Commission Decision

of 10 October 2001

declaring a concentration to be incompatible with the common market

Council Regulation (EEC) No 4064/89

(Case COMP/M.2283 - Schneider/Legrand)

(notified under document number C(2001) 3014)

(Only the French version is authentic)

(Text with EEA relevance)

(2004/275/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 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 Council Regulation (EC) No 1310/97 of 30 June 1997(2), and in particular Article 8(3) thereof,

Having regard to the Commission decision of 30 March 2001 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),

Having regard to the final report by the Hearing Officer in this case(4),

Whereas:

(1) On 16 February 2001 the Commission received notification, pursuant to Article 4 of Council Regulation (EEC) No 4064/89, of a takeover plan whereby Schneider Electric was to acquire, within the meaning of Article 3(1)(b) of Council Regulation (EEC) No 4064/89 (hereinafter "the Merger Regulation"), sole control of Legrand by way of an exchange of shares announced on 15 January 2001.

I. THE PARTIES

(2) Schneider Electric (hereinafter "Schneider"), a French limited company, is the parent company of a group whose business is in the production and sale of products and systems in the electricity distribution, industrial control and automation sectors. It is active worldwide.

(3) Legrand (hereinafter "Legrand"), a French limited company, is the parent company of a group whose business is in the production and sale of low-voltage switchgear and accessories. It is active worldwide.

II. THE CONCENTRATION

(4) The concentration involves an offer for an exchange of shares made by Schneider for all shares in Legrand held by the public. It therefore constitutes acquisition of sole control within the meaning of Article 3(1)(b) of the Merger Regulation. The public offer closed on 25 July 2001 and Schneider holds 98,1 % of Legrand's capital.

III. COMMUNITY DIMENSION

(5) The firms involved achieve total turnover worldwide in excess of EUR 5000 million(5) (Schneider: EUR 8750 million; Legrand: EUR 2791 million). Each of them achieves turnover in the Community of more than EUR 250 million (Schneider: EUR 4095 million; Legrand: EUR 1684 million), but neither achieves more than two thirds of its turnover in a single Member State. The acquisition therefore has a Community dimension.

IV. PROCEDURE

(6) Having examined the notification, the Commission concluded that the acquisition notified fell within the scope of the Merger Regulation and raised serious doubts about its compatibility with the common market and the EEA Agreement. By decision of 30 March 2001, it therefore initiated proceedings under Article 6(1)(c) of the Merger Regulation.

(7) In order to be able to examine the notified acquisition, the Commission sent a request for information to Schneider and Legrand on 6 April 2001, pursuant to Article 11 of the Merger Regulation. The deadline for replying to the request expired on 18 April 2001. However, Schneider and Legrand did not provide all the information requested within the period set.

(8) The Commission therefore adopted two decisions, addressed to Schneider and to Legrand, in accordance with Article 11(5) of the Merger Regulation. Pursuant to Article 10(4) of the Merger Regulation, the period within which a decision must be adopted under Article 8 of the Merger Regulation was accordingly suspended on 6 April 2001 until the date on which all the information requested by the Commission was received, this being 25 June 2001.

(9) The Commission addressed a statement of objections to Schneider on 3 August 2001. The parties replied to the statement of objections in a document (hereinafter "the reply to the statement of objections") transmitted on 16 August 2001. A hearing was then held on 21 August 2001.

V. COMPATIBILITY WITH THE COMMON MARKET

A. THE LOW-VOLTAGE ELECTRICAL EQUIPMENT SECTOR

A.1 INTRODUCTION

(10) The effects of the merger would be felt primarily in the low-voltage electrical equipment sector, where all of Legrand's sales are made and almost half of Schneider's business is conducted.

(11) This sector comprises equipment found in industrial, commercial or residential buildings downstream of connection to the medium-voltage electricity supply. It includes all the equipment needed for electricity distribution and connection to the grid in a building (such as electrical switchboards, cable ducts and junction boxes, sockets and switches), as well as communication and control components (for air conditioning, lighting, etc.) and other equipment used in buildings, such as security systems and fire or intruder detection and alarm systems.

(12) More specifically, the merger would essentially affect the following three business categories:

(a) low-voltage switchboards, which essentially distribute electricity to the various levels of the installation (building, floor, apartment, etc.) and protect installation and user from overcurrents and short circuits.

These boards, consisting mainly of a cabinet and protective components (circuit breakers, fuses or earth leakage switches), can be subdivided into three further categories, corresponding to different levels of electricity distribution: (i) main switchboards (for connecting large industrial or commercial buildings to the medium-voltage network), (ii) distribution boards (typically used for floors in buildings) and (iii) final panelboards (for end users with low energy requirements, such as the occupant of an apartment);

(b) cable trays and busbar trunking, which support the routing of electric cables in the basement, service duct or false ceiling of a building;

(c) electrical equipment downstream of the final panelboard, which comprises six categories of product: (i) wiring accessories, constituting the final part of the electrical installation (sockets, switches, etc.), (ii) control systems, that control a specific application (such as heating) in a specific part of a building, (iii) systems for the protection of property and life (alarm systems, fire detection systems, emergency lighting, etc.), (iv) data connectors for data networks (data connectors, wiring cabinets, etc.), (v) fixing and connecting equipment, for the connecting, fixing and cabling of installations downstream of final panelboards and (vi) cable trunking components (trunking, floor boxes and distribution columns).

(13) The notified merger would also have an effect on other types of product with industrial applications, such as control and signalling units, also called "industrial pushbuttons", and electricity supply and transformation equipment.

(14) The parties propose the following segmentation of the sector, which will be taken as the starting point for the definition of the relevant markets in this Decision:

Table 1

>TABLE>

A.2 PRESENTATION OF THE SECTOR

A.2.1 Market participants

(15) There are six distinct types of participant in the market for the equipment concerned, on the supply and demand sides: manufacturers, wholesalers, panel builders, installers, project managers (architects, engineering consultants, etc.) and end users.

A.2.2 Manufacturers of low-voltage electrical equipment

(16) Manufacturers of low-voltage electrical equipment are industrial groups which develop and manufacture the equipment concerned. According to Schneider's internal segmentation(6), there are three types of player: "mega-players", "dilemmas" and "mature players".

(17) Schneider distinguishes the major international groups ("mega-players") principally by their large size, diverse product range and capacity to undertake major repositioning of their activities. In addition to Schneider itself, the major groups found in this category at world level are ABB, Siemens, General Electric, Tyco, Matsushita and Emerson. Only four of these groups carry on significant business in low-voltage electrical equipment in Europe. They are Schneider, ABB, Siemens and GE, which all have a vast range of low-voltage products and carry on significant business in medium and high-voltage equipment. ABB, Siemens and GE are also vertically integrated to some extent and are active as installers of electrical equipment and/or panelbuilders. Emerson is present primarily in the United States, Matsushita is practically absent from Europe, and Tyco's business in Europe is restricted to a few niches in equipment downstream of final panelboards and in cable trays.

(18) According to Schneider, the "dilemmas" [...]*(7) are more specialised firms with their main focus on cyclical sectors [...]* that are suffering from a temporary lack of growth. These firms are also characterised by major changes in their range of activities, and they have not been able to form a coherent group, which is reflected in a significant drop in their stock-market value.

(19) The "mature players" [...]* are smaller companies specialised in low-voltage equipment. They most frequently have a range of mature activities that changes very little, but have seen sustained growth in their turnover thanks to external acquisitions. This description would also fit [...]*.

(20) The above segmentation is essentially based on size and product range, which is in line with Schneider's commercial and strategic vision. Nevertheless, it also reflects how internationally diversified the firms are. The "mega-players", principally Schneider, ABB and Siemens, are generally active in a large number of Member States, while some of the "mature players" tend to restrict their business to a small number of territories. [...]*, for example, focuses mainly on France, Germany, the Netherlands and Portugal, while [...]* achieves more than half its turnover in Germany and [...]* focuses essentially on Italy.

(21) To summarise the above, the following table shows the activities of the main manufacturers (***= vast range of products sold in most Member States, **= gaps in product range or coverage, *= large gaps in product range or coverage):

Table 2

>TABLE>

A.2.3 Wholesalers

(22) Wholesalers are local distributors offering the whole range of equipment needed by installers or panel builders to carry out an electrical installation. As indicated by the parties, they perform a local-level distribution and logistical function, but they also have a product selection role and sometimes, for certain products and customers (such as small installers), a financing role for the purchase of the products, even providing technical advice. It is wholesalers that purchase directly from the manufacturers.

(23) Relations between wholesalers and manufacturers are governed by contracts, which generally last one year but which are renewable. These contracts are negotiated at various geographic levels (essentially local and national) and for various product lines. Generally speaking, they include discounts per product line from the manufacturer's catalogue price. These discounts are in relation to the volume of sales for the products concerned. In addition to this first discount, contracts with wholesalers contain further rebates designed as incentives (they are progressive, for example) to develop certain product lines or increase general sales of the manufacturer's products. The rebates are calculated at the end of a period. These distribution agreements may sometimes be governed by European agreements, but which tend to be general in scope and contain no financial provisions.

