for welding. However, customers generally do not consider substitution to be a realistic option. The replies to the Commission inquiry received indicate that for most applications, price differences and the degree of integration of a particular gas with the customers' specific application processes largely exclude substitution between gases in practice.

(19) Therefore, for the purpose of this case, the Commission considers that oxygen, nitrogen, argon, hydrogen, carbon dioxide, acetylene, wholesale helium and electronic speciality gases constitute separate product markets.

2. SUPPLY METHODS

(20) Industrial gases are supplied in different forms (gaseous or liquid) and via different distribution channels (tonnage, bulk and cylinders).

(21) Tonnage sales take place where demand for air gases involves large quantities of oxygen and nitrogen. Customers are mainly industrial users (for instance in the petrochemical/chemical, steel, refining and glass industries).

(22) Supplies take place through dedicated production plants installed on the customer's site ("on-site" air separation units) or by means of pipeline links. In the first case, air separation units are built on or close to the site of the customer and are dedicated to the requirements of that customer(12). The products are delivered in gaseous form directly from the supplying plant through a pipe connecting the plant to the industrial site of the customer. The supplier owns the on-site plants and operates them on the basis of a long-term contract (up to 15 years). It provides ongoing maintenance and support. In geographical areas where the density of customers makes it economically viable to link air separation units to each other, a pipeline network may be built (e.g. Northern France, Belgium and the Netherlands). Each gas (oxygen or nitrogen) is delivered through a specific pipe. According to the notifying party, these methods of supply are without alternative for volumes between 100 tonnes per day, or 3000 m3/hour, and more than 2000 tonnes per day (tpd), or 60000 m3/h.

(23) On-site air separation plants (mostly non-cryogenic, sometimes also cryogenic) are also used to satisfy demand for oxygen or nitrogen from 20 to 100 tpd, that is to say in a range that could also be supplied in bulk. Smaller on-site units often produce either nitrogen or oxygen, larger units produce both together.

(24) The quantities of gas that may be supplied in bulk are not as large as in the tonnage business. Except for hydrogen, which is mainly produced and transported in gaseous form, the gases delivered in bulk are generally produced in liquid form. Liquefaction plants can also be constructed on the same site as tonnage plants, thus avoiding investment in a pipeline between the two. The liquid gases are then transported by road or rail tanker from the supplier's plant to the site of the customer, where they are stored, before being used in liquid form or transformed into gaseous form. Each gas is transported and stored in specific dedicated equipment (air gases, in particular, require transport in low temperature cryogenic trailers).

(25) Delivery in cylinders is used when the quantities requested by the customers are small, ranging from one m3/month to 1000 m3/month (above this quantity, the customer's demand would best be served in bulk). All gases are produced and filled in cylinders in gaseous form, except carbon dioxide, which is delivered in liquid form. Cylinders may be filled at, and distributed from, the supplier's production plant or, alternatively, liquid gases may be transported in tankers to cylinder filling centres in order to be transformed into compressed gas. From there, cylinders in various sizes holding gas under pressure are transported either directly to the customer, or to depots from which the supply to retail customers is carried out. The more important cylinder customers will usually be served directly by the industrial gases company, whereas smaller customers will be supplied by the depot holder. Although the volumes of cylinder gases are limited, their importance in terms of revenue is considerable because of the significantly higher prices and related charges that go with cylinder sales.

(26) The industry generally views these three different distribution methods as separate product markets, and the Commission has taken the same view in previous cases. Prices for gases, cost of transportation and rent and possible safety and other charges differ depending on which form of delivery is used.

(27) The Commission therefore considers that the tonnage, bulk and cylinder supply of oxygen and nitrogen, the bulk and cylinder supply of argon (including argon mixtures), hydrogen, carbon dioxide and acetylene, the wholesale supply of helium and the supply of electronic speciality gases constitute the relevant product markets. It should be noted, however, that those markets may nonetheless be inter-related. In particular, a strong position on the tonnage market will often confer competitive advantages on the bulk market and vice versa.

B. RELEVANT GEOGRAPHIC MARKETS

1. TONNAGE

(28) The notifying party argues that the relevant market should be qualified as worldwide. The Commission notes that the notifying party's position is inconsistent with its assertions throughout the procedure as well as its own internal assessment. Throughout the procedure, the notifying party has stressed that none of BOC's businesses and operations in the United States and other parts of the world, which the notifying party plans to acquire, have any effect on competition within the EEA. Those statements clearly contradict the notion of a world market. Furthermore, the Commission has reviewed an internal document in which the notifying party analysed the competition law aspects of the planned acquisition. That document assesses the planned transaction's impact in a reference area not wider than Europe. No mention is made of a wider reference area, for example a world market(13). The Commission concludes that the position taken by the notifying party at the oral hearing contradicts its usual assessment of the relevant geographic market.

(29) At the oral hearing, the notifying party submitted that industrial gases companies are technically able to construct on-site separation plants anywhere in the world. The notifying party infers that the market should be seen as worldwide. However, the mere fact that a supplier has the technological ability to provide certain goods worldwide is not in itself sufficient to justify that conclusion. Rather, in a market in which long-term supply contracts are put out to tender, the analysis should focus on whether suppliers do actually compete for such contracts in the same geographic area, and whether suppliers compete under homogenous conditions in different geographic areas.

(30) The Commission's investigation has confirmed that a distinct group of industrial gases companies, which are established within the EEA, are competing for tonnage supply contracts within the EEA on a regular basis, namely AGA, Air Liquide, Air Products, BOC, Linde, Messer, Praxair and, to a limited extent, smaller companies such as SIAD and SOL. In contrast, a number of companies established in other regions of the world are not active in the EEA. Firstly, the notifying party stated that the following companies have the capability (technology and know-how) to construct air separation units: Hitachi, Kobe Steel, PSI, Cryogenmash, Kaifeng, Sechuan Air Sep, Hang Yang and Cosmodyne. The Commission has found no indications that tonnage customers in the EEA have requested offers from or are supplied by those companies. Secondly, some major industrial gas suppliers, such as Nippon Sanso and Airgas, do not actively compete for tonnage contracts in the EEA. It cannot be argued that technological and regulatory barriers would, in theory, not prevent non-European companies from becoming active in Europe. The advantage conferred by an established presence and existing customer preferences renders this highly unlikely.

(31) Not only is the notifying party correct in asserting that the "bidding" for tonnage contracts takes place on a worldwide basis. Industrial gases companies compete for such contracts on the basis of an established presence in the EEA. Industrial gases companies normally establish or acquire a local subsidiary or joint venture in a region in which they intend to become active. Such local subsidiaries are responsible for penetrating a regional market, compiling and submitting offers and providing ongoing customer relations and technical support once a contract has been concluded. Several industrial gases companies have confirmed that they compete for tonnage contracts in a given region only if they have established a local presence in that region. AGA has stated that it does not make offers outside the areas in which it has an established market presence (Europe, the Midwest of the United States and Brazil); the company does not contemplate stand-alone activities. Linde has indicated that it cannot compete for on-site contracts in the long term without local presence through a subsidiary. Messer has confirmed that it usually invests in on-site projects through a local subsidiary or joint venture.

(32) Praxair and Air Products, the only non-European industrial gases companies active in Europe, have established European headquarters from which they conduct most of their tonnage business in Europe. Praxair has stated that it has a local team of engineers in the EEA (located in Oevel, Belgium) which is responsible for obtaining on-site contracts, designing of on-site projects and carrying out such contracts. Global plant designs are usually adapted to the EEA market in order to include as many local components as possible. Plant maintenance, major repairs in case of plant breakdown and plant upgrade during the contract term are carried out by this European representation. Staff from outside Europe are rarely involved in the negotiation of contracts and maintenance of ongoing customer relations. Air Products has confirmed that it operates its European tonnage business in a similar fashion.

(33) Customers have also confirmed that assessment. None of the customers contacted by the Commission has a tonnage contract with any industrial gases company other than those companies established in Europe. Only one customer has indicated that it contacts other companies as well as the above when awarding a tonnage contract. The Commission concludes that from the perspective of European tonnage customers, only suppliers with an established presence in the EEA are eligible.

(34) Furthermore, the Commission's investigation has shown that while the conditions of competition in the tonnage market are homogenous within the EEA, those conditions are appreciably different in other areas of the world. The EEA must therefore be distinguished from other regions of the world.

