2006/896/EC: Commission Decision of 26 October 2004 declaring a concentration compatible with the common market and the functioning of the EEA Agreement (Case No COMP/M.3436 — Continental/Phoenix) (notified under document number C(2004) 4219)   (Text with EEA relevance)
Date: 2004-10-26
Institutions: European Commission
Subjects: dominant position, economic concentration, merger control, motor vehicle industry, pneumatic tyre, restriction on competition, rubber industry, vehicle parts

13.12.2006

EN

Official Journal of the European Union

L 353/7

COMMISSION DECISION

of 26 October 2004

declaring a concentration compatible with the common market and the functioning of the EEA
Agreement

(Case No COMP/M.3436 — Continental/Phoenix)

(notified under document number C(2004) 4219)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/896/EC)

On 26 October 2004 the Commission adopted a Decision in a merger case under Council Regulation (EEC) No 4064/
89 of 21 December 1989 on the control of concentrations between undertakings (1) (the Merger Regulation) and in
particular Article 8(2) of that Regulation. A non-confidential version of the full Decision can be found in the authentic
language of the case and in the working languages of the Commission on the website of the Directorate-General for
Competition, at the following address: http://europa.eu.int/comm/competition/index_en.html.

I.

THE TRANSACTION

products. The Commission has identified potential compe-
tition problems on four markets:

(1) On 12 May 2004, the Commission received a notification
of a proposed concentration by which the undertaking
Continental AG acquires within the meaning of Article 3(1)
(b) of the Merger Regulation control of the whole of the
undertaking Phoenix AG by way of a public bid announced
on 26 April 2004.

— air springs for commercial vehicles;

— air springs for passenger cars;

1.

The parties

— air springs for rail vehicles;

(2) Continental AG (‘Continental’)

tyres, brakes, suspension systems and other
rubber products, mainly for automotive use.

is a leading producer of
technical

(3)

Phoenix AG (‘Phoenix’) is also specialised in the production
of technical rubber products (e.g. suspension systems, anti-
vibration systems, hoses and conveyor belts), but not active
in the production of tyres. Both companies are based in
Germany.

(6)

2.

The operation

(4) Continental

intends to acquire sole control within the
meaning of Article 3(1)(b) of the Merger Regulation of the
whole of Phoenix. The transaction was notified to the
Commission on 12 May 2004; on 28 June, Continental
acquired 75,51 % of the shares in Phoenix by way of a
public bid.

II.

THE RELEVANT MARKETS

(5)

The concentration leads to horizontal overlaps in a number
rubber
of product markets in the field of

technical

— heavy steel cord conveyor belts.

1.

Air springs for commercial vehicles (OEM/OES)

Both parties are active in the production of air springs for
commercial vehicles (2). Air springs usually consist of a
rubber bellow and a metal plate made of steel. They are
used in commercial vehicles to reduce the vibrations
between axle and chassis and to adapt the chassis to various
loads (3). Although Continental proposes to define a market
encompassing all types of suspension systems for commer-
cial vehicles (spiral steel springs, flat compound springs and
air springs), the market investigation has confirmed the
Commission's position that air springs constitute a distinct
product market. The investigation also confirmed the
distinction between air springs sold to vehicle manufacturers
(OES/OEM) and air
sold to the independent
aftermarket (IAM). A further delineation of smaller markets
(e.g. for air springs for trucks/buses on the one hand and for
trailers/axles on the other hand) has not been supported by
the market investigation and would — in any event — not
change the competitive assessment.

springs

(2) Phoenix markets its OES/OEM air springs for trucks and buses in a
joint venture (‘Vibracoustic’) with the German component producer
Freudenberg (see case M.1778 — Freudenberg/Phoenix/JV). Vibra-
coustic has, however, no own production for air springs for
commercial vehicles but sells springs produced by Phoenix.