(24) The role of wholesalers and their importance in the logistical chain varies significantly from one type of equipment to another. The data provided by the parties and corroborated by the Commission's investigations show that wholesalers are more or less absent from the market in sales of equipment for main switchboards, but they are involved in some 80 % of sales of distribution board equipment and cable trays, and in almost all sales (more than 90 %) of equipment for final panelboards and downstream of them.

(25) These differences mainly reflect the fact that installers tend to make most of their purchases from wholesalers, while large industrial customers and panel builders more frequently buy directly from the manufacturers. Products bought mainly by installers or small and medium-sized panel builders (components for distribution boards and final panelboards, cable trays and busbar trunking, and equipment downstream of the final panelboard) are mostly sold by manufacturers via wholesalers. Products for large industrial customers or panel builders, on the other hand, such as components for main switchboards, will generally be supplied directly by the manufacturer.

(26) The Commission's investigation also shows that the size and the degree of concentration of wholesalers may vary significantly from one Member State to another. Distribution is highly concentrated in France around the Rexel and Sonepar groups, but seems to be much more fragmented in Spain and Portugal. According to internal documents(8) of the parties, these differences in structure affect the conduct of wholesalers in the countries concerned. It would appear that in countries where wholesalers are more fragmented, such as Portugal, competition between wholesalers is generating a price war which is felt at the level of the manufacturers.

A.2.4 Panel builders

(27) Panel builders are the professionals that assemble the various components of an electrical switchboard for a building. In practice, they perform four functions: (i) they design and adapt switchboards to meet the specific needs of each customer; (ii) they supply and mount the various switchboard components (cabinet components, circuit breakers, fuses, etc.); (iii) they wire up the switchboard, and (iv) they check that the switchboard works properly. They then supply the ready-to-use cabinets to an installer, who will place them for the final customer. In practice, panel builders primarily work on main switchboards and distribution boards. Final panelboards are simpler and are usually adapted and assembled directly by the installer.

(28) The size and number of panel builders varies depending on the currents (and thus the complexity of the installation) involved. According to the parties, there are some 3000 panel builders in France capable of assembling switchboards up to less than 630 amperes, but only 300 for switchboards up to 1600 amperes. Furthermore, some panel builders may be vertically integrated. For example, a number of manufacturers such as ABB and Siemens have their own panel building outfits in certain countries. Likewise, some panel builders may also make or modify certain switchboard-related components (such as busbars or protective sheet metal), or even work directly on the installation.

(29) A further point to note is that large panel builders working on complex jobs (such as main switchboards) more often than not obtain their supplies directly from the manufacturer, whereas smaller panel builders that essentially work on distribution boards tend to purchase their components from wholesalers. For logistical reasons, purchases made by large panel builders directly from the manufacturer may sometimes pass through a wholesaler (which acts in a purely logistical role).

(30) Lastly, panel builders may be approved by manufacturers. Such approval certifies that a panel builder has the technical capacity to use the manufacturer's products. In most cases, a panel builder is approved by a single manufacturer, which will then be the panel builder's main supplier.

A.2.5 Installers

(31) Installers are the professionals that install low-voltage electrical equipment for the end customer. They frequently also choose the range and brand of equipment, except in the case of components for main switchboards, which are selected by the panel builders or specified by the project managers, and of "visible" components (sockets, switches, etc.), which are traditionally chosen by project managers for large commercial or residential buildings or together with the end customer for small residential buildings.

(32) This category is relatively fragmented and diverse, comprising a large number of participants (more than 30000 in France) ranging from sole artisans to firms with more than 10 employees and a design office. None the less, as with panel builders, the parties consider that a relationship can generally be established between the size of the firm and the complexity of the installation. Small installers tend to work on final panelboards and wiring accessories (sockets, switches, etc.) in small buildings. For example, the parties state that since final panelboards are less technical than distribution boards, "artisans are often companies of 2 or 3 people comprising the owner with a worker and/or apprentice; it is the owner's wife who orders from the distributor. For reasons of availability and ease of assembly, they buy the whole [of the panelboard in the same brand]*"(9). Medium-sized installers (3 to 10 employees) are generally hired for projects involving distribution boards. Larger installers (10 employees plus) focus on main switchboards. Large installers can be compared to panel builders.

(33) As indicated above, installers obtain supplies almost exclusively from their local wholesalers. Moreover, they tend to keep very limited stocks of products. Wholesalers may supplement their traditionally logistical role with financing services (since the artisan is usually paid only on acceptance of the installation). It has also been found that, in a growing number of cases, installers may require technical advice or even specification services from the wholesaler, especially where complex systems are involved.

(34) Installers are also increasingly using electrical installation design software supplied with or without charge by the manufacturers. This kind of software saves installers time on the design of the installation and the choice of products and they are specific to each manufacturer. The Commission's investigation showed that, in practice, installers use only one or two different manufacturers' programs on account of the time, and thus the cost, required to learn how to use them. The distribution of such software therefore has the purpose and effect of strengthening the loyalty of installers to a manufacturer's products.

A.2.6 Project managers

(35) Project managers are architects, engineering consultants, construction and public works firms or property developers responsible for projects involving the installation of electrical equipment. They are usually involved only in major projects (industrial and commercial as well as residential) and do not buy the products themselves. However, by defining technical specifications for the installation (and sometimes the brand of product), they can end up in the role of specifier.

A.2.7 Customers

(36) End customers are individuals or firms that own the buildings in which the electrical equipment is to be installed. The sector has traditionally divided end customers (on a basis taken up by Schneider and Legrand) into two main groups: industrial applications and construction. The construction sector is then sometimes further subdivided into commercial and residential customers.

(37) With the exception of certain components specifically for industrial use (such as control and signalling units or transformers and supply equipment), a given item of low-voltage equipment (such as a circuit breaker) can be used in an identical way by the two categories of customer. This is particularly true of electricity distribution components, cable trays and most installation accessories.

(38) Nevertheless, there are important differences between industrial and construction projects. In particular, most construction projects involve small-scale installations carrying relatively moderate levels of electrical power (distribution board or final panelboard level). Moreover, for projects of this type, end customers and specifiers have significant influence over the choice of range and brand only as regards "visible" equipment (sockets, switches, trunking, etc.). The choice of brand and range of other equipment (panel components, cable trays, etc.) is made by the installer or, as appropriate, the panel builder.

(39) Industrial projects, on the other hand, often involve high currents (such as those distributed by main switchboards). Furthermore, they may go beyond the simple distribution of electric power and also involve specific equipment for automation, process control, etc. Lastly, the end customer or project manager has greater influence over the choice of brand.

(40) The extent of equipment supplied for industrial applications may therefore differ from that for commercial or residential applications. The type of demand (current, value of the contract) from industrial customers may also significantly exceed that of an average construction contract and be comparable to the largest contracts of this type.

(41) It follows that, in most industrial contracts and major construction contracts, manufacturers sell the electrical equipment concerned directly to the end customers (for large industrial sites) or large panel builders. The situation therefore differs from that of traditional construction contracts, where sales are usually made via wholesalers. Furthermore, contracts in this sector are more predictable and fewer in number and, according to Schneider's internal documents(10), [...]* than in most construction deals. Lastly, the specifications may be quite distinct, for example, with greater emphasis on the use of Community standards than on national installation standards or habits.

(42) In practice, it follows from the above that, although manufacturers are as a rule all present on all the segments, their reputation and competitive position may vary significantly from one type of application to another. Legrand, for example, has a reputation for excellence in the residential sector, while Siemens and ABB seem to have traditionally focused on industrial customers.

A.3 IMPORTANCE OF STANDARDS

(43) Since low-voltage electrical equipment will enter into contact with electric current, the various categories of equipment are subject to rules designed to ensure that their use does not endanger human life or health or property. These rules affect the design of the products. In addition, to the extent that there is a variety of standards applicable within the EEA, the rules also affect the scope for marketing products in the different Member States.

(44) Various categories of rule and standard must be distinguished:

A.3.1 The Low Voltage Directive

(45) First, there are mandatory rules, primarily Council Directive 73/23/EEC of 19 February 1973 on the harmonisation of the laws of Member States relating to electrical equipment designed for use within certain voltage limits(11) ("the Low Voltage Directive"), subsequent directives and the national legislation adopted by the Member States to apply them.

(46) The Low Voltage Directive does not contain precise rules regarding the manufacture of products but is confined to setting a minimum safety level that such products must reach ("essential requirements") in order to move freely within the EEA. It leaves it to European standardisation bodies such as the European Committee for Electrotechnical Standardisation (Cenelec) to draw up, on a mandate from the Commission, harmonised European standards, which do not have any legal force but which guarantee to manufacturers and users, by way of a legal presumption, that the products which comply with them also meet legal requirements.