(35) Firstly, price competition for tonnage contracts is determined by objective factors that differ in different regions of the world. Tonnage contracts establish long-term supply relationships of up to 15 years between a supplier and a customer. Each tonnage contract requires the supplier to make a high capital investment, sometimes in excess of EUR 200 million. The expected return on the capital invested is a decisive criterion for how an industrial gases company can compete on price in a given region. Each supplier will determine the expected return on capital in relation to the perceived risk in a given region. Due to the long-term nature of the contracts and the high investment involved, currency risks, but also, more generally, the economic and political framework in a given region or country, are particularly important. Industrial gases companies establish thresholds for the expected minimum return on investment. Those thresholds differ for the various geographic regions in which the gases companies compete for tonnage contracts. In regions or countries with a higher perceived risk, companies will usually add a premium to the expected minimum return. In addition, smaller industrial gases companies are often forced to finance the initial investment in part by seeking loans locally through their local subsidiaries. In this case, the price they can offer also depends on the different financing conditions in different regions and countries. All those elements together result in regional differences in price setting. The notifying party has stressed that "Europe is an attractive, risk-free zone" whilst acknowledging that the relevant risks vary enormously in other parts of the world. The variation of currency risks is obvious. Competitors have confirmed this assessment.

(36) Secondly, the industry generally distinguishes between developing markets and mature markets. With respect to the tonnage market, the notifying party stated in its notification that "one must distinguish between mature markets which are highly industrialised and structured, such as the European Union, and developing markets, where industrial development and industrial gas usages and applications are still in the process of expansion, for example, in south-east Asia". That distinction is also made in the parties' internal documents which the Commission has reviewed. At the oral hearing, BOC stated that it is able to achieve significantly higher returns in developing markets. Furthermore, conditions of demand also differ in different world regions. The notifying party stated at the hearing that the rate of self production is 11 % in the United States, 21 % in Europe and 78 % in Asia.

(37) Finally, the Commission has not, to date, qualified a market with characteristics similar to those of the tonnage market as worldwide. In earlier decisions, the Commission has found the markets for certain commodities traded mainly at commodity exchanges to be worldwide(14). However, the industrial gases in question are supplied in a different manner, namely through tailor-made on-site plants under varying conditions and in accordance with customer-specific requirements. World markets have also been accepted for large engineered or high-tech products which are, or can be, transported to customers around the world(15). However, the present product market does not concern the supply of such equipment. The tonnage supply of industrial gases on the basis of long-term contracts should be distinguished from the sale of air separation plants. The latter are one-off engineering projects that are based on a different relationship with the customer.

(38) The Commission therefore concludes that the geographic reference market for the tonnage supply of industrial gases is the EEA.

2. BULK AND CYLINDER GASES

(39) The investigations in this Case and the parallel Case COMP/M.1641 - Linde/AGA, have confirmed that, except for certain high purity and high value gases (including helium and electronics speciality gases) and, to a lesser extent, carbon dioxide, industrial gases cannot normally be economically distributed to customers located more than approximately 200 kilometres from the production facility. For an individual production facility, the catchment area is, therefore, defined as a circle with that radius centred on the facility. However, in the larger Member States those catchment areas are normally connected in such a way as to overlap and cover the whole Member State without saps. Furthermore, suppliers often enter into swap arrangements with each other, in order to reduce transportation costs. The notifying party has submitted lists of its swap agreements, which show that it has concluded such agreements for bulk and cylinder gases in all EEA countries in which it is active. The competitive relationship, between at least the large suppliers in the bulk and cylinder markets, is therefore not limited to regional competition but is nationwide. The geographic markets for bulk and cylinder gases are limited to the individual Member States. There are different distribution systems in the different Member States. The market structure in neighbouring Member States is completely different. For instance, in the various markets for bulk and cylinder gases in France, Air Liquide has market shares in the order of [...]* to [...]*, whilst its market shares in Germany are essentially around [...]*. Furthermore, data submitted by the notifying party show significant price differences between different Member States. This has been confirmed by third parties' data. The Commission therefore concludes that the markets for bulk and cylinder gases are generally not wider than national in scope (except for certain high purity and high value gases).

3. HELIUM

(40) Helium is extracted from natural gas, refined and liquefied at a limited number of sites which are located in the United States (Kansas, Oklahoma, Texas and Wyoming), Algeria (Bethouia), Poland (Odolanov) and western Russia (Orenburg). Refined helium is transported from the production sites to resellers and to retail customers, using special transportation equipment (cryogenic transport containers). The EEA is mainly supplied with helium from sources located within Europe (Poland) or close to Europe (Algeria, western Russia).

(41) Helium is supplied to the EEA from all of the above sources, however, the sources located near Europe (Algeria, Poland, and Russia) supply other world regions to only a very limited extent. The Commission estimates that approximately 75 % of the helium demand in the EEA is currently supplied from the sources located near Europe. The imports from the United States vary over time, given that they sometimes occur under large single wholesale contracts. If, as the notifying party argues, a second source for refined helium in Algeria becomes operational in the medium term, it can be expected that imports from the United States will be reduced considerably. No helium is supplied to the United States from Algeria, Poland and Russia.

(42) While liquid helium can, technically, be transported over long distances, a number of factors impede such long distance transportation (beyond mere transport costs, such as freight and freight forwarding costs, import/export costs and container rental). Helium is a very volatile product. Very low temperatures (below -269 °C) have to be maintained during the entire transportation period in order to keep the gas liquid. The greater the time involved in shipment, the more helium gas is produced as the liquid helium warms. This inevitably means that more product losses occur over longer transport distances. An internal study submitted by one industrial gases company states that a container from Algeria or Poland can carry up to 40 % more liquid helium than a container from the United States, due to the shorter transportation time. Apart from the cost of the product lost, additional cooling costs have to be incurred in order to minimise heat leaks as the transport distance increases. Such costs relate, in particular, to liquid nitrogen/helium used to fill liquid container shields in order to keep the product cool. Moreover, if containers have warmed due to a longer transportation time they have to be cooled down before being reused (if the containers are rented, cool-down charges are incurred).

(43) The most important cost factor for the transport of helium is the number of cryogenic containers needed and the corresponding investment. The notifying party has stated that the round trip of a helium container from the United States to Europe takes 40 days, from Algeria 16 days and from eastern Europe 18 days. As the travel time increases, the number of round trips for which a container is used each year decreases. On the basis of those figures, the utilisation rate of a container used for United States imports is [...]* times lower than for Algeria and [...]* times lower than for Eastern Europe. A larger number of containers is therefore needed for transportation from the United States and the fixed costs increase considerably in relation to the value of the product transported.

(44) On the demand side, wholesale customers (in particular smaller industrial gases companies) view the availability of liquid helium from sources located close to the market (that is to say the area where demand takes place) as critical. Apart from the disadvantages resulting from long-distance transportation, the need to maximise security of supply and minimise the risk of disruption must be taken into account. Helium is a key product which industrial gases companies, even smaller ones, consider to be an essential element of their portfolio. On the supply side, even suppliers that have access to refined helium in the United States none the less seek to supply European customers with helium sourced in Algeria, Poland and Russia, insofar as is possible, even if they have to purchase that helium from competitors. They import helium produced in-house in the United States only insofar as they cannot meet demand from sources located closer. Furthermore, if wholesalers were able to compete under homogenous conditions throughout the world, most of the EEA helium demand would be supplied from the United States helium sources, which account for more than 80 % of the world capacity. That is not the case.

(45) The investigation has revealed nothing to indicate that market prices for refined helium are set at the world level. In particular, there are no trade flows from Algeria, Poland or Russia to the United States (which represents approximately 60 % of the global helium consumption) and limited trade flows from Algeria to other parts of the world. Outside Europe, therefore, helium from those sources does not (or does so to only a limited extent) compete with helium from the United States. Data submitted by the main wholesalers indicate that the helium wholesale prices in the EEA have, on average, been more than 12 % higher than the average world prices from 1996 to 1999.

(46) Certain characteristics which have led the Commission to accept world markets in previous cases are not present in this case. World markets for commodities, such as certain metals and minerals, have normally been found to exist where prices are set on commodity or metal exchanges or are linked to the trading on such exchanges(16). As indicated, no similar price setting mechanism exists for refined helium. Prices for helium are set under individual wholesale contracts and not as global market prices.

(47) While these elements suggest that there is a reference market that comprises the wholesale of refined helium to the EEA, the definite market delineation can be left open since the notified operation also raises competition concerns if the wholesale market is considered to be worldwide.