(1) OJ L 395, 30.12.1989, p. 1. Regulation as last amended by

(3) By varying the pressure of the air in the air spring, the height of the

Regulation (EC) No 1310/97 (OJ L 180, 9.7.1997, p. 1).

chassis can be regulated.

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(7) As to the geographic market, Continental argues that the
geographic market for air springs for commercial vehicles is
worldwide in scope. However, the market investigation has
demonstrated that market conditions for air springs for
commercial vehicles in Europe differ significantly from
other regions. Due to different technical requirements (e.g.
bigger trucks) and different customer preferences (European
springs being technically more sophisticated), springs used
in US trucks cannot be used in Europe and vice versa. As a
result, there is no significant competitive impact
from
outside Europe on the European market. Only one
company (the US-firm Firestone)
is currently importing
air springs to Europe. These air springs are designed
specifically for the European market. They contain metal
components which are bought in Europe, shipped to the
USA, built into the air spring and then re-shipped to
Europe. Another cost-disadvantage is caused by tariffs and
transport costs. Although these imports accounted for
approx. 12 % in 2003,
imports are likely to decrease
significantly in the near future, since Firestone is in the
process of building a production plant in Poland, which will
be ready for production in 2005. Therefore, the Commis-
sion is of the opinion that the relevant market for air
springs for OEM/OES is Europe.

(8) With regard to air springs sold by independent dealers in
the relevant
the after market
geographic market can be left open since the market
investigation has shown that no competition concern will
occur in the IAM market.

the question of

(IAM),

2.

Air springs for passenger cars

(9)

Both, Continental and Phoenix/Vibracoustic, also produce
air springs for passenger cars. In passenger cars, air springs
(bellow/plate unit) are part of a more sophisticated air
spring system, consisting of an air spring and other
components (e.g. air pressure system, control units, etc.).
Continental's and Phoenix' activities overlap only in the
field of air springs. Air springs are currently a niche
product, mainly used in luxury cars. The market investiga-
tion has confirmed that air springs for passenger cars have
to be assessed separately from other spring types (e.g. steel
springs). It does not, though, seem appropriate to further
distinguish between different customer segments in the
market for car air springs (e.g. ‘limousines’, ‘SUVs’ and ‘light
trucks’), as the production process and the customers are
similar for all three segments.

investigation has

(10) Continental claims the market to be worldwide in scope.
supported a European
The market
geographic market definition,
there is
currently only one non-European supplier — Gates from
the US — active in Europe. Imports accounted only for
about [5-10* (*) ] % in 2003. Recently, Gates has opened a

though.

In fact,

(*) Parts of the original decision are omitted in this summary to ensure
those parts are

information is not disclosed;

that confidential
enclosed in square brackets.

new production facility for air springs in Aachen/Germany
in order to serve the European market from Europe. In fact,
most customers are not
inclined to buy imported air
springs. This
is mainly because the development of
passenger car air springs requires a close cooperation
between customers, since air springs are technologically
sensitive products. What is more, the development of an
entire air spring system involves also other component
suppliers, who are regularly based in Europe. As a result,
most car manufacturers prefer to source from the two
European manufacturers (Phoenix/Vibracoustic or Conti).

3.

Air springs for rail vehicles

(11) Both parties produce also suspension products for rail
vehicles. Again, Continental proposes to define one product
market
for all kinds of different suspension and anti-
vibration systems used in rail vehicles (e.g. steel springs,
hydraulic systems, air springs, rubber-metal parts). Though,
the market investigation has confirmed the Commission's
view that secondary air spring systems (rubber bellow plus
rubber-metal parts)
form a distinct product market,
separate from other primary or secondary suspension
parts. This is mainly because most customers buy the air
spring separate from other suspension parts and the
production know-how for air springs varies significantly
from the know-how for other products. Unlike in the field
of commercial vehicles, there is no IAM for rail suspension
products.

(12) Continental claims the market to be worldwide in scope.
The market investigation has rather supported a European
geographic market definition, most European customers
dealing with European manufacturers. The geographic
market definition, however, can be left open, since even
on a European wide market the transaction would not lead
to a dominant position of Continental and Phoenix.