A.3.2 Product standards issued by standardisation bodies

(47) Besides harmonised European standards, which are linked to European legislation in that they flesh out the essential requirements of the directives, other standards exist that have been adopted by various standardisation bodies at international, European and national level, such as the International Electrotechnical Commission (IEC), Cenelec, the Union technique de l'électricité (UTE) in France, the Deutsche Elektrotechnische Kommission (DKE), a joint German standards institute (DIN) and German electrotechnology association (VDE) body in Germany, and so on. These standards also lay down precise requirements regarding the manufacture of the products concerned. Compliance with them is not required by law.

(48) The main interests (manufacturers, users, etc.) are represented within the standardisation bodies. The IEC is the international federation, and Cenelec the European federation, of the national bodies. Within these two bodies, technical committees and sub-committees exist for the various categories of product, made up of delegations from the corresponding national committees and sub-committees. Only the chairpersons and secretaries of each committee and sub-committee are appointed for a fixed period. The members of the national delegations are appointed on an ad hoc basis for a specific meeting or series of meetings. The manufacturers usually try to be represented on committees dealing with the products that they make, so as to be involved in the standardisation process. An international presence is therefore an advantage since it enables participation at several levels. Each of the parties devotes considerable resources to their involvement in standardisation work.

(49) Cenelec standards are usually (in 80 % of cases(12)) adopted following the production of a standard by the IEC, and they follow the IEC standards, sometimes with certain adaptations. Cenelec standards are binding on the national standards bodies. They have to be adopted as national standards without modification, and any national standards that do not comply with Cenelec standards must be abolished(13).

(50) The parties state that harmonised European standards exist for most electrical distribution equipment. However, the harmonisation process in Europe remains incomplete. Many products are covered by European standards that do not harmonise all their characteristics. For example, no attempt has been made to harmonise the pin configuration of electric sockets.

A.3.3 Installation rules and habits

(51) Installation rules and habits do not apply to the manufacture of the actual products, but to the way in which they must be connected to the network (e.g. neutral point treatment), which often has repercussions for the configuration of the products themselves. These rules are normally laid down by standards bodies (IEC, Cenelec or national bodies). They are sometimes adopted by public authorities (such as in the case of the French decree of 2 October 1978 regarding establishments open to the public, which contains certain rules on emergency lighting(14)). Lastly, there may be mere habits or traditions followed by installers in a given country or region. While such installation habits are not obligatory in any way, they oblige manufacturers de facto to make products in a certain way if they hope to have any success in marketing them in the countries concerned.

(52) Among installation rules and habits, mention must also be made of requirements laid down by certain companies. Electricity distribution companies, for example, lay down rules on the equipment to be connected to the mains supply. These rules, binding de facto on electrical equipment manufacturers, may be national in scope, such as in the case of Electricité de France (EDF), or may be regional or even local, as in the case of certain regional distribution companies in Germany and Austria.

A.3.4 CE marking and national quality labels

(53) There are two types of marking: CE marking and national quality labels.

(54) The Community directives require the CE mark to appear on all products covered by the Low Voltage Directive. The manufacturer has sole responsibility for affixing the mark on its products and by doing so declares that they comply with the Directive's requirements. The requirements cover the product characteristics and the conformity assessment procedures that must be applied before they are placed on the market. Manufacturers may refer to "harmonised" standards to show that their products comply with the essential requirements of the directives, although the procedures laid down may require the intervention of a third party. The CE mark ensures in law the free movement of goods within the EEA.

(55) Quality labels (such as NF in France, VDE in Germany or CEBEC in Belgium) are granted by an independent certification body at the manufacturer's request following tests carried out by a recognised laboratory and on payment of a fee. The quality label certifies that the product complies with the applicable standards (international, European or national).

(56) It is not usually compulsory to obtain the quality label. However, there are exceptions. In France, for example, the French quality label is compulsory for emergency lighting systems. Even though it is not a legal requirement for manufacturers to obtain a country's quality label in order to sell their products there, it is a commercial necessity. Installers and end customers often require it, since the quality label constitutes an assurance that the products bearing it are safe and reliable. This is particularly important for electrical equipment, which, if it is faulty, may cause serious accidents. Confidence in national labels is strengthened by the fact that, unlike the CE mark, they are issued by independent bodies.

(57) The relative importance of the CE mark and the quality label in the eyes of installers and consumers is reflected in their position and visibility on electrical goods. Where both markings are used on a product, the quality label is highlighted by the manufacturer, while the CE mark is often much less visible. On circuit breakers, for example, the quality label is placed on the front of the product and is often brightly coloured. The CE mark is generally placed on the side of the product, and its colour is more often than not the same as that of the product itself.

(58) Arnould, a Legrand subsidiary, summarises the importance to consumers of national quality labels as follows(15):"The NF label reflects the voluntary commitment of the manufacturer, which chooses to submit its products to a rigorous certification procedure. The NF label is evidence of compliance with French and European standards. It is issued by an independent certification body on the basis of comprehensive product tests and audits of the manufacturing sites. It is maintained subject to regular checks. The NF label is a guarantee of far more than just safety. It is a guarantee of the reliability and quality of electrical equipment. In practice, using electrical equipment with the NF label ensures the smooth operation of your installation."

(59) In its product catalogue for 2000, Legrand gives the following explanations on the CE mark(16):

"The CE mark appears on Legrand electrical and/or electronic goods or on their packaging. It is compulsory under European Community Council directives. [...]* In no circumstances can the CE marking replace a quality label. In France, it allows customs officials and anti-fraud officers (from the DGCCRF) to authorise the free movement of any product bearing the CE mark. The manufacturer has sole responsibility for affixing the CE mark on its products or their packaging. The products are not checked for conformity (with national and international safety and performance standards) by an external body."

(60) Likewise, CEBEC, the Belgian certification body, explains(17):

"Belgian and European law require goods to conform to Community directives and thus to bear the CE mark. All goods must bear the CE mark and any which do not are not authorised to be placed on the market. The CE marking as such serves only to enable products to be placed on the market and contains no additional information [...]*.

Many directives applicable to electrical goods apply a conformity assessment formula that does not involve the intervention of an independent laboratory or recognised body. The CE marking is nothing more than a declaration by the manufacturer that the essential requirements have been met.

The CEBEC label reflects ongoing conformity with international safety standards, as certified by an independent and reputable certification body.

Consumers will continue to demand electrical goods with an independent certification. The equipment and installation industry needs ongoing conformity with international standards. The CE mark does not guarantee this, but the CEBEC label does."

(61) In most Member States, national certification bodies are also responsible for product standardisation. In some countries (such as Germany or the United Kingdom), there are several certification bodies.

(62) Under the Cenelec Certification Agreement (CCA) concluded between most of the member organisations of Cenelec, any product that has been granted the quality label of a member organisation may obtain the quality label issued by any other body on request and in return for a reduced fee, without further tests being necessary. The fact remains that there is a different quality label in each Member State of the EEA and that electrical goods bear the national label of the country in which they are marketed.

A.4 FUNCTIONING OF THE SECTOR

A.4.1 Description of the vertical chain

(63) The chain of distribution linking all these participants together may be summarised as follows. Demand originates with the end user, who entrusts the design of the electrical installation either to an installer or, for large-scale projects, to a project manager. Once the design of the electrical installation has been outlined, the electrical equipment is generally selected, purchased and placed by an installer, who in most cases obtains supplies from a local wholesaler, which may be a subsidiary of an international wholesaler. The wholesaler itself is supplied by various electrical equipment manufacturers (such as Schneider and Legrand).

(64) When the installation includes switchboards, they must be specifically adapted to the needs of the customer. This means determining the type, number and characteristics of the various pieces of equipment (circuit breakers, fuses, earth leakage switches) to be included in the switchboard. As indicated above, the adaptation and assembly of final panelboards is usually done directly by the installer, since this type of switchboard is relatively simple. The operation is more complex, however, in the case of main switchboards and distribution boards, and must be done be a specialist, the panel builder. In such cases, it is the panel builders that select and purchase the various components, either from wholesalers or, in the case of the larger panel builders, directly from the manufacturers.

(65) For the sake of completeness, it must lastly be pointed out that manufacturers may sometimes sell directly to certain end users (e.g. certain producers of machinery or equipment using low-voltage electrical equipment such as plug and socket outlets or control and signalling units). Moreover, some end users sometimes choose and place their electrical equipment themselves, purchasing it from hypermarkets or DIY shops. The volume of such sales is minimal however, and does not call into question the general description above.

A.4.2 Importance of installers and panel builders

(66) As indicated above, end users and project managers tend to be involved to a significant extent only as regards the choice of "visible" equipment (sockets, switches, trunking, etc.), for which, according to Legrand's internal documents(18), their main selection criteria are "aesthetic and functional".

(67) Components for main switchboards and distribution boards are generally chosen and purchased directly by the panel builder. The other equipment concerned (components for final panelboards, cable trays, etc.) is chosen by the installer.