4. ELECTRONIC SPECIALITY GASES

(48) The notifying party claims that the relevant geographic market for speciality gases supplied in cylinders to the electronics industry is at least EEA-wide, if not worldwide in scope. Electronic speciality gases are produced by chemical companies (and in some instances also by industrial gases companies), purchased, processed and packaged by industrial gases companies and, finally, sold to customers in the electronics industry (in particular producers of semiconductors). The notifying party argues that its activities in this field, namely the "transfilling" of electronic speciality gases and the supply of those products to the end customers, are merely those of a distributor.

(49) According to the Commission's inquiries, the supply of base gases by their producers to the industrial gases companies should be distinguished from the supply of processed gases, related services and associated products by industrial gases companies to the end-customers. The main industrial gases companies, such as Air Products, Praxair, Air Liquide and BOC, have one "transfill centre" in the EEA from which they serve their customers within the EEA. Customers are usually not supplied from transfill centres outside the EEA. "Transfilling" describes the production (that is to say purification, mixing and filling) of electronic speciality gases according to detailed customer specifications in highly specialised processes. Each individual gas specification undergoes a certification process that can last up to two years. Certifications relate to the specific production site (transfill centre) from which the final gas mix is sourced. Furthermore, electronic speciality gases have to be delivered and handled in specialised containers (for instance in order to maintain purity levels or handle toxic gases). A review of Air Liquide's and BOC's marketing publications confirms that such specialised packaging forms a constituent part of their product offerings. That service is also performed at the level of "transfill" centres at EEA level. The value added in the production and distribution of electronic speciality gases is therefore generated at EEA level where gases companies operate their "transfill" activities.

(50) The importance of having a presence within the EEA, by establishing and operating European production capacity, is illustrated by the fact that, until recently, Nippon Sanso, a significant supplier of electronic speciality gases in the United States, has had virtually no activities within the EEA. The company has only recently been able to enter the European market by setting up a European joint venture with Messer.

(51) Although the ability to deal with a semiconductor company globally may be an advantage, the market investigation conducted by the Commission has shown that purchase decisions are currently still made by end customers at a more local level. The notifying party submits that although the supplies of electronic speciality gases to the semiconductor industry are often discussed at the customer's corporate level, the actual purchase orders for electronic speciality gases are decided, managed and issued at the local site, taking account of specific factors.

(52) The Commission therefore concludes that the market for electronic speciality gases is the EEA.

C. COMPETITIVE ASSESSMENT

1. TONNAGE MARKETS FOR AIR GASES

(a) Market structure

Air Liquide/BOC would have by far the highest market shares in the European tonnage markets for air gases.

(53) The market shares of the parties and competitors in the European tonnage market are set out in table 2(17):

Table 2

European tonnage market for standard air gases

>TABLE>

(54) The proposed concentration would create by far the largest tonnage supplier of standard air gases in Europe. The combined entity would hold almost [...]* of the market for tonnage oxygen and nitrogen. Furthermore, all competitors are significantly weaker. In the oxygen market, the next largest supplier, Linde, does not reach [...]* of Air Liquide/BOC's sales. In the nitrogen market, the remaining supply is even more dispersed, with no competitor reaching [...]* of Air Liquide/BOC's sales.

(55) Air Liquide/BOC's combined strength becomes even more apparent if the number of on-site supply contracts won is taken as a criterion for their market position(18) as set out in table 3:

Table 3

On-site contracts won (last five years)

>TABLE>

(56) It should be noted that the figures in table 3 cover only contracts for the on-site supply of gases. Pipeline supply contracts have not been systematically included. Given that Air Liquide is by far the leading European pipeline supplier, table 3 probably understates the number of contracts it has won.

(57) In its notification, Air Liquide submits that "a producer's share of tonnage sales is simply irrelevant" for analysing the structure of the market because it considers the tonnage market to be a "bidding market". Instead, the notifying party suggests relying on the number of players as a measure for assessing competition. In the present context, the following considerations are sufficient. Firstly, unless there is specific evidence that the pattern of the past no longer reflects the present situation, it is reasonable to assume that a supplier's market share is indicative of its strength. Secondly, the number of contracts awarded confirms the market share analysis.

As the incumbent supplier with by far the largest number of supply relationships, the combined entity would have an established market position and would enjoy a clear lead over its competitors

(58) During the procedure, the notifying party has stressed that the "contestability" of the tonnage market would ensure a competition. However, the notion that the contest for each tonnage contract starts "at zero", and that even suppliers with no sales at all can compete on equal terms, cannot be accepted. The investigation has shown that the dynamics of competition for tonnage contracts are such that the incumbent supplier is in the best position to compete for a renewed contract. An established market position does therefore reflect a supplier's market power. The Commission notes that if the combined position of Air Liquide and BOC is measured by counting the number of contracts recently won (in order to assess the extent to which they are "incumbents"), their joint position is even stronger than in terms of sales turnover (see table 3). Judging from the number of contracts won, no competitor enjoys a remotely similar position.

(59) The incumbent contract holder's advantage is based on the following factors.

(60) The supply of tonnage gases typically involves a close working relationship between the customer and its present supplier. The incumbent supplier knows when the current supply contract will expire and is therefore best placed to offer a renewal at an early stage. By virtue of its ongoing working relationship with the customer, the incumbent will also usually be the first to learn of that customer's intention to extend or modify an existing supply agreement. When customers plan a new contract or a change to an existing contract, they will, in most cases, seek advice from their current supplier in defining the terms of the new supply arrangement (for example a new on-site plant, a capacity extension etc.). Incumbent suppliers are thus often involved at the project planning stage, and will consequently almost always be included amongst the industrial gases companies from which an offer is requested. Since they have detailed knowledge of the customer, they have an advantage in responding to such a request and in the subsequent negotiations. All those elements lead to the conclusion that a customer will not change its supplier unless a competitor submits an offer which is advantageous, rather than merely equivalent.

(61) If an on-site contract comes up for renewal, the incumbent supplier will usually be able to offer more advantageous financial terms (discounts etc.) for the follow-on contract because, in most cases, its initial investment in the on-site plant will have been fully written off. Even where that is not the case, the incumbent supplier can normally propose more favourable conditions by reusing equipment already installed in its existing facility(19). The incumbent is also best placed to make the most economical offer if the customer's demand evolves in such a way as to necessitate a change to the on-site contract before expiry of the contractual term. For instance, if additional capacity is required, the incumbent can offer either to extend the capacity of the existing plant or, alternatively, to build a single new plant for the aggregate capacity. Any competitor could only offer to build a second additional plant on the same site, an obviously less economical solution. Even where a customer's demand is so high that it requires a second plant on the same site, it will normally prefer to use the same supplier in order to reduce its administrative costs and operate the two plants in a coordinated, and therefore more economical, way.

(62) Most customers contacted by the Commission have confirmed the incumbent's advantage. Competitors have also confirmed that they are more likely to gain contract extensions or renewals from existing customers. The same conclusion can be drawn from the bidding histories submitted by industrial gases companies. For instance, the list of renewals/extensions of existing contracts won by BOC illustrates the importance of the incumbent's relationship with its customers.

(63) Finally, a BOC document assessing the position of BOC Process Systems in the on-site market confirms that analysis. The following statements are made in that document(20): "Mature strongholds can be difficult to break into using traditional commercial approaches where incumbency is strong. (...) Much of the potential growth in developed countries will be difficult to access for BOC because of incumbency exclusion. (...) Leveraging of existing customers will generate 'natural' growth."

The proposed concentration would remove an important competitor

(64) By acquiring BOC, Air Liquide would remove the third largest competitor in terms of market share from the EEA tonnage market. The elimination of BOC as a competitive force would result in significant deterioration of the market structure.

(65) It can be concluded from BOC's own data that the company has been competing actively for tonnage supply contracts across the EEA, namely, in addition to the United Kingdom, other key industrial regions in Belgium, the Netherlands, Italy, France, Germany and Spain. It is to be noted that, in the past, BOC has mainly submitted offers for very large on-site plants (some with a planned capacity of up to 120000 m3/h). The number of competitors able to plan and carry out such large projects is particularly limited. The proposed concentration would remove one of those few competitors.

