CELEX: 31993M0337
Language: en
Date: 1993-10-15 00:00:00
Title: COMMISSION DECISION of 15.10.1993 declaring a concentration to be compatible with the common market (Case No IV/M.337 - KNORR-BREMSE / ALLIED SIGNAL) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

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31993M0337

COMMISSION DECISION of 15.10.1993 declaring a concentration to be compatible with the common market (Case No IV/M.337 - KNORR-BREMSE / ALLIED SIGNAL) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)  

Official Journal C 298 , 04/11/1993 P. 0000

 COMMISSION DECISION of 15.10.1993 declaring a concentration to  be compatible with the common market (Case No IV/M.337 - KNORR- BREMSE / ALLIED SIGNAL) according to Council Regulation (EEC)  No 4064/89  (Only the English text is authentic)  The paper version of the decision is available through the  sales offices of the Office of Official Publications of the  European Communities. PUBLIC VERSION MERGER PROCEDURE ARTICLE 6(1)(b) DECISION Registered with advice of delivery To the notifying party Dear Sirs, Subject: <tab> Case No. IV/M337 Knorr-Bremse/Allied Signal  <ind>  <ind> Notification of 14.9.1993 pursuant to Article 4  of  Council Regulation No 4064/89  1. <ind> The above mentioned notification concerns an agreement  between Allied Signal Inc (AS) and Knorr-Bremse AG (KB) to set  up a worldwide joint venture for the design, development,  manufacture, distribution and sale of air brake systems (and  certain other related automotive products) for commercial  vehicles over 6 tonnes.  2. <ind> After examination of the notification, the Commission  has concluded that the notified operation falls within the  scope of application of Council Regulation No. 4064/89 and does  not raise serious doubts as to its compatibility with the  common market.  I.  <ind> THE PARTIES  3. <ind> AS is a US conglomerate active in the development,  manufacture and distribution of aerospace products, automotive  products and engineering materials.  4. <ind> KB is a German company active in the development,  manufacture and distribution of railway brakes, automotive  brakes, foundry products and torsional vibration dampers.   II. <ind> THE OPERATION  5. <ind> The JV to be established by the parties will operate  on a worldwide basis through two legal entities, one based in  North America, the other in Europe. The parties will transfer  their European air brake businesses (and related products) for  commercial vehicles over 6 tonnes to the European JV. AS will  transfer its North American air brake business (and related  products) for commercial vehicles over 6 tonnes to the North  American JV while KB's contribution will consist of cash  payment.   III.  <ind> COMMUNITY DIMENSION  6. <ind> The aggregate worldwide turnover of AS and KB in their  respective last financial year exceeded 5.000 million Ecus  [Deletion]. Their respective Community-wide turnover exceeded  250 million Ecus [Deletion]. The parties did not achieve more  than two thirds of their Community-wide turnover within one and  the same Member State. Consequently, the proposed operation has  a Community dimension.  IV. <ind>  CONCENTRATION   <ind> Joint Control  7. <ind> The JV will operate through two legal entities - the   European JV, in which KB will have a 65% equity interest and AS  a 35% interest, and the American JV in which KB and AS will  have an equity interest of 35% and 65% respectively. Each of  the two JV entities will have its own management body, both of  which will be composed of the same six members, three nominated  by AS and three by KB [Deletion].  8. <ind> In regard to matters of fundamental importance,  defined by the parties as including annual and long-range  business plans and strategies, operating and capital budgets,  internal organisation and acquisitions and divestitures, a  majority of the votes of the two management entities is  required. More specifically, at least one of the two voting  members nominated by each of the parties must vote with the  majority on such matters. In addition, certain important  business decisions of one JV entity [Deletion] which may affect  the interests of the other JV entity will require the agreement  of both JV entities.   9. <ind> In the light of this, it is concluded that AS and KB  will exercise joint control over the JV.   <ind> Autonomous economic entity  10. <ind> The parents will contribute two existing businesses  to the JV, which will thus have the necessary assets (notably  manufacturing facilities and distribution network), personnel  and expertise to perform on a lasting basis all the functions  of an autonomous economic entity.   <ind> Absence of risk of coordination  11. <ind> KB will completely withdraw from all automotive brake  markets in Western Europe by contributing its relevant  subsidiaries to the JV. Having withdrawn from these markets and  disposed of its plant and expertise, it would make little  commercial sense for KB to re-enter the market. AS will  contribute to the JV its business involved in the manufacture  of air disc braking systems for commercial vehicles over 6  tonnes and the related products of operating cylinders and  clutch servos.  12. <ind> AS will remain active in the following markets:   <tab> a) <ind> hydraulic brake systems for passenger cars and  light commercial vehicles (LCV's), and    <tab> b) <ind> air drum brakes for medium and heavy trucks.  13. <ind> There are two types of brake systems: air and  hydraulic. The two systems differ in several respects:    <tab> - <ind> technically there is a limit to the braking  pressure which can be applied through a hydraulic system which  limits their use to vehicles under six tonnes. Almost all  vehicles above this weight use air systems;   <tab> - <ind> air systems require space for an air compressor  and reservoirs which is not usually available in passenger cars  and LCV's;   <tab> - <ind> hydraulic actuation systems are more than three  times cheaper than air systems;   <tab> - <ind> hydraulic systems for passenger cars and LCV's  are manufacturered in highly automated plants and represent 98%  of all automotive brake systems made; the remaining 2% is  accounted for by air and air over hydraulic systems for medium  and heavy vehicle brakes and are made mostly with non-automated  machine tools;  <tab> - <ind> air and hydraulic systems within AS are  manufactured in separate plants and use different manufacturing  equipment, technology, know-how and components. They are also  sold through separate distribution and marketing operations to  different customers.   <ind> On this basis, it is reasonable to consider air and  hydraulic systems as separate product markets.   14. <ind> Air drum brakes for medium and heavy trucks is a  mature product [Deletion].   It accounts for a very small  percentage of AS production.  15. <ind> For these reasons, it is not reasonable to expect  that there will be any appreciable risk of coordination between  AS and the JV company in relation to brake systems for cars and  LCV's and air drum brakes for trucks because of AS's  involvement in these markets and the market for air actuation  systems for commercial vehicles over 6 tonnes.  16. <ind> In addition to the above, KB will transfer to the JV  a small amount of business making air over hydraulic brakes for  buses. Air over hydraulic brakes are a hybrid system which uses  an initial air actuation system but then converts it to a  hydraulic system for the final transfer of pressure to a  hydraulic foundation brake. This business is small in volume,  to be discontined [Deletion], and the trend for bus brakes is  toward air disc brakes [Deletion]. Even if there were  substantial overlap between this residual business being  transferred to the JV and AS's hydraulic brakes business, the  procurement decisions of vehicle manufacturers which make both  cars and buses is totally separate  and not vulnerable to any  coordinated strategy between the JV and AS. In fact, of KB's  existing customers for these brakes only one also makes cars  and the turnover related to this part of the business is small.  There is thus no scope for coordination betwen the JV and AS as  regards their production of hydraulic brakes for buses and  cars/LCV's respectively.  17. <ind> The Commission therefore concludes that the notified  operation constitutes a concentration within the meaning of  Article 3(2) of the Merger Regulation.  V. <ind> ASSESSMENT   <ind> Relevant product market  18. <ind> The JV's product range will be in the sector of  braking systems for commercial vehicles over 6 tonnes.  For the  reasons outlined earlier in paragraph 13, this means that the  actuation systems used for these vehicles are predominantly  air, although there is a certain use of air over hydraulic  systems and even a very limited and vestigial use of hydraulic  systems for trucks between 6 and 7.5 tonnes.  Within this  overall set of products it is necessary to make the following  distinctions:  19. <ind> (i) foundation brakes and actuation systems - a brake  system consists of two parts: the actuation system, which  creates and controls the braking power, and the foundation  brake, which applies the braking power to the wheel. The two  are manufactured separately, largely by different producers,  and are purchased separately by vehicle manufacturers.  In a  previous case (IV/M.149 - Lucas/Eaton), the Commission  distinguished actuation systems and foundation brakes as  separate markets, and it is also appropriate to do so in this  case.  20. <ind> (ii) trucks, buses and trailers - braking systems for  trucks and buses are substantially the same.  