(68) It follows that installers (and, to a lesser extent, panel builders) play a dominant role in the choice of the electrical equipment concerned. As pointed out by Legrand(19), "demand for Legrand goods is principally determined by the extent to which electricians and project managers require Legrand products from wholesalers".

(69) Attracting this population therefore constitutes one of the critical factors of competition between electrical equipment manufacturers. It is all the more important given the fact that medium-sized installers and panel builders tend to remain loyal to the brand that they habitually use.

A.4.3 Importance of wholesalers

(70) As indicated above, small and medium-sized installers and panel builders obtain supplies from wholesalers within the locality of their business. Only large industrial customers or panel builders (working on the main switchboard market) may find it worthwhile to purchase directly from the manufacturers.

(71) There is therefore a split between large projects (or projects involving large amounts of power), for which the manufacturers will sell directly to end customers and large panel builders and installers, and other installations, for which wholesalers will be the unavoidable intermediary between manufacturers and installers (or panel builders). As explained above, wholesalers are not involved in sales of components for main switchboards, but they are the outlets for between 80 % and 90 % of other types of electrical equipment.

(72) It follows that access to wholesalers constitutes an extremely important factor of success for manufacturers of electrical equipment other than components for main switchboards. It is important to note that, according to the parties, all manufacturers will not necessarily have access to the same wholesalers. The largest manufacturers tend to work with major international groups (such as Rexel, Sonepar or Hagemayer in France), while smaller manufacturers have more of a regional presence and work with smaller wholesalers.

A.4.4 Selection criteria

(73) It follows from the above that the competitive position of the various manufacturers will largely be determined by (i) their ability to establish brand loyalty amongst installers and panel builders and, therefore, to meet their expectations; and (ii) their access to wholesalers, at least in those Member States in which wholesalers are sufficiently established.

(74) Reports by certain analysts(20), confirmed by Legrand documents(21), indicate that the main criteria on which installers base their choices of product are (i) quality and safety of equipment, (ii) ease of installation (which cuts installation time and thus the installer's costs), (iii) compatibility with local tastes and standards and (iv) long-term availability of the product (which means faulty parts can be replaced and new manufacturers do not need to be found for each job).

(75) The findings of the Commission's investigations confirm the importance of these factors. They also show that quality and safety of the products are essential requirements, without which a manufacturer cannot hope to sell its goods. Lastly, they show that the relative weight of the different criteria can vary as between installers and panel builders. The immediate availability of the goods is a determining factor for installers, which do not keep stocks, but is less crucial for panel builders. Likewise, panel builders appear to place less importance on brand than do installers.

(76) The Commission's findings also confirm that price is not the fundamental criterion in the choices of installers in most Member States. This is explained by the fact that (i) electrical equipment represents only a relatively small (usually around 20 %) part of the contract, the rest being accounted for essentially by labour costs, (ii) installers (like project managers or panel builders) will tend to give priority to the safety and quality of the installation (for reasons of liability, and to avoid having to return to the site, etc.) and (iii) a difference in price can be more than compensated for by other factors, such as installation time (given the importance of labour costs as a proportion of the total contract, a 10 % gain in installation time would be more profitable to the installer than a 10 % discount on the price of the equipment).

(77) These selection criteria also go a long way to explaining the loyalty of installers and panel builders to brands. As explained by one manufacturer(22), "the attitude of the participants in the distribution chain is very conservative. Reasons of quality, safety and civil liability are certainly strong incentives for purchasing known brands". Installers and panel builders also have a strong incentive to use products of one brand or of a small number of brands as this gives them better knowledge of the products and, ultimately, implies substantial gains in installation time and thus labour.

(78) The criteria on which wholesalers select goods must obviously follow the criteria of their customers, installers and panel builders. However, there are also a number of factors specific to wholesalers. In particular, the parties state that wholesalers tend to keep down the number of their suppliers and the brands that they distribute for each category of product, for reasons of cost, storage, computer systems operation, technical and commercial training of staff, etc. This tends to favour manufacturers with well-established brands and manufacturers with a wide range of products.

A.5 CONCLUSION

(79) To summarise, low-voltage electrical equipment is used in three types of application: industrial plants, commercial buildings and residential buildings. For industrial and large construction contracts with high power requirements and thus involving the design of main switchboards, the equipment is generally chosen by a project manager or large panel builder and supplied directly by the manufacturer. For other types of contract, most equipment is chosen and purchased directly by an installer or panel builder (via a local wholesaler), and the end user tends only to choose the "visible" components on the basis of aesthetic or possibly practical considerations.

(80) Excepting main switchboards, the primary concern of manufacturers is thus to obtain sufficient listing with wholesalers and to convince installers and panel builders to choose their products on the basis of the reputation of their brands, their range of products and their immediate availability.

(81) Installers are swayed by the safety and reliability, availability and ease of installation of products, which tends to make them loyal to a given brand. Wholesalers follow the wishes of their customers (installers and panel builders), and look for suppliers with the widest possible range of products.

(82) Manufacturers therefore compete primarily on brands, by which they attempt to distinguish themselves from their competitors and retain the loyalty of installers and panel builders. Manufacturers also seek to develop the widest possible range of products, which is vital as regards switchboards, and a significant advantage as regards other types of component.

(83) These characteristics, which are common to all the product markets affected by the merger, create significant barriers to entry (access to wholesalers, development of a brand and an extensive product range), and diversification increasingly takes place by way of external growth (acquisitions). Generally speaking, markets are becoming increasingly concentrated.

B. DEFINITION OF RELEVANT MARKETS

B.1 ELECTRICAL SWITCHBOARDS

(84) This section looks at the effects of the merger on electrical switchboards, i.e. main switchboards, distribution boards and final panelboards. Schneider and Legrand both produce distribution boards and final panelboards. Schneider also produces main switchboards.

B.1.1 Electricity distribution equipment and how it is organised

(85) Electricity distribution within a building (residential building, commercial building, factory, etc.) is handled by a number of successive equipment stages which allow electricity to be supplied from the grid connection to the various items of electrical apparatus used in the building.

(86) A low-voltage electricity distribution system thus uses a number of interconnected switchboard stages from the main switchboard (or distribution board in smaller installations) to the final panelboards. Further downstream, wiring accessories such as sockets and switches are connected to the switchboards by means of cables and wiring.

(87) Electricity distribution and the protection of electrical equipment and/or persons are carried out within the electrical switchboards, which are accordingly the key components of the system. Two switchboards belonging to two consecutive equipment stages are interlinked by means of electrical cables. Current levels in cables and switchboards decrease with each successive step away from the point of connection to the power grid. The main switchboard is thus the point at which the current is highest. Current strengths decrease at each successive stage, i.e. distribution board, final panelboard and sockets and switches. Annex 1 shows the typical layout of a low-voltage electricity distribution system and the position within it of the various types of equipment described above.

B.1.2 Selecting components

(88) Switchboards comprise various components enabling them to perform their protective function, and these are housed in a cabinet (steel or plastic). Such components include circuit breakers, fuses (for the protection of equipment), earthing (for the protection of persons) and various other items.

(89) The type, number and size of these components depend essentially on the relevant distribution level and on the type of equipment being used downstream. Thus, main switchboards essentially contain heavy-duty circuit breakers and moulded case circuit breakers. Distribution boards mainly contain moulded case circuit breakers and miniature circuit breakers. Lastly, final panelboards contain miniature circuit breakers and earth leakage switches.

(90) In practice, each type of switchboard has to be designed specifically to meet the particular requirements of the installation it has to protect (these are dictated by the layout of the premises and their use). Its size will depend on the characteristics of the electrical installation in use downstream (electrical power, number of circuits handled, etc.). Consequently, each switchboard is a one-off design, and the combination of components used can vary substantially from one contract to another. The information provided by Schneider(23) thus suggests that a component in a given final panelboard (even one of the most widely sold) is generally used in less than one board out of five.

(91) Main switchboards are situated downstream of the connection to the medium-voltage electricity supply, generally just after a transformer substation. Main switchboards are used to control electricity distribution mainly in large commercial buildings (more than 5000 m2). Distribution boards are used to control electricity distribution on a floor of a large commercial building and are thus, within the electricity distribution system, situated downstream from a main switchboard. Final panelboards are the last stage in an electricity distribution protection and handling system. Panelboards are generally situated at the level of an individual dwelling or small group of offices. In contrast to main switchboards and distribution boards, final panelboards are generally installed in such a way as to be accessible to non-professionals and are therefore required to meet stricter protection standards than main switchboards and distribution boards.

(92) Main switchboards essentially consist of (i) heavy-duty circuit breakers with a nominal rating of between 630 and 6300 A; (ii) moulded case circuit breakers with a nominal rating of 400 to 1600 A; (iii) fuses (400 to 1600 A); (iv) cabinets and cabinet components; and (v) wiring.

(93) Distribution boards essentially consist of (i) moulded case circuit breakers with a nominal rating of between 100 and 250 A; (ii) miniature circuit breakers with a nominal rating of up to 125 A; (iii) fuses; (iv) cabinets and cabinet components, generally metal; and (v) wiring.