(66) By removing one of the leading on-site suppliers, the proposed concentration would reduce the potential for competition in the European tonnage market. The presence of credible competitors is particularly important in a market where very large projects are awarded, contracts cover long terms, the number of eligible suppliers is already limited and customers rely on the contract award procedures as the only means of ensuring reasonably competitive terms. BOC is one of the leading tonnage suppliers worldwide and in Europe, with strengths in all relevant areas. BOC is considered to have competitive process technology (cryogenic air separation technology as well as vacuum/pressure swing adsorption technology) and is a leader in some technologies (for instance with respect to small and medium sized oxygen plant technology, that is to say the line of ICO generators). Given that on-site supply can be extremely capital intensive, BOC is one of the few suppliers capable of financing the investment associated with large projects. Industry analysts consider BOC to have strong capabilities with respect to large on-site plant project execution(21). To summarise, BOC can be considered to be one of the industrial gases companies with strong competitive potential. The removal of its competitive potential, in an already concentrated market, would further reduce customer choice.

The planned transaction would combine an entrenched position in the United Kingdom with an entrenched position in France and strong positions in other key regions in Europe

(67) According to figures provided by the notifying party, which have been confirmed by the Commission's inquiries, BOC provides [...]* of tonnage oxygen and the same proportion of tonnage nitrogen in the United Kingdom(22).

(68) According to its own estimates, Air Liquide is currently providing by far the largest proportion of tonnage gases in France ([...]* of oxygen and [...]* of nitrogen). Its position in Belgium is similarly strong. Air Liquide has a less strong, but still significant, presence in other countries, in particular in Italy and Spain.

(b) Specific strengths

(69) The Commission accepts that, in addition to market share, other parameters can also be used in assessing a tonnage supplier's market power. The investigation has shown that, with reference to each of those additional aspects the combined entity would be the strongest supplier. Some of the combined entity's strengths would be derived from Air Liquide's already strong position, and increased by adding BOC's position. Others would result from the combination of important tonnage suppliers in Europe, creating a supplier that would be superior to any competitor. If all those elements are considered together, the notified operation would create a market structure in which the strongest supplier, in terms of the parties' combined market position, would also be the strongest with respect to other key competitive parameters. Confronted by the combined entity's comprehensive strength, the remaining industrial gases suppliers would be at a severe disadvantage in competing for tonnage contracts.

Air Liquide/BOC would have an established infrastructure throughout the EEA

(70) In their respective home countries (France and the United Kingdom/Ireland), Air Liquide and BOC have production facilities for industrial gases and extensive infrastructures for the distribution of those gases in bulk and cylinders (see recitals 165 and 177). Those networks give both companies superior production capacities and superior access to bulk and cylinder customers. The planned transaction would combine these networks.

(71) Air Liquide also has an established production and distribution infrastructure in a number of other European countries (the Benelux countries, Denmark, Germany, Greece, Italy, Portugal, Spain and Sweden). That pan-European infrastructure comprises stand-alone production plants (liquid gases plants), dedicated plants (plants dedicated to one or several customers) with excess production capacity for the bulk or cylinder markets, small on-site production plants and cylinder-filling facilities. Table 4 sets out Air Liquide's European production and distribution network in countries outside France(23). In each of the countries listed in table 4, Air Liquide has established cylinder-filling facilities in line with the size of the market concerned (the only exception being Finland where only dedicated plants exist). In the majority of countries, the cylinder-filling network covers the full range of gases, including a number of facilities capable of filling high-value gases with a higher transportation radius (argon, argon mixtures and other gases including speciality gases).

(72) Local production and distribution infrastructures do confer competitive advantages. A local production capacity for liquid gases facilitates the provision of back-up for small and medium-sized tonnage plants. Where such back-up can be provided out of captive production, the supplier does not have to enter into arrangements for the purchase of merchant liquid on the market or otherwise have to guarantee penalty payments to the customer. Each of those alternatives would impose an additional cost, putting the tonnage supplier at a competitive disadvantage. A local distribution infrastructure allows a tonnage supplier to create a dedicated on-site plant required for a tonnage contract with capacity exceeding the demand of the tonnage customer. The extra capacity (so-called "piggy back" production) is then liquefied and sold on the bulk or cylinder markets. The cost advantage for the tonnage supply results from economies of scale in the investment (as well as the additional income from bulk and cylinder sales). Those cost advantages can only be achieved where a "route to the market" is ensured via a company's own distribution network. Finally, a local infrastructure facilitates the maintenance and support of on-site plants as well as other aspects of customer service.

(73) In its reply to the statement of objections, the notifying party disputes the importance of a local production and distribution infrastructure for back-up and excess liquid sales. However, at the beginning of the procedure, the notifying party stressed the importance of a local infrastructure, allowing liquid back-up and "piggy back" production, for establishing a tonnage business. In a study submitted later during the procedure, the notifying party stated that liquid back-up deliveries were relevant only for customers whose requirements amount to 200 to 500 tpd or less. In its reply to the statement of objections, the notifying party seems to suggest that even for customers above 200 tpd, back-up deliveries in bulk may become inappropriate. The Commission finds that that claim is not credible.

(74) The Commission maintains that a dense network of liquid gas production facilities is advantageous in providing back-up for on-site plants. Where liquid plants are located close to on-site plants, a lower number of tanker trailers are needed to supply a given quantity of liquid gases. This renders emergency back-up more feasible, even for larger quantities, and less costly. The notifying party has, in any case, confirmed in its notification that a back-up and service infrastructure is important for smaller on-site plants. The supply through such plants is highly profitable and fast growing.

(75) It is recognised that back-up can also be provided by co-producing liquid gases at the on-site plant and storing them in a tank, a method that is open to any competitor. However, in its reply to the statement of objections, the notifying party presented an alternative way of ensuring back-up that is favourable for a supplier with a large market presence. When production capacity is increased or old plants are renewed, it may be possible to keep old plants or their parts in order to provide spare capacity. This back-up method is suitable for large quantities. For instance, Air Liquide's [...]* tpd tonnage plant in Antwerp is backed-up by an old [...]* tpd plant which is kept in reserve. This back-up method favours strong incumbent suppliers, such as the combined entity, which already have a large number of tonnage plants in place.

(76) According to the notifying party, the Commission also overestimates the importance of simultaneous (piggy back) production of liquid gases for sale on the bulk market. In particular, the notifying party has indicated that the number of its tonnage contracts which include such simultaneous production has decreased. That development may be explained by Air Liquide's large existing bulk capacity in an extended production infrastructure. Competitors (AGA, Linde, Praxair) attribute more importance to simultaneous production in tonnage plants than the notifying party. Although it appears that under current market conditions the importance of simultaneous liquid production may be decreasing, the co-production of tonnage and liquid gases still offers a significant cost advantage. According to the notifying party, the cost of operating a combined tonnage and liquid plant is [...]* lower than the combination of a stand-alone tonnage plant and a stand-alone liquefier.

(77) By creating a single supplier with a superior production and distribution infrastructure, the proposed concentration would afford Air Liquide/BOC a structural advantage in competing for tonnage contracts. On the basis of data provided by the other competitors, it can be concluded that none of their production and distribution infrastructures would have a similar geographic coverage. None of Air Liquide/BOC's competitors would therefore enjoy the same advantage.

The combined entity could build on the position of the leading European operator of pipelines

(78) Industrial gases companies pursue, to a varying degree, a strategy of linking their own production sites with their customers' sites through pipelines. Such an approach is used, in particular, in regions where clusters of volume users of industrial gases are located, such as steel producers, chemical companies, paper or glass manufacturers and others (so-called "industrial basins"). Two kinds of pipelines can be distinguished, namely "local distribution pipelines" and "interconnecting pipelines". Local distribution pipelines are the primary structure. They connect an industrial gases company's air separation plant(s) with the sites of gases users (customers) within an "industrial basin". Such local distribution pipelines usually have a high transfer capacity sufficient to satisfy the demand of multiple customers(24). Their overall length is limited by the geographic dimensions of the industrial region concerned. Interconnecting pipelines constitute a secondary structure. Such pipelines link local pipeline networks in different industrial regions, sometimes over significant distances, creating a larger regional network. Interconnecting pipelines sometimes (but not always) have a lower transfer capacity than local distribution pipelines(25).