4.

Heavy steel cord conveyor belts

(13) Phoenix and Continental are also specialised in the
production of conveyor belts. Conveyor belts, made of
rubber, textile or PVC, are designed for the transport of
goods. There are three main types of conveyor belts: light
conveyor belts, heavy conveyor belts and specialty belts. Heavy
conveyor belts are used for the transport of heavy goods
such as coal, ore, gravel or sand. Two main types of heavy
conveyor belts can be distinguished, steel cord conveyor belts
and textile conveyor belts. The parties are particularly strong
in the field of steel cord conveyor belts. Continental argues
that both types (textile and steel cord belts) belong to the
same market
for heavy conveyor belts. This market
delineation, however, has not been confirmed by the
outcome of the market investigation.

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(14) From the supply side, textile belts and steel cord belts
involve a significantly different production process, since
steel cord belts are made of rubber and steel ropes whilst
textile belts are woven of different layers of technical fibres.
What is more, competitors and customers have explained
that both types have their respective fields of application,
due to their manifestly different product characteristics:
While textile belts can be used for smaller applications
(short distances, smaller loads), the transport of heavy loads
over long distances (e.g. for open cast mining applications)
requires imperatively steel cord conveyor belts. This is
because textile belts are by far more elastic than steel rope
belts and can, therefore, only surmount relatively short
distances. Although Continental rightly claims that
for
some applications both belt types can be used, the market
investigation indicates that only 5-10 % of steel rope
applications can be substituted by textile belts. Accordingly,
heavy steel cord conveyor belts do not seem to belong to
the same market as heavy textile conveyor belts and should
be assessed separately.

(15) According to Continental, the relevant geographic market
for heavy conveyor belts is worldwide in scope. However, the
outcome of the market investigation militates clearly in
favour of a European-wide market. This is due to the fact
that steel cord conveyor belts are in many cases tailor-made
for a specific application. What is more, transport and
logistic problems play an important role. As a result, non-
European producers play only a minor role in the European
steel cord conveyor belts market. Therefore, the Commis-
sion has analysed the competitive situation on the basis of a
European market.

III.

ASSESSMENT

1.

Air springs for commercial vehicles (OEM/OES)

(16) Continental and Phoenix would have a combined market
share on this market of [55-65] %. The main competitors
are CF Gomma [10-15] %, Firestone [10-15] % and Good-
year [5-10] % .

(17) Such a high market share would already in its own be
indicative of a dominant position (4) of Continental. A
dominant position is also likely with a view to the market
structure: The combined entity's market share will be four
times higher than the one of the closest competitor.

(19) There are additional factors which underpin such competi-
tion concerns. First, in case of a price rise of the merged
entity, customers would not be able to switch easily
significant volumes to competitors. This is not only because
any new supplier would have to undergo a qualification
is more, all
procedure with most customers. What
competitors are capacity constraint. Both CF Gomma and
Goodyear are utilising almost all their capacity. Firestone's
new production plant in Poland will probably be filled by
its current supply contracts.

(20) Second, the transaction would combine the two leading
firms in the OEM/OES market. Indeed, the current market
position of Phoenix does not seem to reflect
its true
potential. Phoenix brought its OEM/OES business with
trucks and buses into the joint venture with Freudenberg,
the joint venture focused its
Vibracoustic. However,
marketing efforts on air springs for passenger cars and
achieved a rather minor position in the market for trucks
and buses. Phoenix is contractually bound to refrain from
participating in requests for quotations by truck and bus
manufacturers. However, Phoenix managed to negotiate a
suspension of the penalty clause and was able to participate
in two recent competitions.
these two
competitions it ended up as runner up behind Continental.
Customers rank Phoenix close to Contitech when it comes
to technical skills and even better in terms of pricing.