(94) Lastly, final panelboards essentially consist of (i) miniature circuit breakers; (ii) earth leakage protection; (iii) fuses; (iv) an enclosure (generally plastic), similar to the cabinet used for distribution boards. One of their features is that they provide for a system of fixing to the board by clipping on to DIN (i.e. standard) rails.

(95) The price (excluding installation and labour) of these various types of switchboard is made up as follows:

Table 3

>TABLE>

(96) This table shows that the various components account for widely differing proportions of the overall price. In particular, it may be seen that circuit breakers (and, where applicable, earth leakage protection) often play a key role in the choice of manufacturer, since these are the components which determine almost all of the performance and most (between 50 % and 70 %) of the value of the switchboard.

(97) The following paragraphs look at the role and use of each type of active component (circuit breakers, earth leakage protection, etc.) and at the parameters determining the selection of the type of component and the performance of each component, with a view to their integration into an electrical switchboard.

Two types of protection to deal with two types of risk

(98) The type of products used (circuit breakers, fuses, earth leakage protection, etc.) is initially determined by the type of protection to be provided by the switchboard. In practice, two types of protection may be distinguished: first, the protection of property, equipment and the electrical installation itself (in particular, against the risks of fire and overheating in the event of electrical overcurrent(24) or short circuit); and, second, the protection of persons (against the risk of electrocution resulting from a leakage of current due to accidental contact between a live conductor and a user).

Protection of the system: circuit breakers or fuses

(99) Protection against overcurrent and short circuits is provided either by circuit breakers or by fuses. These two types of component cut off the current in the event of an overcurrent or short circuit and thus perform the same protective function. However, they do not work in the same way. Circuit breakers are electromechanical devices which interrupt the current by tripping a switch. Fuses interrupt the current through the melting of a conductor brought about by overheating due to an abnormal increase in the electric charge passing through it.

(100) The technology used in circuit breakers and fuses is thus different. Furthermore, once the cause of the overload or short circuit has been eliminated, a fuse must be replaced (since it has melted in order to cut off the current), whereas a circuit breaker will simply have to be reset (i.e. the circuit breaker switch must be reset to the normal operating position).

Protection of persons: earth leakage protection or circuit breakers

(101) The risk of electrocution may result either from direct contact between the user and a live conductor (phase conductor) or from indirect contact. Indirect contact arises where the user touches part of an electric apparatus which is itself accidentally in contact with a live conductor.

(102) In the event of direct contact between a person and a live conductor, an electric current may pass through the person's body. The seriousness of the situation depends both on the strength of the current and the period of time during which the person is exposed to the current. The greater the strength of the current, the shorter the period of time of exposure to the current must be.

(103) Protection against electrocution is provided by devices which detect the current leakage (i.e. the current passing through the user's body in the event of accidental direct contact with a live conductor) and cut off the electricity supply immediately (generally in less than 0,1 second). Such devices are known as earth leakage protection or residual current devices. The principle on which they work is to measure the difference between the strength of the current entering and leaving the installation. Normally, the difference is zero. Where there is accidental contact between a person and a live conductor, there is a leakage of current through the person's body. This leakage, entailing a difference between the current entering and leaving the installation, is detected by the earth leakage protection, which automatically cuts off the current in order to protect the person.

(104) In a low-voltage electrical installation, the use of highly sensitive earth leakage protection is the main means of protecting persons against the consequences of accidental direct contact with a live conductor, whatever the neutral point treatment used. Earth leakage protection is thus an essential element in ensuring the safety of persons. However, the conditions under which it has to be provided are not identical in all Member States.

(105) As stated above, the risk of electrocution may also arise through accidental indirect contact. This occurs when a live wire within a piece of equipment accidentally comes into contact with an external part of the equipment which the user can normally touch without incurring any risk. When the user touches the electrical equipment (for example, an oven), the person may then be in contact with the electrical current transmitted indirectly by the equipment.

(106) In this second case (accidental indirect contact), the protection of the user is based essentially on earthing, i.e. the establishment of an electrical connection between the ground and the electrical device, certain parts of the electrical installation and/or certain items of equipment.

(107) Earthing requires either the use of earth leakage protection (as in the case of direct contact) or the use of circuit breakers. The choice depends on the neutral point treatment, i.e. the way in which the exposed conductive parts(25) and the neutral conductor(26) are connected to the ground.

The importance of neutral point treatments

(108) There are three types of neutral point treatment, depending on how the exposed conductive parts and the neutral conductor are connected to the ground. These types of treatment are designated by two letters, the first indicating how the neutral conductor is earthed and the second how the exposed conductive parts are earthed: "TT" (exposed conductive parts and neutral conductor directly connected to the ground), "TN" (exposed conductive parts connected to the neutral conductor, which is itself directly connected to the ground) and "IT" (neutral conductor connected to the ground through an impedance, exposed conductive parts directly connected to the ground). There are also two variants of the TN method: "TNC" (in which a single conductor is both the neutral conductor and the protective conductor) and "TNS" (in which the neutral conductor is distinct from the protective conductor).

(109) Where there is a leakage of current (through faulty insulation or accidental contact with a live conductor), the neutral point treatment is of crucial importance, since it determines the intensity of the leakage current (fault current), and hence the strength of the shock received by the person. Thus, the TT method results in fault currents which may amount to several amps or tens of amps. The TN method may result in fault currents of the order of several hundreds (or indeed thousands) of amps, since, in this method, a fault current produces an immediate short circuit between a phase(27) and the neutral conductor. Lastly, under the IT method, the fault current is weak (several tens of milliamps), since it is limited by the impedance of the neutral-earth connection.

(110) All this has important consequences for the design of the electricity distribution installation.

(111) Under the TT method, an insulation fault or accidental contact between a phase and an exposed conductive part produces a current leakage through the earth electrode of the installation. The exposed conductive part (i.e. the external part of electrical equipment which the user can normally touch) is then live. In order to protect the user from the risk of electrocution as a result of accidental contact with the conductive part (electrocution through indirect contact), current leakage through the earth electrode must be detected and the electrical power supply cut off very rapidly. This is the function of the earth leakage protection described earlier. The TT method thus necessarily involves the use of earth leakage protection in order to protect persons against the risk of electrocution through indirect contact. The sensitivity of the earth leakage protection used in the TT method to protect persons against indirect contact varies generally between 30 milliamps (high sensitivity) and 300 or 500 milliamps (medium sensitivity).

(112) Under the TN method, an insulation fault or accidental contact between a phase and an exposed conductive part does not result in an actual current leakage, but in a short circuit (between phase and neutral). The neutral conductor then carries a very strong current. Protection of the user against the risk of electrocution through indirect contact is provided in this situation mainly through circuit breakers (and not by earth leakage protection, except under the TNS method) with a low tripping threshold (ensuring that they are tripped rapidly). Fuses may also be used instead of circuit breakers.

(113) Lastly, under the IT method, as stated previously, the leakage current in the event of an insulation fault or accidental contact between a phase and an exposed conductive part is weak and does not require the cutting-off of the electricity supply. The IT method thus ensures continuity of electricity supply in the event of an initial fault. It is the preferred neutral point treatment in applications (hospitals, airports, etc.) which require such continuity of service. However, it is important that the initial fault be detected so that it can be remedied. If a second fault occurs, the installation using the IT method becomes equivalent to an installation using the TN method (or TT, if the exposed conductive parts are not connected with one another) and a large short circuit (or leakage) current then occurs.

(114) In practice, the IT method results in the use of two types of apparatus: first, an insulation monitoring device to detect the weak leakage current resulting from the first fault; and, second, a circuit breaker or earth leakage device to provide protection against the second fault.

Performance of the components

(115) The next step is to select the size, i.e. the performance, of the components. This means, for example, determining the most appropriate circuit breaker technology (heavy-duty circuit breaker, moulded case circuit breaker or miniature circuit breaker) and, within the relevant category, selecting the most appropriate type. Circuit breakers are characterised essentially by (i) their nominal rating (rating beyond which the circuit breaker is tripped and breaks the circuit); (ii) breaking capacity (maximum current which can be withstood without damage by the circuit breaker in the event of a short circuit); (iii) the number of poles (i.e. the number of conductors, from 1 to 4, which are cut simultaneously by the circuit breaker when triggered); and (iv) their typical tripping curve (reflecting tripping time as a function of current). All these characteristics are directly linked to the neutral point treatment, the power carried by the installation and the other equipment situated upstream or downstream.

(116) The information provided by the parties suggests that the choice of components is generally imposed by the installation. More particularly, it appears that the configuration of the building or industrial unit generally determines the electrical arrangement to be adopted by the installer, and that the relevant arrangement will in its turn determine the performances of the components used in the switchboards.

(117) As Schneider, for example, states, "the increase in the price of a 16 amp circuit breaker, such as is generally used downstream from the installation [...]* and hence used in large numbers in final panelboards, may have a significant impact on the price of the board (and hence, in certain particular cases, lead to a change in the architecture of the installation). However, [...]* it is more the layout of the installation and the need to ensure operating safety that determine the operator's and hence the installer's final choice.".