(79) The main industrial gases companies' European pipeline networks can be summarised as set out in table 5:

Table 5

Pipelines (km)

>TABLE>

(80) In continental Europe, Air Liquide controls an extensive network of local distribution pipelines in important "industrial basins": the Antwerp region, the Liège region, the Mons-Charleroi region (all in Belgium/The Netherlands), the Dunkerque region, the Fos-sur-Mer region, the Metz region, the Le Havre region (all in France), the Limito region and the Padova region (all in Italy). No other industrial gases company has access to pipelines in more than one or two confined regions (Air Products - Gent/Terneuzen; Messer - Ruhrgebiet; Linde - Leuna/Buna and Ruhrgebiet; Praxair - Spain). Some competitors' networks are negligible in comparison to Air Liquide's. Furthermore, Air Liquide is the only company to control extensive interconnecting pipelines (northern France/Belgium). In the United Kingdom, BOC controls pipeline grids in important industrial regions (Sheffield, Scunthorpe, Teeside, Grangemouth, Margham and Southampton). No competitor has access to pipeline grids similar to those of Air Liquide.

(81) The control of a pipeline network affords the owner structural advantages which are not available to competitors. Firstly, economies of scale can be achieved by constructing larger air separation units that feed a regional pipeline network than would be possible if individual units had to be built for each customer. Indeed, Air Liquide and BOC have been able to feed their pipeline grids from very large air separation units (ASUs) with oxygen capacities sometimes above [...]* tpd, in Air Liquide's case even up to [...]* tpd. Return on capital, and production and operating costs are therefore more advantageous. Secondly, the ability to construct larger plants allows the development of a large production capacity in a given region. This also improves the cost base for the production of bulk (liquid) gases that constitute a further source of income. Thirdly, the additional capital investment in connecting a new customer to an existing pipeline is limited compared to the construction of a dedicated plant on the customer site (the only alternative open to competitors). Pipeline coverage of an industrial region with multiple gases users is therefore a considerable advantage in competing for potential customers. Fourthly, the control of interconnecting pipelines allows partial back-up in the event of plant breakdown, even if the interconnecting pipelines' capacity is insufficient to fully supply a local group of customers. In view of the cost of liquid back-up, this advantage can be considerable. Interconnecting pipelines also allow the balancing of the production of the various plants feeding a pipeline system, thereby facilitating a more even capacity utilisation.

(82) In its reply to the statement of objections, the notifying party states that the Commission has misunderstood the role of pipelines in the tonnage market. The notifying party states that production capacity, not pipeline length, is the key factor in terms of tonnage activity. However, as set out in recital 81, the specific strength of a pipeline operator arises precisely from the fact that it can build up a superior capacity on the basis of a pipeline network. Air Liquide's position in the industrial triangle Rotterdam-Mons/Charleroi-Liège demonstrates this advantage. Air Liquide's air separation units, linked by its regional pipeline system, account for [...]* of the entire industry capacity in this region (this rises to [...]* if Air Liquide's air separation unit in Dunkerque, which is also linked to the pipeline system, is added). Air Liquide's capacity exceeds that of all competitors together, even though Air Products, Praxair and Linde have made significant investments in that region. The notifying party further argues that industrial gas pipelines are not distribution pipelines. However, local distribution pipelines, the primary pipeline structure, serve precisely to distribute industrial gases to customers.

(83) BOC's internal analysis also contradicts the notifying party's statements. A BOC document which analyses the position of BOC Process Systems on the on-site market ranks Air Liquide as the only industrial gases company whose "pipeline grid strength" is "very high"(26). The document also states that pipeline operators "attempt to lock in business via pipeline grids" and that "pipeline grids remain powerful profit drivers".

(84) A pipeline connection can have benefits for a customer, such as the ability to meet demand peaks and easier back-up. Under competitive conditions, the pipeline operator's lower costs would, in theory, be passed on to customers, leading to lower prices. However, there is risk that the creation of strong and exclusive control over pipeline networks will, in the long term, create a situation in which competitors can and will no longer compete for customers. This will ultimately be to the disadvantage of customers, as the incumbent pipeline supplier is no longer forced by competition to pass on lower costs.

(85) Firstly, the strong structural advantages which result from Air Liquide/BOC's control of a large pipeline network could be used as leverage against competitors to the extent that the latter could be excluded from winning tonnage contracts in the regions concerned (foreclosure). Any competitor without access to the pipeline network would have to offer the customer a new dedicated on-site plant. Because of the substantially lower investment and cost related to a pipeline link, the incumbent pipeline supplier can undercut any such offer. It is economically rational for the incumbent to do so in order to prevent any other supplier from gaining a foothold in the controlled area. Furthermore, a situation will be created in which the pipeline supplier is no longer forced by competition to pass on a large part of its efficiency gains to its customers. It is constrained only by substantially more expensive on-site offers. Cost savings will therefore be passed on only insofar as is necessary to meet such offers.

(86) Secondly, once customers have taken the initial decision in favour of a pipeline contract, they risk becoming "locked in". The strong position of an incumbent pipeline supplier will remove a large degree of choice from customers seeking to renew a contract or extend capacity. While each customer could, in principle, seek offers from alternative suppliers, pipeline customers have indicated that, in reality, their choice becomes limited. For shorter renewal periods and limited capacity slight, alternative suppliers may simply find that their chances of success are too reduced to warrant making an offer. The customer's only choice is often therefore to fall back on its existing supplier. The customer's negotiating position is further weakened by the fact that any cost transparency is lost. An individual customer is no longer in a position to monitor a dedicated on-site plant, because it is supplied through a complex system jointly with other companies(27).

(87) The Commission concludes that the combined entity would be able to rely on Air Liquide's considerable pipeline coverage, as one element of its market power. In this respect, the combined entity would be superior to its competitors, having exclusive control of distribution pipelines [...]* times longer than all of its competitors' pipelines taken together. It would derive that position mainly from Air Liquide's existing pipeline network, although the proposed concentration would add pipeline grids in industrial regions in the United Kingdom. The structural advantage, which Air Liquide/BOC would enjoy in the areas covered by their pipelines, would allow them to concentrate on other areas. No other supplier would be able to compete in a similar way.

The combined entity could use its dominant positions in the bulk markets in France, the United Kingdom and Ireland as leverage

(88) For the description of Air Liquide's and BOC's dominant positions in the markets for bulk and cylinder gases in France and the United Kingdom/Ireland, reference can be made to recitals 152 to 183. Recitals 89 to 91 describe how those dominant positions could be used as leverage in competing for tonnage customers.

(89) An industrial gases supplier which has an established bulk supply relationship with a customer is normally best placed to judge the customer's demand. At the borderline between the tonnage and bulk markets, demand can be fulfilled by both on-site and liquid supply. The parties are increasingly supplying customers with a demand of 20 to 100 tpd through small on-site plants (for nitrogen, Air Liquide has almost [...]* such contracts in France and BOC more than [...]* in the United Kingdom; for oxygen, PSA, VPSA and even cryogenic plants can also be built around or below 100 tpd). Where this is the case, or where a customer's demand grows, the incumbent supplier can use its existing bulk contract as leverage in seeking an tonnage contract. If it is foreseeable that a customer's demand will justify tonnage supply at the end of the current bulk contract, the incumbent will almost always be the first to be able to propose a tonnage solution because of its knowledge of the customer's needs. In making and negotiating its offer, it will be able to build on the established relationship with the customer. If a customer's demand moves into the tonnage range during the term of a bulk contract, the incumbent will, by definition, be the only supplier able to offer tonnage supply.

(90) The possibility of "moving" certain bulk customers to tonnage supply gives the incumbent supplier a logistical flexibility that represents an overall cost advantage. For instance, when acquiring a new tonnage customer, the incumbent may be able to build a larger on-site plant in order to gain excess capacity for the bulk market. By linking a new customer to a pipeline, the incumbent may improve the capacity utilisation of that pipeline grid. On the other hand, if the incumbent has limited liquid gases production capacity in a given region, for instance in a growing market, moving a bulk customer to tonnage would relieve the situation.

(91) In theory it could be argued that other industrial gases companies may also be able to build on existing bulk supply contracts in order to obtain tonnage orders. However, since they have very strong (dominant) positions as bulk suppliers in their respective home markets, Air Liquide and BOC are particularly well placed to use bulk customer relationships as leverage in seeking tonnage contracts. In a more balanced market, many customers, in particular large companies, may have more than one bulk supplier, or they may change bulk suppliers more frequently. A company that dominates a national bulk market is likely to be the only choice for many customers. By combining strong positions in several important bulk markets, the notified transaction would combine the advantages enjoyed by Air Liquide and BOC as a result of their dominance.

