Summary of Commission Decision of 13 January 2022 declaring a concentration to be incompatible with the internal market and the functioning of the EEA Agreement (Case M.9343 - Hyundai Heavy Industries Holdings / Daewoo Shipbuilding & Marine Engineering) (notified under document number C(2022) 63) (Only the English version is authentic) (Text with EEA relevance) 2023/C 93/04
Date: 2022-01-13
Institutions: Directorate-General for Competition, European Commission
Subjects: European Economic Area, economic concentration, merger control, shipbuilding, tanker








C_2023093EN.01003501.xml










13.3.2023   


EN


Official Journal of the European Union


C 93/35






Summary of Commission Decision
of 13 January 2022
declaring a concentration to be incompatible with the internal market and the functioning of the EEA Agreement
(Case M.9343 - Hyundai Heavy Industries Holdings / Daewoo Shipbuilding & Marine Engineering)


(notified under document number C(2022) 63)


(Only the English version is authentic)
(Text with EEA relevance)
(2023/C 93/04)

On 13 January 2022 the Commission adopted a Decision in a merger case under Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (1)
, and in particular Article 8(3) of that Regulation. A non-confidential version of the full Decision, as the case may be in the form of a provisional version, can be found in the authentic language of the case on the website of the Directorate-General for Competition, at the following address: http://ec.europa.eu/competition/elojade/isef/index.cfm?clear=1&policy_area_id=2

1.   THE PARTIES









(1)


Hyundai Heavy Industries Holdings (‘HHIH’ or ‘Notifying Party’) is a South Korean holding company that controls, through its subsidiary Korea Shipbuilding & Offshore Engineering (‘KSOE’, South Korea), Hyundai Heavy Industries Co. Ltd (‘HHI’), Hyundai Samho Heavy Industries (‘Hyundai Samho’) and Hyundai Mipo Dockyard (‘Hyundai Mipo’). Its shipbuilding activities entail the production of a range of cargo vessels, marine engines and offshore facilities.












(2)


Daewoo Shipbuilding & Marine Engineering Co., Ltd. (‘DSME’) is a South Korean company mainly active in shipbuilding. It notably produces a range of cargo vessels and offshore facilities, but not marine engines.




2.   THE OPERATION









(3)


On 12 November 2019, the Commission received a notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which HHIH through its subsidiary KSOE, would acquire within the meaning of Article 3(1)(b) of the Merger Regulation sole control of DSME (the ‘Transaction’).




3.   THE PROCEDURE









(4)


On 17 December 2019 the Commission adopted a decision under Article 6(1)(c) to initiate proceedings. The Commission raised serious doubts as to the compatibility of the Transaction with the internal market and with the functioning of the EEA agreement in relation to the potential worldwide markets for the construction of: liquefied natural gas (‘LNG’) carriers (‘LNGCs’, including the potential sub-market for Floating Storage and Regasification Units ‘FSRUs’) and the sub-market for LLNGCs (including the potential sub-market for ‘large FSRUs’), oil tankers including the potential sub-market for very large crude carriers, liquefied petroleum gas (‘LPG’) carriers including the sub-market of very large LPG carriers and containerships including the potential sub-market for large containerships.












(5)


On 10 January 2020, the timeline of the proceedings was extended by 20 working days to the request of the Notifying Party under Article 10(3)2 of the Merger Regulation. The timeline was suspended by decisions under Article 11(3) of the Merger Regulation between 23 January 2020 and 21 February 2020 and between 31 March 2020 and 2 June 2020, due to the failure of the Notifying Party to provide information requested by the Commission.












(6)


On 8 June 2020 the Commission issued a Statement of Objection (‘SO’) in which it raised serious doubts as to the compatibility of the Transaction with the internal market and with the functioning of the EEA agreement. The Notifying Party responded in writing to the SO but did not ask for a formal oral hearing.












(7)


The timeline of the proceedings was suspended again by a decision under Article 11(3) of the Merger Regulation between 13 July 2020 and 18 November 2021 due to the failure of the Notifying Party to provide information requested by the Commission.