Trailer systems  differ only in  that they have fewer components since the  compressed air supply for trailers is supplied by the main  truck system.   The trailer and truck systems must be  compatible.  21. <ind> (iii) actuation systems and components of actuation  systems - the parties argue that air actuation systems should  be regarded as a single product market on the basis that the  competitive conditions for each component in the system do not  differ significantly, and that brake system manufacturers focus  their marketing effort on the supply of complete systems.  It  is understood by the Commission that companies with a full  system capability discuss and establish with their key truck  manufacturing customers yearly turnover targets and overall  quotas of that customer's brake business. Based on these  overall targets and quotas, prices and quotas are then agreed  for individual components such as air dryers, actuators and air  compressors.  The aim of the brake suppliers is to obtain as  large a share of each system as possible.  22. <ind> Not all suppliers of components for actuation systems  are able to supply the whole system, however, nor do truck  manufacturers necessarily buy an entire system from a single  supplier.  Many, if not most, equip their trucks with hybrid  systems built from the components of several different  manufacturers, and indeed may source the same part in the same  system from more than one supplier.  23. <ind> In particular, ABS, is generally considered as an  add-on product. In those systems in which it is present it may  represent between one third and one half of the overall cost.  24. <ind> The Commisssion acknowledges that manufacturers  expect component suppliers to have an overall know-how and  production capability regarding the air brake system as a whole  as well as the capacity to develop and offer complete air brake  systems and that in the future manufacturers may move to make  their procurement decisions increasingly on the basis of  systems. Nonetheless, the Commission considers that since, for  the time being at least, sales are made on the basis of  components, the relevant product markets are for individual  components rather than systems.  In any event, the conclusions  of the competitive analysis would be unchanged were it to be  made on the basis of complete systems.   25. <ind> (iv) OEM and aftermarket sales - identical JV  products are supplied both to original equipment manufacturers  (OEMs) and to independent resellers on the independent  aftermarket (the IAM).  Parts are not specially developed for  the aftermarket.  OEMs use the JV products for their production  of new vehicles and also as replacement parts on the  aftermarket (OES). Truck manufacturers can insist on being  supplied with replacement parts for OES use on the same terms  and conditions as can be obtained for OEM use, at least for the  lifetime of a model.  As such sales destined for OES use are  indistinguishable from OEM sales,  they form part of the OEM  market rather than a distinct market on their own.  26. <ind> Prices of parts sold to independent resellers are  much higher than to OEMs [Deletion].  The reasons given for the  differences include: lower volumes per customer than for OEMs;  the requirement for rapid delivery which necessitates  stockholding; marketing support; packaging; additional sales  personnel and technical training on maintenance and repairs. 27. <ind> For these reasons the conditions of competition for  OEM/OES sales are different from those for IAM sales, and the  two should be considered to be distinct markets.   <ind> Related products  28. <ind> The JV will also sell a number of "related products":  levelling control components, operating cylinders and clutch  servos.  For the purposes of the present case each of these  constitutes a relevant product market.  Since in any event the  operation does not raise doubts with regard to these products  in the common market, there is no need to assess whether they  form part of a wider product market.  29. <ind> The Commission has thus identified, for the purposes  of evaluating this operation the following relevant product  markets:    <ind> - <ind> components for air actuation systems   (including ABS) for commercial vehicles over 6 tonnes;  <ind> - <ind> air foundation braking systems for commercial  vehicles over six tonnes;  <ind> - <ind> levelling control components;  <ind> - <ind> operating cylinders;  <tab> - <ind> clutch servos;  <ind> - <ind> independent aftermarket sales of the above.   <ind> Geographic reference market  30. <ind> In Lucas/Eaton the Commission concluded that the  geographic reference market for braking systems is the  Community as a whole. This clearly applies in this case to the  OEM/OES products, with each of the parties selling to vehicle  manufacturers across the EC.  Both parties also sell to at  least one EFTA state and the geographic reference market may  thus be larger, extending to all of Western Europe.  This issue  can be let open because the conclusions of the competitive  analysis are the same in both cases.  31. <ind> The position in respect of the independent  aftermarket is more complex. While, as stated above, the market  for trucks is at least EC-wide, the distribution chain for  replacement parts appears to be more national with brake system  manufacturers frequently having national sales subsidiaries in  each of the larger Member States. Whilst there also  considerable variations in market shares between Member States,  this appears to be primarily due to a tendency to use a  replacement part of the same make as the original part. Thus a  brake manufacturer's share of the IAM in a particular Member  State depends largely on the strength of its historic sales to  the principal suppliers of trucks to that country.  Accordingly  the large variations in the IAM market shares of the parties  should not necessarily be interpreted as an indication that IAM  markets are national.  Moreover,  there are no differences in  the nature of the product sold in different Member States and  there would appear to be no barriers to cross-border purchases.  Nonetheless, the geographic extent of the IAM market can be  left open since it does not affect the conclusions of the  competitive analysis.    <ind> Dominance  32. <ind> The proposed JV will combine the parties' current  activities in air actuation systems, including ABS, for trucks,  buses and trailers. In addition, the JV will combine the  parties' interests in certain related products.  The  Commission's analysis is at the level of individual  components.  33. <ind> Air compressors - the JV will have a market share of  [Deletion] of the EC market for air compressors (valued at  around 45 million ECU), thereby taking it ahead of the current  market leader, Wabco, which has between [Deletion]. The only  other player on this market is Grau Bremse whose market share  is [Deletion - less than 10%] .  34. <ind> Brake actuators - (valued at around 95 million ECU),  the JV will have a market share of [Deletion - between 35 and  45%]   and Wabco one of [Deletion - between 35 and 45%].   The  other players on this market include Bosch with [Deletion -  under 20%], Grau Bremse, Neway Anchorlok and MGM Brakes.  35. <ind> Air dryers - (valued at around 25 million ECU), the  JV will have a market share of [Deletion - between 40 and 50%]  again reinforcing KB's market leadership.   Wabco, the next  largest player has [Deletion - between 20 and 40%], while  Haldex, a specialist company, has a share of [Deletion - below  20%] and Bosch [Deletion - below 20%].  Grau Bremse is also  active on this market.  36. <ind> ABS - (valued at around 120 million ECU).  AS  currently has [Deletion - minimal] sales although its own  system has been undergoing approval by certain manufacturers,  so it is likely that it would have entered the market on its  own in the near future.   The JV will have a market share of  [Deletion - below 25%], thereby remaining well behind Wabco  with [Deletion - over 50%] of the market and also behind Bosch  with [Deletion - below 25%]. Grau Bremse also operates on this  market.  37. <ind> On the basis of these figures, the parties' market  position for all the abovementioned components, except for ABS,  will be strengthened by the JV, and in respect of air  compressors and air dryers the JV will be the market leader.   However Wabco remains a significant player on all the markets  concerned. Bosch is a major competitor on the ABS market and is  also present on the markets for brake actuators and air dryers.   Grau also supplies all the main actuation system components  although it specialises in the trailer segment.  Gau is a  subsidiary of a large US corporation, ECHLIN Inc.  Finally  there are certain other specialist component suppliers such as  Haldex for air dryers.   38. <ind> Notwithstanding the fact that competition occurs  primarily at the level of individual components, full-range  suppliers will wish to sell as much volume of as many  components as they are able to when negotiating and so will  have an incentive to price all components at a competitive  level, in order to offer the best price overall.  <ind> Considering air actuation systems as a whole (including  ABS), the operation will give the JV an estimated market share  of [Deletion - between 30 and 40%].  Wabco has a market share  of [Deletion - between 40 and 50%] and Bosch one of [Deletion -  under 20%].  