The proposed transaction would combine two competitors with leading technology and project execution capability

(92) There is consensus in the industry that technology is an important factor, allowing a supplier to differentiate itself from competitors. In the tonnage sector, production technology (process technology) is a key competitive parameter. The supply of industrial gases using large on-site facilities is highly capital-intensive and advanced process technology can offer a supplier a cost advantage, for instance in terms of power consumption, reduced emissions and capital expenditure. The notifying party confirmed the importance of process technology in its reply to the statement of objections.

(93) The strong R & D potential of Air Liquide and BOC is illustrated by their R & D expenditure and facilities. In 1998, Air Liquide had a total R & D budget of EUR [...]* million. It employed [...]* researchers in [...]* research centres, made [...]* inventions and filed [...]* patent applications. Air Liquide has [...]* industrial partnership agreements and [...]* international cooperation agreements with universities. Air Liquide's engineering division ([...]* staff worldwide) designs and builds gases plants. In 1998, BOC's total R & D expenditure was EUR [...]* million. It employs more than [...]* researchers in [...]* main and a number of smaller research centres, covering process systems as well as key industries such as the electronics industry (BOC Edwards). It has also a large number of ongoing R & D cooperation agreements with third parties. BOC has concentrated its worldwide plant engineering capability in the process systems line of business.

(94) Air Liquide and BOC have comprehensive state-of-the-art plant construction technology and, importantly, engineering know-how. Both companies are leaders, for instance, in the production of high purity gases for the electronics industry. Air Products has confirmed that BOC is very competitive with respect to smaller plants in the 150 to 350 tpd range. Even though cryogenic production technology used for large on-site plants may not change fundamentally in the near future, the ability to make and implement continuous improvements is an important asset. Air Liquide would acquire unlimited access to all of BOC's process-technology and plant engineering know-how. The Commission has to assume that Air Liquide would also acquire BOC's related R & D centre, which is located in the United States (in addition to the BOC Edwards research centre in the United Kingdom).

(95) The capability to plan, manage and execute large on-site projects is at least as important as a broad portfolio of technologies. Air Liquide and BOC belong to the group of four industrial gases companies considered by industry analysts to be leading in this respect. For instance, [...]* of the world's largest oxygen plants (over [...]* tpd capacity) are built by Air Liquide.

(96) Both companies also have leading non-cryogenic production technology, in particular, in advanced VPSA generator technology. Air Liquide is the world's leading provider of small membrane generators which are capable of producing nitrogen with a 99,9 % level of purity. Those technologies make it possible to extend the on-site business into the area of smaller-volume users (below 100 tpd), a strategy pursued successfully by Air Liquide in the past (almost [...]* small on-site contracts).

(97) The combined entity would be a leader in other areas, for instance the co-generation of gases, electricity and steam (so-called "expanded offer"). It would also be best placed amongst its competitors to serve customers in key industries, such as the electronics industry where high volume contracts can be won. Air Liquide has focused [...]* of its R & D on this sector, and leads the industry in offering a comprehensive "total gases and chemicals management", including logistics, detection, monitoring, recycling and customer process integration. BOC has gained considerable exposure to the electronics sector through its BOC Edwards subsidiary. Both companies offer the electronics industry a comprehensive product range covering the on-site production of high purity standard gases, speciality gases and customer process equipment.

The combined strong global presence of Air Liquide/BOC would offer further advantages with respect to multinational customers

(98) Air Liquide pursues a strategy of accompanying its large tonnage customers (leading industrial companies) in the supply of gases throughout the world. Air Liquide's 1998 Annual Report sets out that strategy: "Air Liquide pursues its global expansion to accompany and serve its customers throughout the world." Such partnerships are "made possible by Air Liquide's global presence." BOC, having operations in more than 50 countries, is generally considered to have the most comprehensive global coverage of all the industrial gases companies. Its global orientation has resulted in the recent reorganisation of its operations in four global "lines of business".

(99) Customers' replies indicate that global presence is not a prerequisite in order to compete for tonnage supply contracts, because most customers seek the best supply solution in a given regional market. However, global presence may give an industrial gases company a competitive advantage with respect to multinational customers. Having established a business relationship with a customer and proved its reliability in one region, the industrial gases company will have a reference when competing for a tonnage supply contract in another region. A gases company with global coverage is also better placed to offer a customer concessions (for example discounts) in one country in exchange for a new contract in another. In particular, according to market participants, the ability to operate on a global basis represents an advantage in dealing with customer companies in the electronics industry. Industrial gases companies with limited global exposure, such as Linde, Messer and AGA, are at a disadvantage in competing for such customers.

(c) Position of competitors

The merged entity's power would be a disincentive for any vigorous activity by the remaining competitors

(100) Air Liquide/BOC would be the strongest tonnage supplier in all relevant respects. Some of its strengths are of a general nature (technology, project execution capability and multi-country infrastructure). In addition, the combined entity would have particular regional strengths (strong regional supply positions, control of pipeline networks, and dominance in national bulk markets).

(101) None of the remaining competitors share Air Liquide/BOC's overall strengths. Because the competitors lag behind in those general areas, they would also have less incentive to attempt to make substantial inroads into Air Liquide/BOC's regional strongholds, where they would face particularly strong resistance. The combination of regional strengths with general strengths in one entity could therefore lead to the de facto partitioning of the EEA market into a single large western European area controlled entirely by Air Liquide/BOC, on the one hand, and the rest of the EEA, on the other.

(102) Multi-market contacts between Air Liquide/BOC and its competitors serve to further discourage competition. Each of the remaining competitors competes against Air Liquide/BOC in national bulk and/or cylinder markets in which Air Liquide/BOC are also strong (see, for instance, table 9). Each competitor would therefore have an incentive to defer aggressive competition in order to avoid exposing itself to counter-action by Air Liquide/BOC.

Most remaining tonnage suppliers are considered by market participants to be "second tier" competitors

(103) For a general assessment of the competitive strength of the remaining tonnage suppliers, it is useful to consider the views of the industrial gases companies themselves. In an internal study prepared by Air Products, which does not only relate to the tonnage market(28), a distinction is made between "first tier" and "second tier" industrial gases companies. Air Liquide, BOC, Air Products and Praxair belong to the first group; Linde, AGA and Messer to the second. It should be noted that in that analysis, Linde, AGA and Messer lag behind with respect to "large, on-site plant project execution capabilities", amongst other things. Industry analysts share this assessment(29).

(104) None of the remaining competitors share Air Liquide/BOC's specific strengths in the tonnage market (Europe-wide infrastructure, control of a large pipeline network, strong regional positions, and strong position in national bulk markets) to a similar extent.

The links created between Air Liquide and Air Products by the joint acquisition and division of BOC would further reduce the incentive to compete

(105) Air Products has a limited market share in Europe (5 to 10 % for oxygen and 10 to 15 % for nitrogen), although it can be considered as one of the leading companies in terms of production technology and on-site plant project execution(30).

(106) The links between Air Liquide and Air Products that would be created by the joint acquisition and division of BOC make it likely that Air Products would not pursue aggressive competition against Air Liquide/BOC (see recitals 223 to 243).

The Linde/AGA merger, if completed, would not reduce the anti-competitive effects of the proposed concentration

(107) In terms of market share, Linde is the next most important competitor (15 to 20 % for oxygen and 15 to 20 % for nitrogen). If it acquires AGA, its market share will increase to 25 to 30 % for oxygen and 15 to 20 % for nitrogen. However, the gap between its market share and that of Air Liquide/BOC will still be considerable, namely [...]* for oxygen and [...]* for nitrogen.

(108) Linde is generally considered to be one of the leading companies with regard to production technology (process technology) for cryogenic air separation plants. Linde has significant in-house engineering capability. However, in some areas it lacks technology. For instance, it has no competitive membrane air separation technology for nitrogen production, a profitable and growing sector. The merger with AGA will add nothing to Linde's technological competence because AGA does not have any genuine plant engineering expertise. In fact, AGA currently uses Linde technology under licence.

(109) In its reply to the statement of objections, the notifying party stressed Linde's plant construction capability and plant sale activities, in particular with respect to large cryogenic air separation units. Linde AG is a diversified corporation which operates its industrial gases business as one of four business divisions (Werksgruppen). On-site air separation units are not constructed by Linde's industrial gases department (Werksgruppe Technische Gase), which, since November 1999, is a separate subsidiary of Linde AG, but by Linde's engineering and construction department (Werksgruppe Anlagenbau). Linde's Werksgruppe Anlagenbau also carries out engineering projects in a range of sectors unrelated to technical gases. It has, in the past, provided cryogenic air separation units to the Werksgruppe Technische Gase as well as to other industrial gases companies. In that respect Linde's Werksgruppe Anlagenbau acts like any other engineering company. Linde stated at the oral hearing that it sees no reason why its plant sale activities should strengthen its gases supply activities.