(118) The parties thus indicate that there is generally an optimum electrical arrangement for a given building, apartment or industrial unit. For example, although one can in theory conceive of a large number of different electrical installations for a given dwelling (with a different circuit breaker for each room, or a circuit breaker for two rooms, etc.), the installer's main concern is operating safety and quality, which will prompt him to increase the number of protective devices (in order to isolate each circuit in the event of a fault and thus ensure that power continues to be supplied to all the circuits which are not affected by the fault). In practice, the layout is often determined using computer software, such as the ECODIAL system provided by Schneider, designed to guide the customer towards an arrangement that will provide optimum service quality, i.e. one not necessarily orientated towards the lowest installation cost. The parties also stress that selecting multiple protection may also make economic sense, since it means thinner (and less costly) electrical wiring.

(119) The arrangement decided on then directly defines the characteristics of each circuit, and hence the performance expected from the various components.

(120) These parameters subsequently determine the choice of the most appropriate components, i.e. those which meet the required performance without exceeding it unnecessarily (for reasons of cost). Although one can in theory use higher-performance components, that would not entail any advantage for the user while at the same time adding significantly to costs. As Schneider points out, "one can in theory use high-breaking-capacity circuit breakers used in Segment 2 for Segment 4, in accordance with the saying 'he who can do more can do less'. But the cost of these items is prohibitive".

(121) Switchboards may contain the following products:

Table 4

>TABLE>

B.1.3 Definition of product markets

(122) The parties have activities which overlap in the area of low-voltage electrical switchboards and the components incorporated into them.

Product market definitions proposed by the parties

(123) The parties suggest distinguishing three product markets amongst the systems used for protecting persons and equipment in low-voltage electrical installations. The parties propose that such product markets be defined by reference to the level of electrical distribution. They thus distinguish a market for main switchboards, a market for distribution boards and a market for final panelboards.

Solution markets

(124) Firstly, Schneider considers that competition between manufacturers does not take place at the level of switchboard components (which are sold by the manufacturers to wholesalers, and by wholesalers to panel builders and installers), but at the level of electrical distribution "solutions" (i.e. the switchboards themselves) assembled on the basis of such components. The various manufacturers' solutions are, it is argued, substitutable for one another, since they perform the same functions and are subject to the same technical requirements. By contrast, the components supplied by the various manufacturers are not, it is argued, substitutable for one another, either on grounds of technical compatibility (in the case of main switchboards and distribution boards), or because the installers are in general loyal to a brand and thus buy all their components from one and the same manufacturer (in the case of final panelboards). To satisfy this demand, the manufacturers have developed a range of solutions, which means that they must be able to offer all the components comprising each solution. These solutions therefore constitute, it is argued, the product market.

Three distinct markets

(125) Schneider also considers that each type of switchboard (main switchboard, distribution board and final panelboard) constitutes a separate market. In the first place, main switchboards are considered to differ in their technical performances from distribution boards and final panelboards (electrical current levels in particular) and are made up, in part at least, of components which are specific to such category of switchboard (heavy-duty circuit breakers, also known as open air circuit breakers). Conversely, main switchboards do not contain miniature circuit breakers, which are used to a large extent in distribution boards and final panelboards.

(126) Secondly, it is argued, distribution boards differ from final panelboards in that the latter are designed for lower levels of current (less than 125 amp) and distribution boards contain specific components (earth leakage protection in particular) which are not used in final panelboards.

Commission's analysis

(127) The following paragraphs look at the parameters governing competition in the markets linked to electrical switchboards. It is evident from the Commission's investigation that, generally speaking, electrical switchboards comprise a single brand. However, it must also be acknowledged that manufacturers of electrical equipment sell components to wholesalers and that there is therefore competition between manufacturers in selling components. In conclusion, the relevant markets to be taken as the reference in analysing the notified transaction under competition law are markets for components to be incorporated into electrical switchboards.

Switchboards are in most cases single-brand

(128) The Commission's investigation shows that in most cases electrical switchboards (particularly where they are installed) contain components from a single brand. This is attributable to technical constraints (mainly in the case of distribution boards) and commercial habits (mainly in the case of final panelboards).

Technical constraints

(129) Competition between manufacturers is based not only on individual components considered on their own merits, but also on the performance of switchboards assembled through combining such individual components with other components. For example, a moulded case circuit breaker is of limited use if it is not compatible with the other protective devices (other moulded case circuit breakers, miniature circuit breakers, fuses, etc.) making up a switchboard.

(130) However, the information provided by the parties and the results of the investigation show that, in main switchboards and distribution boards, it would not be economically possible to ensure compatibility between certain components of different brands. For example, the parties state that combining components of different brands within a single main switchboard would require panel builders to carry out further tests in order to check whether the board thus assembled worked properly. The costs of such additional tests would amount to between EUR 10000 and EUR 25000 depending on the guarantees to be given, which would be prohibitive for any given switchboard.

(131) Similarly, in distribution boards, the cabinets and certain cabinet components (fixing devices, etc.) sold by a manufacturer are, it is reported, specifically designed for the manufacturer's components. This is because the manufacturers have all developed specific assembly devices designed to make it easier to assemble the board.

(132) A distribution board typically contains a moulded case circuit breaker as incomer to feed and protect a series of outgoings, which are themselves protected and fed by a series of miniature circuit breakers. So as to ensure that a fault on an outgoing results in the cutting only of the relevant outgoing and not all the outgoings connected to the board, any fault occurring on the outgoing must be cut by the protective device specific to that outgoing rather than by the incomer protective device. This is called "selectivity".

(133) However, it is apparent that, at least as far as distribution boards are concerned, such selectivity is based on extremely subtle features (speed of contact opening, quantity of energy which the circuit breaker allows to pass when the current is interrupted, etc.), which are linked to the way in which the products are designed and manufactured. Schneider estimates that two circuit breakers which are identical in terms of the relevant standards may nevertheless have different performances in terms of selectivity, with the result that it is impossible to guarantee the selectivity function as between the various manufacturers.

(134) Component compatibility and selectivity are of crucial importance to the panel builder or installer, since it is these parameters which enable the panel builder to guarantee the performance of the final switchboard and hence to meet the customer's requirements. Since compatibility and selectivity can be ensured only if a single brand is used, panel builders cannot mix components of different brands and will source all the electrical equipment required for a switchboard from one and the same manufacturer. As one panel builder states(28), "there is no mixing of products of different brands. [...]* Installation rules require one and the same brand to be used".

(135) It follows that, in main switchboards and distribution boards, the choice of the brand of one key component, such as the moulded case circuit breaker for distribution boards, generally means that the same brand must be used for all the other protective components required in the relevant board. For example, once a panel builder has decided on the brand of the moulded case circuit breaker to be used in his board he has de facto restricted his choice as regards the other components (cabinet, miniature circuit breakers, etc.) in his board, since he can then use only the brands which will ensure compatibility with the moulded case circuit breaker selected.

(136) Nevertheless, all the board components do not necessarily have to be sourced from the same brand, and there is some mixing of brands in the case of certain components. This appears to be the case particularly for components that do not directly play a protective role, such as cabinet components. The parties' shares of sales can vary considerably in a given territory between the different components put together to make up a distribution board. Schneider's share of the French market in circuit breakers for distribution boards is thus said to be in the range of [50-90] % but not more than [30-40] % in the case of cabinets. The parties consider that these differences are explained by the variety of solutions that can be imagined for a given type of electrical switchboard. If that were the case, the above figures would show that, on average, distribution boards sold by Schneider contained nearly twice as many circuit breakers as those sold by its competitors. That is unlikely to be the case, among other things in view of the variety of Schneider's customers in France. A more plausible explanation would be that, while the mixing of brands is limited in the case of circuit breakers (for reasons of compatibility and selectivity), it occurs more frequently in the case of cabinet components, which are not subject to the same selectivity and compatibility rules as circuit breakers. The same applies to earth leakage protection devices, which are also supplied by specialist firms: for example Baco, a Legrand subsidiary which sells earth leakage protection under its own brand. Lastly, in the case of final panelboards, the market shares as presented by the parties in terms of component categories vary widely from one component to another.

Commercial habits

(137) Combining products of different brands within one and the same final panelboard is technically possible and is sometimes done. However, as the parties point out, final panelboards are essentially put together and selected by installers, who "are in general loyal to a brand and purchase the complete kit from a single manufacturer, for reasons of ease of assembly of the board, the matching in appearance of the products, the functioning of the apparatus and confidence in the technical quality of a manufacturer"(29). Thus, although there are no technical obstacles to the mixing of components in final panelboards, installers usually purchase all their components from one and the same brand.

(138) These factors also demonstrate that having a complete range of products confers a significant competitive advantage on a given brand within this sector. As one manufacturer states(30), "given the way the market is developing with the aim increasingly being to provide complete installations and integrated systems, the room available for small producers or for producers of single components is becoming more and more restricted".