4.   SUMMARY









(8)


The Commission concluded that the Transaction would significantly impede effective competition in the internal market with regard to the worldwide market for the construction of LLNGCs.












(9)


The Notifying Party did not submit formal proposal for commitments to meet the Commission concerns.












(10)


Therefore, the Commission declared the Transaction incompatible with the internal market and with the functioning of the EEA Agreement, pursuant to Articles 2(3) and 8(3) of the Merger Regulation, and Article 57 of the EEA Agreement (‘the Decision’).




5.   EXPLANATORY MEMORANDUM

5.1.   THE RELEVANT PRODUCT MARKET








(11)


LNGCs are vessels equipped with a special cargo containment system that allows them to transport LNG at a temperature of close to minus 162 degrees Celsius. LNGCs also refer to the sub-group of FSRUs. FSRUs include also the equipment to regasify the LNG and send it to shore (all reference to LNGCs refer hereinafter also to FSRUs).












(12)


The Decision distinguishes between small LNGCs that can carry up to 40 000 cubic meters of LNG and LLNGCs that can carry equal to or more than 145 000 cubic meters. LNGCs in a size between 40 000 to 144 999 cubic meters are very rare.












(13)


The Decision finds that LLNGCs are not homogenous goods but rather differentiated under several grounds such as use/type (besides “standard LLNGCs, there are ice-breaker LLNGCs and large FSRUs), cargo tank technology types, other technology types and overall quality of the vessel.












(14)


From the demand side, LNGCs are not substitutable with any other cargo vessel as LNG can only be carried by LNGCs. Furthermore, LLNGCs are not substitutable with small LNGCs. LLNGC are, for example, used for long distance ocean transport of LNG while small LNG carriers are used for short distance transport and are not used in ocean transport.












(15)


From the supply side, LLNGCs represent the most sophisticated and differentiated cargo vessel for construction, requiring, as opposed to other vessel types or even small LNGCs, a specific expertise and track record in building a highly sophisticated cargo gas containment system. Consequently, only a very small number of shipbuilders worldwide are able to construct LLNGCs: HHIH, DSME, Samsung Heavy Industries (‘SHI’), all of them South Koreans and, to a much lesser extent, CSSC (China).












(16)


Therefore, the Decision finds that the construction of LLNGCs is a distinct product market.




5.2.   THE RELEVANT GEOGRAPHIC MARKET








(17)


LLNGC shipbuilders are located in South Korea and China and the customers are located around the world. Customers generally do not consider the location of the shipbuilder when placing orders for LLNGCs. The Decision therefore concludes that the market for the construction of LLNGCs is worldwide.




5.3.   COMPETITIVE ASSESSMENT








(18)



Market concentration and high combined market shares. The market for the construction of LLNGCs is highly concentrated with only four shipbuilders that are able to build independently these vessels. Post-Transaction the merged entity would enjoy very high combined market shares, well above the prima facie presumption for dominance threshold of 50 % and have been consistently increasing over the last 10 years.












(19)



Closeness of competition. The market investigation showed that HHIH and DSME are each other’s close competitors and even particularly close competitors (the Transaction leads to the combination of two out of three – with SHI – very close competitors) as customers indicated that the Parties compete closely under nearly all the top parameters that customers usually take into account when deciding with which shipbuilder to place an order for LLNGCs. Such parameters are quality/vessel’s performance, price, slot availability/delivery time, engineering skills/design, track record/technology and historical relationship. Moreover, HHIH, DSME and SHI are the three shipbuilders that customers mentioned the most when asked which shipbuilder they invited for tenders for LLNGCs since 2014. More specifically, HHIH and DSME are the two shipbuilders that customers mentioned the most as those having been ultimately selected in LLNGCs tenders since 2014. Last, the analysis performed by the Commission confirmed that the Parties are close competitors, together with SHI, and even particularly close competitors. The Transaction would therefore bring together two out of three very close competitors.