(110) It would appear, therefore, that Linde's plant construction and plant sale activities do nothing more than ensure that its cryogenic technology is generally available to other industrial gases companies. By acting as an equipment supplier to other industrial gases companies, Linde will not enhance its own chances of winning tonnage supply contracts directly. The supply of equipment, through engineering contracts, and the supply of gases, under long-term supply relationships, belong to different product markets in which different competitive strengths are required. For instance, Linde does not have access to any large pipeline network. This limits its chances of winning new tonnage customers in key industrial regions where other competitors have pipeline networks and constitutes a strategic disadvantage.

(111) In competing for tonnage supply contracts, the capability to plan, execute and manage large on-site projects is at least as important as technological expertise. Industry analysts consider that Linde falls behind the "first tier" industrial gases companies in that respect(31). The fact that Linde has won and implemented a comparatively small number of large on-site contracts during the last five years (see table 3) appears to confirm that assessment(32). In the past it preferred to license its technology to other industrial gases companies, or to build plants as a subcontractor for other companies. That suggests that Linde has adopted a rather cautious policy with respect to directly implementing projects.

(112) In assessing the competitive force that Linde/AGA would exercise, the fact that Linde/AGA would have certain regional strengths should be taken into account. Like Air Liquide/BOC, although on a smaller scale, Linde/AGA would have a strong position in certain " home" territories (Austria, Scandinavia and certain regions within Germany). There is a risk that Linde/AGA would concentrate on those regions where it enjoys specific competitive advantages and lower risk, thereby reducing the overall level of competition.

Messer and Praxair are unlikely to present effective competition

(113) Neither Messer nor Praxair share Air Liquide/BOC's specific strengths to the same extent.

(114) Messer falls significantly behind in terms of market share (10 to 15 % for oxygen and 5 to 10 % for nitrogen) and number of contracts won (see table 3). Although it has plant construction expertise, Messer faces strategic disadvantages compared to Air Liquide/BOC. The fact that it is considerably smaller than the industry leaders Air Liquide/BOC and other major players (for example Air Products) is an additional disadvantage, particularly in competing for large projects which require large financial investments. Having increased its level of debt significantly in recent years, Messer may lack the financial strength to invest in on-site supply projects on a significant scale in the future. Messer also lacks global exposure.

(115) Praxair's position in Europe is limited (market share less than 5 % for oxygen and 5 to 10 % for nitrogen). The company's strengths are mainly in the American markets.

(116) In assessing future competition by Praxair in the EEA tonnage market, it is necessary to assess Praxair's economic incentives to compete vigorously. Praxair stated at the oral hearing that, in spite of its technological capabilities, it has not been able to acquire a significant market share in Europe. The company perceives its chances of winning contracts as small against the competition of large incumbent suppliers. It stated that it is not likely to make major investments in order to expand its European presence in the future. It appears that although Praxair has technological capability it considers it to be economically rational to give preference to investments in other regions of the world in which it perceives a higher potential for growth. On that basis, it is not likely that Praxair would challenge the parties' combined position in the EEA tonnage market to such an extent as to remove their dominance.

(d) Position of customers and award of contracts

Highly concentrated supply faces a much less concentrated demand

(117) Customers in the European tonnage market already face a highly concentrated supply structure. Few (not more than seven) suppliers of tonnage gases are currently present in the market. Their number could be reduced to five. Of those, some are clearly less qualified than others.

(118) The proposed concentration would further reduce customer choice. The elimination of BOC as an independent competitive force would further narrow the supply structure, not only because of the reduction in the number of competitors but, more importantly, because one of the few leading tonnage suppliers would be removed. BOC is one of the few "first-tier" industrial gases companies with leading technology, strong investment capability and project execution expertise.

(119) The demand side, on the other hand, is less concentrated. A range of industries require oxygen and nitrogen in tonnage form, for instance the steel, metal (ferrous and non-ferrous), chemical, petrochemical, refining, electronics and glass industries. In each of those industries a significant number of (potential) customers exist. More than 100 different customers have made requests for large on-site plant offers (above 100 tpd capacity) during the last few years in Europe. If the demand for smaller (but still significant) on-site plants at the borderline between bulk and tonnage supply (20 to 100 tpd capacity) were to be included, the number of customers would be even higher.

(120) In the steel and chemical/petrochemical industries large customers exist. The notifying party argues that some of those customer companies are larger than Air Liquide. It is not clear, however, how the size of a customer can increase its bargaining power. Purchaser power is not a function of the size of a company but of the respective degrees of concentration of supply and demand. No single customer accounts for an important share of the tonnage supply in the EEA and the degree of concentration on the purchaser side is significantly lower than on the supply side.

Not all customers concentrate their procurement at headquarter level or can exercise bargaining power by using the volumes purchased as leverage

(121) In its notification, Air Liquide states that tonnage customers are essentially a few large worldwide companies (steel, chemicals and refining) and generally have centralised purchasing functions. It also states that the customers' gas requirements are for high volumes and that those customers are therefore able to exercise very strong bargaining power vis-à-vis gas suppliers.

(122) However, the Commission's inquiries have not confirmed that tonnage customers are limited to a few large multinational companies. Moreover, even companies which have centralised procurement have expressed the view that they face an uphill battle in matching the power of their gases suppliers.

(123) In some industries the cost of industrial gases constitutes a higher proportion of the customers' production costs than in others. For instance, the quantities of oxygen and argon supplied to a steel mill will be very large and will also be a significant part of the steel mill's variable costs. However, the quantities of oxygen and nitrogen supplied to the production site of a chemical company may still be large in absolute terms, but constitute only a relatively small part of the customer's costs. According to the notifying party, oxygen and nitrogen typically represent approximately 3 % of the cost of the products they are necessary to produce. In most cases, the customer's operations are dependent on the supply of a fixed quantity of gases and the cost of any interruption of the supply may be very high. Those elements indicate that demand tends to be price-inelastic. Therefore, the mere fact that the purchase of large quantities does not mean that customers will be able to exercise bargaining power vis-à-vis gas suppliers.

(124) The introduction of the "expanded offer" or "utility island" concept which mainly involves the co-generation of electricity and steam will result in lower costs for both the industrial gases supplier and the customer, but will also reduce the customer's bargaining power. By not only supplying gases, but also co-generating electricity and steam, the industrial gases company can satisfy its own need for electricity (in order to run the on-site plant), as well as the customer's need for steam (typically required by chemical companies). Air Liquide pioneered this method and has so far had the greatest success in implementing it. The nature of such a comprehensive utility supply has more in common with a joint venture than a traditional supply agreement. While the customer may benefit from the outsourcing of utilities, it will find it more difficult to sever the symbiotic relationship with the industrial gases company once the contract expires. The customer's bargaining power will eventually be diminished.

The existing contract award procedures are insufficient to constrain the parties' strength

(125) In its notification, Air Liquide submits that the tonnage market is a "bidding market" and that presence of any co-bidder (even just one) is therefore sufficient to ensure a competitive outcome. However, the notifying party's definition of a "bidding market" is not clear. If this term is meant to characterise a formal bidding process, the usual award procedure in the tonnage market clearly falls short of such a process. In a typical bidding situation, for instance in the area of public procurement, invitations to bid are published in such a way that all competitors are informed. Competitors are able to submit bids on the basis of the same information under the same conditions, and the award decision is taken after evaluation of those bids.

(126) The Commission's investigation has shown that a more differentiated view of the award procedure for large on-site contracts should be taken. No standardised tender procedure exists. The elements set out in recitals 127, 128 and 129 have been raised as typical by customers and competitors.