In both of

(21) Third, contrary to what Continental claimed, the market
investigation has shown that patents are used to prevent
competitors from stepping in as a second supplier in an
ongoing delivery contract. A competitor told the Commis-
sion that especially Continental is using claimed IP rights
aggressively to exclude competitors from competitions.

(22) For all these reasons the Commission believes that the
proposed takeover of Phoenix by Continental would lead to
a dominant position of the merged entity in the market for
air springs for commercial vehicles in Europe.

2.

Air springs for passenger cars

(18) Potential competition problems are not excluded by the
mere fact that the merged entity's customers are, at least to
a certain extent, big automotive companies. Although it is
true that some of the bigger truck producers have not
raised series concerns about the merger, many smaller axle/
trailer producers are afraid of a negative impact of the
transaction on prices.

(4)

It should be noted that the case was notified under the old regulation
4064/89.

(23) The takeover of Phoenix/Vibracoustic by Continental would
combine the two only European producers of passenger car
air springs. The market share of the combined entity in
Europe would be around [85-95] % for 2003. Although all
customers of air spring modules are big automotive
companies and have usually some buyer power over their
suppliers, even some of the big customers have raised
concerns about the transaction. Indeed, the investigation
has shown that many car producers have only one supplier
for air springs. The merger would eliminate the ability from
car manufacturers to instil competition between Continen-

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tal and Phoenix, leaving them with only one supplier active
in Europe. On the other hand, the Commission has found
some evidence that new players from outside Europe might
enter the European market in the near future.

the combined market

share of
the conclusion that
Continental and Phoenix would be [>70] %. Remaining
competitors are Sempertrans [5-15] %, Bridgestone [0-5] %
and several small, mostly regional suppliers with market
shares of less than [0-5] %.

(24) The question, whether the transaction would lead to a
dominant position in the passenger car air springs market
can be left open, since Continental has recently committed
to divest Phoenix' activities in this market by selling
share in the joint venture Vibracoustic to
Phoenix'
Freudenberg. The
in
acquisition of Phoenix'
Vibracoustic by Freudenberg removes the competition
concerns in the field of air springs for passenger cars,
since Phoenix is only active in the market for passenger car
air springs through Vibracoustic.

shares

3.

Air springs for rail vehicles

(25) The market

the combined
investigation revealed that
market share for Continental and Phoenix for secondary
air spring systems would be approx. [55-65] %. Other
competitors (e.g. Paulstra, Schwab, Trelleborg or Toyo)
would hold only minor shares of 5 % or less.

(26) Despite these relatively high market shares, the Commis-
sion has come to the conclusion that no dominant position
is to be expected in the market for railway air springs for
two main reasons: Firstly, all competitors (including the
parties) have to buy up to 70 % of the parts of the air
spring system from their competitors who are either
manufactures of the rubber bellow or the metal parts.
Indeed, Continental was able to demonstrate that is has
recently increased its supplies of rubber bellows to a
competitor of the air spring system underpinning the fact
that in this industry cross-supplies are a common practice.
Secondly, there are enough potential competitors in the
market who could prevent the parties from raising prices
independently. Toyo and Sumitomo from Japan have
significantly strengthened their European presence through
subsidiaries in Europe. They were able to gain new business
through their newly created subsidiaries in Europe and are
most likely to further increase their market position in the
near future. Given the long lifetime of trains (up to 30
years), customers will have enough time to qualify new
suppliers.

(27) Therefore,

the Commission believes that

the proposed
lead to the creation of a dominant

takeover will not
position in the market for railway air springs.

to three,

from four

(29) The transaction thus reduces the number of main European
competitors
the two remaining
(Sempertrans and Bridgestone) being very small compared
to the merged entity. One the one hand,
the market
investigation has revealed that the main customers — big
energy companies such as RWE — have certainly some
buyer power which they will use to defend competition in
the market. However, they admit that they had only limited
— if any — alternative suppliers after the merger. The
market position of the merged entity would be particularly
strong in the segment of belts for lignite mining and belts
with a width of more than 2,4m. Lignite mining customers
account for more than 50 % of the entire demand for steel
cord conveyor belts. For some belt widths (>2,4 m), the
merged entity would even enjoy a de facto monopoly
position in Europe.