(20)



Competitive constraints from competitors. The Commission’s investigation further showed that post-Transaction, not only would the merged entity command a very large share of the market, but it would also face limited constraints from competitors in its actual conduct. There are few competitors in such a concentrated market, and the Commission assessed individually the situation of competitors SHI and CSSC. The Commission further considered the position of competing shipbuilders established in Japan, which in the past had constructed LLNGCs.












(21)


SHI is the only remaining competitor with a large market share post-Transaction. SHI appears from the market investigation to be the only competitor that can participate in tenders and offer a quality of products comparable to the Parties’. Post-Transaction, however, it would be the only such competitor, in a very concentrated market where the merged entity would command a significant share. The ability of SHI to constrain the Parties is also limited by the fact SHI would lack sufficient available capacity to this end. The market investigation supported the finding SHI would have limited incentive to defeat a price increase by the merged entity post-Transaction.












(22)


CSSC is a player whose market presence remains very limited. The market investigation also suggested that for customers CSSC cannot match the Parties on many parameters including quality, infrastructure, timely delivery, know-how, project management and cost of maintenance. Moreover, CSSC’s ability to expand in this market is constrained by its capacity. CSSC’s domestic focus also does not support the view it would constrain the merged entity post-transaction.












(23)


The Commission considered the position of shipbuilders from Japan that were building LLNGCs in the past, and concluded they are not a meaningful competitive constraint on the Parties. Beside disadvantages in prices and more limited capacity, they have domestic focus. Such players are also active through an old LNG cargo tank technology which is less attractive to customers than the technology used by the Parties. Moreover, the Commission found such player effectively exited the LLNGC market in recent years.












(24)



Barriers to entry. The merged entity would likely not be constrained by potential entry or re-entry. Entering, re-entering the market and becoming a credible autonomous player capable of exerting a sufficient competitive constraint in a likely, timely and sufficient manner would take significant effort and time for a shipbuilder. Barriers to entry and expansion are high for LLNGCs and expansion requires significant time and effort. Such barriers consist in licences, know-how and project management, technology, qualitative and quantitative (a series of at least 4-5 vessels delivered) track record, dock size, special equipment and facilities, delivery time and quay slots and financial backing. Shipbuilders who have not been active on the market for a lengthy period of time (10 years or even less) would not be considered as capable of building LLNGCs by customers, including because of lost or outdated know-how.












(25)



Buyer power. The conduct of the merged entity post-Transaction would not be constrained by a sufficient degree of buyer power held by customers. The supply side of the market is very concentrated even pre-Transaction, while the demand side of the market is fairly fragmented. Even large customers would not enjoy a sufficient degree of buyer power. Moreover, there is a significant price/margin dispersion across customers and projects, while realised and expected margins are often materially different (i.e., higher), which are also indications of a lack of buyer power.












(26)



Capacity. Despite the Parties’ claims that spare capacity in the market would discipline their conduct, the Commission finds that supply and demand are in fact currently rather balanced and capacity is not fungible in the LLNGC market. Demand for LLNGCs is expected to keep increasing in the next 5 years (even accounting for the COVID-19 impact, see further below). This means that CSSC and SHI would not be able to absorb demand in case the merged entity will raise prices post-Transaction, making the merged entity pivotal under all plausible scenarios.












(27)



Impact of COVID-19. Contrary to the argument of the Notifying Party, the COVID-19 crisis did not significantly affect the demand for LLNGCs. As apparent from third-party data and forecasts, the LLNGC market is and will continue to experience an upcycle in demand in the coming years.




6.   CONCLUSION









(28)


The decision therefore concludes that as a result of the Transaction effective competition would be significantly impeded in the internal market or in a substantial part of it. Consequently, the decision suggests to declare the Transaction incompatible with the internal Market and the EEA Agreement, in accordance with Articles 2(3) and Article 8(3) of the Merger Regulation and Article 57 of the EEA Agreement.












(29)


Therefore, the Commission concludes that the Transaction is incompatible with the internal market.






(1)  OJ L 24, 29.1.2004, p. 1.