(127) Planning of an on-site plant and design of the terms of reference. Air Liquide itself has stated that industrial gases companies (the potential suppliers) are often involved in a dialogue with their (potential) customers at the project design stage. A customer company will often seek the advice of industrial gases companies in planning a tonnage solution. This will often be the case when large, customised onsite plants are needed, given the complexity of such projects in terms of technology as well as project planning and management(33). In such cases most customers rely on the advice of a competent industrial gases company in order to identify and specify the best technical solution for the required capacity, purity and flow rate, the alternatives and parameters for the plant design, appropriate back-up solutions, environmental considerations etc. This initial dialogue can last for a prolonged period of time, up to 18 months, during which meetings are held at expert/engineer level and detailed technical discussions take place. The process results in a customized solution for the specific customer site. At least one potential supplier will therefore make a significant input in defining the terms of reference for a large on-site plant. This process comes close to joint project development.

(128) Requests for offers. Customers have confirmed that calls for tender for on-site supply are not normally published. Most customers contact one or several industrial gases companies (mainly in writing, but also orally) and request an offer. The terms of reference vary from a broad description to full details.

(129) Decision-making and additional negotiations. Once offers have been received, additional negotiations will often take place with the incumbent supplier (on the basis of the terms of other offers submitted) or with other competitors that have responded (on the basis of the incumbent's and other offers). On that basis, the customer will take the procurement decision.

(130) On the basis of those elements, the Commission's assessment of whether the contract award procedures could constrain the parties' market power is set out in recitals 131 to 144:

(131) It must first be noted that the tendering procedures used by tonnage customers are with few exceptions not objective tendering procedures, with objective and clearly laid down criteria to award a contract (e.g. lowest price), but simply negotiation procedures which are conducted to a varying degree with different suppliers.

(132) In most negotiation procedures competitors have the possibility of modifying their offers and offering different conditions during the course of the negotiations. The examples provided by the notifying party confirm this view. According to the notifying party, this allows customers to play off suppliers against each other in order to obtain a better deal. However, various elements of the negotiation procedure limit that possibility.

(133) Firstly, it will often be the incumbent whom the customer will select for advice on the specifications of the new plant and the terms of reference, since the incumbent has an established working relationship with that customer(34). Therefore, the usual award process often involves the incumbent at an earlier stage than competitors. The proposed on-site solution is often one which the incumbent has co-designed and which corresponds to its capabilities.

(134) The incumbent is able to make the most economical offer by benefiting from its existing supply relationship and the initial investment made. That is the case both where an on-site arrangement comes up for renewal and where extensions or modifications to existing agreements are required (for details recitals 58 to 61). This bias against outside competitors may limit the incentive for other suppliers to compete as fiercely as they would do in a bidding process in which they could bid on equal terms (or to bid at all), as confirmed by responses from some customers(35).

(135) Indeed, most customers contacted replied that the incumbent enjoys an advantage in bidding for an on-site supply contract, in particular where extensions have to be made to an existing supply arrangement.

(136) In some situations, the bias towards the incumbent may be so pronounced that a customer will find it difficult to obtain competing offers. This tends to be the case if the contract to be awarded is not attractive enough and the chances of success are too limited to warrant the investment in making an offer. Such a situation arises where a customer seeks to add limited capacity to an existing supply arrangement (for instance, the customer has one on-site supply contract with the incumbent for1200 tpd oxygen and needs additional supply of 350 tpd). Where a customer has a pipeline supply contract, the chances of outside competitors are also reduced (for details see recitals 85 and 86). In such situations, competitors may simply find it unattractive to bid against the odds and the customer will have little choice but to fall back on its current supplier. Individual customers have confirmed this concern.

(137) Secondly, while calls for tender for large on-site projects may become known to all suppliers capable of making an offer, that is not always the case with respect to the larger number of medium-sized or smaller contract opportunities. In those cases, only a limited number of competitors are able to make an offer because customers typically do not publish calls for tender and often do not contact the entire spectrum of potential suppliers. However, the incumbent is normally requested to make an offer.

(138) Thirdly, suppliers need a significant amount of information about the customers, their operations and requirements in order to prepare their offers. The notifying party has stressed that tonnage contracts are normally tailored to the customer's specific needs. That knowledge puts the supplier in a good position to assess the options open to the customer (for example, replacement, refurbishment or deferral of the contract) and the customer's costs associated with each option. In the course of the negotiations that follow, the supplier can gather further information. The possession of such information enables the supplier to evaluate the risk that a given project will be abandoned, deferred or scaled down or that the customer will switch to an entirely new plant instead of extending the existing arrangement. That knowledge enables a supplier to adjust its price accordingly. Customers can therefore have bargaining power only for marginal projects.

(139) This degree of transparency of the customers' options and the suppliers' ability to adjust to the customers' behaviour distinguishes the prevailing negotiation procedure in the tonnage market from classical bidding procedures. The latter are designed to avoid this kind of transparency in order to strengthen the customers' position and ensure effective competition between suppliers on a level playing field.

(140) Fourthly, the history of the tonnage market suggests that it is not easy for customers to switch between suppliers. There is no evidence that the parties' market shares have been subject to wide variations. The existence of strong regional positions also contradicts the notifying party's view. Both Air Liquide and BOC have consistently held very large parts of the tonnage supply in their "home" territories (see recitals 67 and 68). If the outcome of each contract award procedure was entirely open, one would expect the parties' market positions to be much less stable. This has not been the case.

(141) The notifying party has quoted several Commission decisions in merger cases in support of its opinion that the use of tendering procedures would reduce the competition concerns normally arising from high market shares.

(142) In its reply to the statement of objections the notifying party refers to the Commission's Decision of 12 December 1996 in Case No IV/M.692 - Electrowatt/Landis. However, the relevant statements in that decision related to small markets which were characterised by the entry of new competitors and by a degree of technological innovation (electronic components) that would make market share variations likely. None of those elements are present here.

(143) In the same context, the notifying party quotes the Commission's Decision of 23 October 1998 in Case No IV/M.1298 - Kodak/Imation. However, in that decision, the existence of tendering procedures was only one of several factors taken into account in determining whether the operation would create a single or collective dominant position. A more relevant factor was that any increase in prices was likely to accelerate the customers' switch to a different technology, in particular to digital systems. In the present case, there are no competing technologies that could constrain the parties in a similar way.

(144) The Commission concludes that the prevailing contract award procedures are not in themselves sufficient to ensure that each potential supplier can bid on equal terms and receive equal treatment during the procedure. The result of such procedures depends on different factors such as the strength of the suppliers in the market. Where one supplier, such as the combined entity after the proposed concentration, has a much stronger position than others, such a procedure allows the dominant supplier to benefit from its position in order to adapt its offer to those of its competitors and, therefore, further weaken their position. The increased imbalance in favour of the combined entity Air Liquide/BOC would further diminish the effectiveness of the existing award procedures. On the basis of those considerations, the Commission considers the prevailing award procedures to be insufficient to constrain the parties' market power.

Customers have limited cost transparency and will not normally resort to self-production

(145) The notifying party argues that customers always have the option of investing in the purchase of an air separation plant and operating it themselves. Purchasing gases and purchasing air separation plants are therefore two equal and substitutable ways for the customer to satisfy its needs. According to the notifying party, most customers have, at one time or another, owned and operated air separation plants. The customers are therefore in an excellent position to calculate costs of production, to benchmark gas prices and to insist on and obtain the lowest possible gas prices.

(146) The Commission's investigation has not confirmed those statements. When asked whether they consider self-production to be a viable alternative, most customers replied negatively. There are plausible reasons for this. Firstly, companies in most customer industries pursue a policy of outsourcing non-core tasks. To make a major capital investment for the production of one raw material would go against that trend(36). Secondly, few customers have the expertise and personnel to operate and maintain large air separation units, in particular as the relevant technology is constantly evolving. Customers are not normally able to operate on-site plants as economically as industrial gases companies because they do not benefit from the sale of excess liquid production. Thirdly, customers would not be able to control the subsequent implications of their initial investment decision. Each time the customer required a capacity extension, a purity upgrade or any other modification to the existing plant, it would have to make additional investments. In view of those factors, a customer's threat to switch to self-production, if made during contract negotiations, is hardly credible.

(147) In particular, there is no justification for stating that plant purchase and tonnage supply of gases are "equal and substitutable" ways for a customer to satisfy its needs. In its reply to the statement of objections, the notifying party describes how, in a tonnage contract, the risk associated with the large investment is shared ("underwritten") by the customer and the supplier. If a customer opted to purchase a plant, it would have to bear that risk alone.

(148) The data submitted by the notifying party contradict its statement that customers are generally likely to purchase air separation units and switch to self-production. Of [...]* offers submitted by Air Liquide in Europe during the last five years, self-production was considered by the customers in only [...]* cases. Furthermor