(139) The need to have complete ranges stems firstly from the fact that installers and panel builders will obtain their supplies primarily from brands which provide an assurance of safety and compatibility, whatever the configuration adopted, and hence whatever the choice and assembly of the various components in a switchboard. In view of the diversity of the components which may be incorporated into a main switchboard or distribution board (Schneider has more than 3000 product types for distribution boards), the manufacturers must provide the whole range of protective equipment to be incorporated into such switchboards.

(140) The importance of having full ranges and of not significantly mixing products of different brands is further underlined by other features of the sector. Firstly, as General Electric (GE) states, "panel builders and installers normally try to purchase all their products from a single supplier or make. This reduces their transaction costs, gives them better access to training and maintenance services and ensures that the various components are technically compatible". Secondly, some panel builders and installers have pointed to the availability of price reductions or training sessions, linked to large-scale purchases or to annual purchase volume targets for products of one and the same make. As the results of the investigation show, it is also apparent that having a wide range of products confers a significant advantage in access to wholesalers.

(141) All the parties' main competitors (such as ABB, Siemens or Hager) have complete ranges of components. Any medium-sized manufacturers that do not produce the full range of components must generally make up for this by purchasing the missing type of component from other manufacturers and then integrating it into their own range. This is the case, for example, with Moeller (which obtains heavy-duty circuit breakers from Schneider), Gewiss (which has developed its distribution boards around moulded case circuit breakers supplied by ABB) and Schneider (which purchases fuse switches from ABB and fuses from Holec and Harvey Bubble).

Competition between manufacturers is also component-based

(142) However, the parties' position as regards the definition of the relevant product markets on the basis of the final combination of components in "solutions" does not stand up to closer examination. As the following paragraphs make clear, the parties' position is invalidated by the economic facts, and, as the parties' documents demonstrate, competitive constraints are also component-based.

The economic facts show that the market operates through the sale of components

(143) In its decision of 30 March 2001 pursuant to Article 6(1)(c) of the Merger Regulation ("Article 6(1)(c) decision"), the Commission stated that it did not rule out the possibility that each of the various component categories in electrical switchboards formed a relevant product market. If that were the case, the product markets would then have to be defined on the basis of component categories rather than in terms of "solutions". In its Article 6(1)(c) decision, the Commission noted in particular that many third parties had indicated that electrical components are generally sold as such by manufacturers, who supply them to their wholesalers or to panel builders without integrating them into a complete "solution" (this is left to panel builders and installers).

(144) In the decision, the Commission also noted that some competitors did not seem to be able to manufacture themselves all the components needed for the "solutions" (electrical switchboards) they supplied, that the parties' catalogues did not seem to apply the breakdown between main switchboards, distribution boards and final panelboards which the parties proposed and that, on the contrary, such catalogues divided components up by range or by category on the basis of their performance.

(145) The Commission's in-depth investigation has confirmed that wholesalers, installers and panel builders purchase, and manufacturers sell, components. There is strictly speaking no such thing as the sale of integrated switchboards. The role of panel builders and installers is precisely to build an electrical switchboard to meet the technical requirements of the installation for which it is intended. The design of a switchboard, its make-up, i.e. in particular the circuit breakers (heavy-duty, moulded case or miniature), fuses and earth leakage devices which it comprises and the choice of such components depend primarily on the technical specifications of the installation.

(146) There cannot therefore be any such thing as a "standard switchboard", since each switchboard has to reflect the virtually unique features of the installation into which it has to be incorporated. As Legrand states(31), "the diversity of the configurations observed is very wide and makes it very difficult to define a standard switchboard". The switchboard is thus designed and assembled only at the level of the panel builder, installer and/or design office in contact with the end user.

(147) In their reply to the statement of objections, the parties do not dispute the virtual non-existence of standard switchboards but argue that standard solutions do exist. They stress that building a switchboard always involves mounting the same types of component (circuit breakers, earth leakage protection, cabinet or enclosure components, etc.) and that customers feel the need to obtain standard solutions, as can be seen from the development of software packages designed to assist the demand for which manufacturers have to cater, i.e. the demand from installers.

(148) The Commission does not dispute these remarks, but considers that they cannot under any circumstances be interpreted as proving the existence of standard switchboards. The fact that all switchboards of a given type tend to contain the same type of component shows that all those switchboards fulfil the same purpose, but not of course that they are all identical. The specific nature of each switchboard (and therefore the virtual non-existence of standard switchboards) is furthermore confirmed by the existence of switchboard design software, the purpose of which is to specify the component make-up that best serves the needs of each customer. The Commission therefore maintains that, with the exception of a few standard final panelboards, which relate to only a few specific configurations and account for only a tiny share of sales, there is no such thing as a standard switchboard, and what the parties call a standard solution appears to have more to do with brand cohesiveness.

(149) In general, an electrical equipment manufacturer neither designs nor sells switchboards, but rather sells (directly, or indirectly through the trade) to other companies (panel builders, installers) the components which they require in order to assemble their own customers' electrical installations. The parties' catalogues and those of their competitors are moreover broken down by component category, and not by switchboard type. The catalogues present the detailed technical specifications of the components, without necessarily referring to the switchboards into which they could be incorporated.

(150) In addition, the parties have stated that more than 80 % of low-voltage distribution board or final panelboard equipment is sold through the trade. As Schneider states(32), "[each wholesaler] purchases from the parties the components or sub-assemblies needed to maintain a stock that will allow it to supply the various system configurations which its own customers have to install". This reply confirms the fact that orders from wholesalers in respect of distribution boards and final panelboards relate to components and not to integrated solutions.

(151) In reply to questions put by the Commission(33), Schneider provided, for each EEA country, copies of the main orders for distribution boards and final panelboards and of the invoices relating to such orders. It is quite clear that the orders placed by Schneider's customers relate almost always to components, identified by their specific catalogue numbers, and not to solutions. The few exceptions almost all relate to direct sales to customers other than wholesalers or panel builders. However, as stated above, such sales are marginal (less than 5 % in the case of distribution boards, and less than 10 % in the case of final panelboards).

(152) It is evident from the above considerations that almost all of the parties' sales of distribution boards and final panelboards are in the form of components, and not "integrated solutions". The same applies to their competitors.

There are competitive constraints at component level

(153) A look at the reasons (technical constraints and commercial habits) why switchboard components tend to be of the same brand shows that a hypothetical manufacturer which, while offering the full range of components (a necessary condition for being present on the market), enjoyed a particularly strong position with regard to one type of component would be able to wield market power over that component type.

(154) As far as final panelboards are concerned, it is apparent that the only reason for the use of components of one and the same brand is installers' loyalty to the brand. However, a look at the conditions of competition shows that market shares may vary considerably from one component to another. For example, the results of the investigation show that, in the case of certain manufacturers, market shares can vary by a factor of two from one component to another. Such differences appear to show that competitive conditions are not uniform as between different components.

(155) As far as distribution boards are concerned, the parties, citing technical constraints (compatibility and selectivity), argued that analysis should be based solely on "solutions". They also stress in their reply to the statement of objections that choosing switchboard components of the same brand enables panel builders to make substantial time savings (between 25 % and 50 %) when assembling the switchboard.

(156) Nevertheless, as stated earlier, there does appear to be some mixing of brands, at least in the case of cabinet components. Furthermore, the fact that different brands of circuit breaker are not mixed does not rule out the existence of different competitive conditions between moulded case circuit breakers, key components the choice of which will determine that of the other protective components, and those other protective components. Manufacturers will naturally tend to focus the bulk of their R& D and promotion efforts on these key components rather than on the others. This is confirmed by the figures supplied by the parties in their reply to the statement of objections. These show that in Italy, over the period 1998-2000, the difference between the lowest price (corresponding to special offers) and the highest price (no special offers) was as much as [20-30] % in the case of moulded case circuit breakers but did not exceed [10-20] % in the case of miniature circuit breakers. This suggests that special offers traditionally play a more important role for MCCBs than for other circuit breakers.

(157) Focusing the analysis on components seems all the more appropriate as it is generally at this level that the value of a brand is based. This is also the level at which the parties analyse their own position on the markets for low-voltage electrical distribution equipment. For example, Legrand's "Medium-term plans 2001-2005" for most of the EEA countries give a breakdown of market shares by component category ("power circuit breakers", "distribution [board] circuit breakers", "earth leakage switches", "enclosures"). Conversely, the documents do not include any breakdown by "solution" (i.e. by type of low-voltage electrical switchboard).

(158) The parties' internal documents also include analyses which underline the importance of components as such. For example, Bticino, which forms part of the Legrand group, states(34): "[...]*".Similarly, Legrand(35) has separate breakdowns for distribution circuit breakers and earth leakage circuit breakers. In its three-year plan for [...]*, Schneider stresses the positive effects which it expects the arrival of a new range of [...]* will have, providing a basis for the sale of other products. In [...]*, Schneider expects its range of [...]* to strengthen its position with industrial customers and, conversely, it regards its range of [...]* as responsible for its weak competitive position with customers in the residential sector.