(30) For the above reasons the proposed takeover of Phoenix by
Continental is likely to lead to a dominant position in the
market for heavy steel conveyor belts in Europe.

5.

Conclusion

(31) The decision,

therefore,

concludes

the notified
concentration raises serious doubts as to its compatibility
with the Common Market with regard to the markets of air
springs for commercial vehicles (OES/OEM) and heavy steel cord
conveyor belts.

that

IV.

UNDERTAKINGS SUBMITTED BY THE PARTIES

(32)

to address

In order
the aforementioned competition
concerns, the notifying party has submitted undertakings
on 1 October. Continental commits

1.

2.

to sell Phoenix' 50 % share in Vibracoustic to the joint
venture partner Freudenberg (5);

to sell Phoenix' entire production for passenger car air
springs (OES/OEM), located in Nyireghyza in Hungary,
to Freudenberg;

4.

Heavy steel cord conveyor belts

(28) The operation would combine Europe's

two leading
suppliers. Indeed, the in-depth market investigation led to

3.

to sell a production line for 3,2 m heavy steel cord
conveyor belts to its competitor Sempertrans.

(5)

It should be noted that Freudenberg has a call option for Phoenix'
50 %-share in Vibracoustic in case of a takeover of Phoenix by a third
undertaking. In absence of the commitment, it was, however, not
clear, if Freudenberg would exercise this call option or not.

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Assessment of the undertakings submitted

C o m m e r c i a l v e h i c l e a i r s p r i n g s

(33) The divestiture of Phoenix' shares Vibracoustic will allow
Freudenberg/Vibracoustic to offer the full range of air
including springs for
springs for commercial vehicles,
trailers/axles and springs for the IAM market. Controlling
Vibracoustic, Freudenberg can use a strong research &
development and an experienced distribution team to
compete in the markets for air springs. With the acquisition
of Phoenix' air spring production in Hungary, Freudenberg/
Vibracoustic will have their own air spring production
facility, which will enable them to sell air springs not only
to van/bus customers but also to trailer/axle manufacturers.
The divestiture also comprises the existing supply contracts
with Phoenix' customers.

(34) The complete divestiture of Phoenix' activities in the market
(OES/OEM)

commercial vehicles

for
eliminates the overlap in this market.

springs

for

air

H e a v y s t e e l c o r d c o n v e y o r b e l t s

(35) The commitment to sell a whole production line for steel
cord belts with a width of more than 2,4m to Sempertrans
is also an appropriate remedy to solve the competition
problems in the market for heavy steel cord conveyor belts.
In fact, the main concerns in this market relate to the

segment of belts for lignite mining customers. The acquirer
Semperit/Sempertrans, already qualified with some belts in
this segment, will get access to the production technology
for wide belts through the divestiture, this capacity being a
key factor for the success in the steel cord belt market. The
the
market
commitment, since all major customers have indicated to
the Commission that
they regard the divestiture of a
production line as an effective measure to instil competition
in the steel cord belt market. Therefore, the Commission
the divestiture will solve the competitive
believes that
concerns in this market.

effectiveness of

confirmed the

test has

V.

CONCLUSION

(36) The Decision, therefore, reaches the conclusion that, on the
basis of the commitments submitted by the Parties, the
notified concentration will not lead to a dominant position
of the Parties in the markets for air springs for commercial
vehicles (OEM/OES), for passenger cars, for rail vehicles and
for heavy steel cord conveyor belts, as a result of which
effective competition would be significantly impeded in the
common market or a substantial part thereof. The merger
should therefore be declared compatible with the common
market and the EEA Agreement subject to full compliance
with the obligations contained in the Annex under Article 2
(2) and Article 8(2) of the Merger Regulation and Article 57
of the EEA Agreement.