(159) The way these documents stress the strategic role of a component (in this instance, [...]*) provides a clear illustration of the importance of these components in the various manufacturers' competitive strategies. The role of components is also apparent from the manufacturers' advertising aimed at installers and panel builders. Such advertising focuses on the performance of the relevant components and not on the complete solutions which may be assembled from them.

(160) Lastly, it should be noted that [...]*(36).

(161) In their reply to the statement of objections, the parties dispute the existence of market power at the level of components. They take the view, among other things, that the hypothetical monopoly test cannot be applied to a particular type of component, since all manufacturers offer the full range of components. The case of a hypothetical monopoly over a single type of component is therefore, they argue, a scenario that is completely divorced from the reality of the market.

(162) The Commission cannot agree with that view. While the case of a hypothetical monopoly over a single type of component indeed does not correspond to the reality of the market, that does not rule out the existence of competitive conditions (and therefore of possible market power) that differ for each type of component. The fact that all manufacturers have to offer, and installers buy, all the components necessary for building an electrical switchboard does not mean that the competitiveness of the different manufacturers, the characteristics of demand and therefore price setting are necessarily equivalent for all components. In other words, the fact that the hypothetical monopoly test cannot technically be applied at the level of components (since all manufacturers sell all the products) shows that a monopoly situation probably cannot exist at the level of a single component independently of all the others. But this does not, in itself, rule out the existence of market power at component level.

(163) The mere fact (not disputed by the parties) that there are key components shows that certain components are more important than others and that competitive conditions for those components may differ from those prevailing for the others. Furthermore, as stated earlier, there is some mixing of brands in the case of certain components, in particular cabinet or enclosure components.

(164) This is amply confirmed by the figures supplied by Schneider, which show substantial differences between profit margins for the different types of component.

Profit margins

>TABLE>

Source:

Schneider, reply to the questionnaire of 6 April 2001.

Conclusion

(165) As the Commission stated in its notice on the definition of relevant market(37), "the objective of defining a market [...]* is to identify those actual competitors of the undertakings involved that are capable of constraining those undertakings' behaviour and of preventing them from behaving independently of effective competitive pressure". The aim in defining the relevant market is thus to identify the areas in which a possible dominant operator could exercise market power and to provide a conceptual framework for analysing the conditions of supply and demand in such areas.

(166) The above analysis shows that the manufacturers' market power may be exercised at two levels: at the level of the brands (and therefore the combination of all the components to be incorporated into a switchboard) and at the level of each category of component individually.

(167) The fact that customers frequently choose components of the same brand requires manufacturers to offer a full range of products and guarantee the (technical and economic) performance of switchboards resulting from the assembly of those products. Furthermore, once a particular component (for example a circuit breaker) has been chosen, the other components of a given switchboard will normally be sourced from the same brand. This is the case particularly of the other types of circuit breaker incorporated in distribution boards, on account of the compatibility and selectivity considerations set out above. There is therefore an initial level of competition corresponding to all the components (or at the very least all the protective components).

(168) Nevertheless, it is also clear from the foregoing that (i) components of a single brand are not always chosen, in the case of both final panelboards and distribution boards; (ii) there appears to be more mixing of brands in the case of cabinet or enclosure components than protective components; (iii) the choice of brand is in practice determined by that of certain key components; and (iv) the competitive positions of the different manufacturers can vary greatly from one type of component to another. Competitive conditions are therefore not uniform for each type of component. This is broadly confirmed by the data supplied by the parties in their reply to the statement of objections. These data reveal the existence of special offers that are specific to each type of component (for example, a model of miniature circuit breaker or a type of enclosure), something which strongly suggests the existence of competitive pressures differing from one component to another. And, in the case of distribution boards, these special offers appear to be significantly more generous for key components (moulded case circuit breakers) and components that can be combined with those of other brands (cabinet components) than for miniature circuit breakers.

(169) In their reply to the statement of objections, the parties dispute this analysis and argue on the contrary that the competitive assessment should focus only on the whole switchboard, i.e. the group of components that go to make up a particular type of electrical switchboard. They base their argument in particular on (i) considerations of a technical (compatibility, selectivity, etc.) and economic nature (assembly time) which restrict the mixing of products of different brands, (ii) the tendency of installers and panel builders to choose components of the same brand and (iii) the fact that all manufacturers have to offer and do indeed offer all the components necessary for building an electrical switchboard. They also rely on the findings of a study they commissioned from the consultancy NERA, which in their view demonstrates a very close correlation between the sales volumes for each type of component. The parties consider that this correlation of sales volumes demonstrates the existence of a single market in components.

(170) As stated earlier, the Commission does not dispute the existence of an initial level of competition corresponding to all the components that go to make up a particular electrical switchboard, or the fact that such competition requires manufacturers to offer a full range of products and guarantee the technical and economic performance of switchboards resulting from the assembly of those products. It takes the view, however, that competition occurs not only at that level but also at the level of each type of component.

(171) The Commission also considers that the data supplied by NERA confirm rather than disprove the appropriateness of a component-based analysis. First, manufacturers run a large number of special offers concerning an individual type of component rather than all the components necessary for building an electrical switchboard. In June and July 2000, Schneider is thus said to have offered discounts of [0-20]* % on certain [...]* and rebates of [20-40]* % on certain [...]*. Likewise, Legrand is said to have run special offers specific to certain types of [...]* for final panelboards and, at other times, special offers on certain [...]*. The scale of these offers and the fact that they relate to a single type of component illustrate the existence of specific competition at the level of each type of component.

(172) Second, the data supplied by the parties also suggest that these special offers have a very substantial impact on sales of the items concerned by the offer, but only limited effects on sales of the other components designed to be combined with the item concerned in order to form "solutions". For example, when in January 2000 Bticino offered (in Italy) a discount of [0-20]* % on certain [...]*, its sales of [...]* went up by [0-20]* % in relation to December 1999, but its sales of [...]* rose by only [0-20]* % on the previous month. The difference is even more marked if seasonal variations in sales are taken into account since, in that case, sales of [...]* even fell by [0-10]* % on the previous month (sales of [...]* having risen by [20-30]* %). This suggests that sales promotions on components do not have a uniform effect on all the components necessary for building an electrical switchboard, which again confirms the existence of a second level of competition at component level.

(173) Third, the data supplied by NERA show that there is no significant correlation between the variations in the prices of the different components. Since price variations reflect changes in the supply and demand conditions for the products concerned, this lack of correlation once more illustrates the specific nature of each type of component and confirms that the prices of each type of component are set to a large extent on the basis of considerations specific to that component type (rather than as a result of competitive changes affecting the switchboards into which they are incorporated).

(174) Lastly, the Commission takes the view that the correlation of component sales volumes as observed by NERA does not call into question the existence of specific competition at component level. NERA's correlation calculation takes no account of the seasonal nature of the business. Seasonal variations can, however, occasionally be very wide, in particular during August, when sales volumes can fall by more than 75 % from July levels. By failing to separate out these factors, the data supplied by NERA therefore significantly overestimate the real correlation of sales volumes. To measure the real correlation, the Commission has performed its own calculations on the basis of the data supplied by the parties. These calculations show that, if seasonal sales variations are separated out, the correlation drops significantly to ranges (in the region of 0,7) that do not allow precise conclusions to be drawn.

(175) It is clear that there will always be some relationship between sales of the different types of component, since final sales relate to finished switchboards and these are obtained by assembling the components in question. The Commission nevertheless takes the view that the existence of this relationship does not make it possible to conclude that all the components belong to a single product market. When transposed to another sector, the line of argument developed by NERA would be tantamount to considering that, since there is (probably) a relationship between sales of car tyres and engines (sales of both these components being linked to car sales), tyres and engines belong to the same product market. Such a conclusion would be absurd given the total lack of substitutability between the two products (on both the demand and the supply side) and fundamental differences in the structure of competition between the two sectors (presence of integrated manufacturers, level of concentration, etc.). It is, furthermore, for this reason that econometric studies on the definition of product markets are generally based on price correlations rather than sales volume correlations(38). The Commission therefore considers that this relationship does not call into question the existence of competitive conditions specific to each type of component, in view in particular of the facts and considerations set out above. The fact that, despite the inevitable existence of a relationship between components, sales of certain components rise whereas those of others fall confirms this analysis once more.

(176) At all events, even if one accepts the importance of component brands and ranges in competition, a brand's strength rests mainly on the competitiveness of the various components. Since a possible monopolistic supplier of a component could derive market power from its position in respect of that component, the competitive analysis must be carried out at the level of each type of component.

(177) The Commission therefore concludes that the analysis of the effects of the notified merger on competition must be carried out at two levels: both at the level of the group of components necessary for building a particular type of electrical switchboard (this being the level adopted by the parties) and at the level of the various components to be incorporated into distribution boards and final panelboards.

Product segmentation

Distinction b