Thus Wabco remains the market leader overall.  The  parties, however, though,  the JV will become a more equal  competitor.  39. <ind> The suppliers are dependent on a relatively small  number of European truck manufacturers, five of whom account  for over 90% of total Western European production. These  manufacturers are extremely knowledgeable and price sensitive.    Moreover, as a result of the decline in production which has  taken place in the market over the last three years, there is   a trend for manufacturers to reduce the number of their  suppliers and to increase pressure on their remaining suppliers  to cut costs, increase productivity and invest in R&D.  40. <ind> The suppliers are also aware that truck manufacturers  have at least the technical capability to design and develop  components while perhaps subcontracting production.  MAN  actually produces air compressors itself for one particular  line of trucks.  Alternatively, most of the truck manufacturers  questionned were confident that they could source at least the  less sophisticated components from suppliers outside Europe.  41. <ind> The various different categories of actuation system  and foundation brake products for vehicles of different types  frequently share certain common techology and manufacturing  processes.  Thus it is possible that price increases in one  sector or sub-sector will encourage players on neighbouring  markets such as truck foundation brakes or braking systems for  off-road vehicles to enter the truck air actuation systems  markets.  42. <ind> Innovation in this sector is taking place primarily  in the field of electronically controlled braking systems,  incorporating ABS.  The latter is increasingly required by  national and EC legislation for trucks and buses.  Wabco is  currently the recognised market leader, its system having been  approved by almost all of the major truck manufacturers and a  large proportion of the bus and coach builders. Bosch's system  is also more established than that of KB, although the latter  has been making inroads into its competitors' market share  since its introduction in 1991.  43. <ind> Truck manufacturers thus expect their suppliers to be  capable not only in ABS but also in the emerging "brake by  wire" technology which is expected to become available on the  market from late 1995.  As such, expertise in both is essential  for competitive survival.  Bosch has expertise in depth in the  automotive electronics sector  and a high reputation for  innovation.   In addition, Wabco has the critical mass  necessary to support sustained and extensive R&D spending on  new technology, in a way that the parties themselves consider  they could not justify.  Thus both Wabco and Bosch are in a  strong position vis-à-vis this new technology.   44. <ind> On the basis of these factors, and in particular the  strength of Wabco, the proposed operation does not create or  strengthen a single dominant position for the JV as a result of  which competiton would be significantly impeded on the common  market or a substantial part thereof.  45. <ind> The structural features of the components markets,  however, could indicate a situation of oligopolistic dominance.   In relation to air compressors, AS, KB and Wabco are currently  the only players, other than Grau whose presence is minimal.   For brake actuators, air dryers and for systems overall their  combined market share is [Deletion - over 75%], with the next  competitor having [Deletion - below 25%].  The JV will thus  result in two rather than three players having this share of  the market with the two players being more equal than was  previously the case. However, the factors referred to earlier  (the buyer power of truck manufacturers, potential entry and  the importance of innovation) are equally relevant in  addressing concerns of oligopolistic dominance in this  particular case.  Furthermore, the lack of transparency in  prices resulting from the fact that suppliers negotiate  individually with vehicle manufacturers, together with the  importance of non-price criteria (such as quality, delivery and  technical competence), means that overall coordinated behaviour  would be extremely difficult.  46. <ind> In the light of these factors the Commission also  concludes that the proposed operation will not lead to the  creation or strengthening of a position of oligopolistic  dominance as a result of which competition would be  significantly impeded on the common market or a substantial  part thereof.   <ind> RELATED PRODUCTS  47. <ind> The proposed operation will not lead to any increase  in market share in levelling control components since AS is not  present on this market. KB is the current market leader with  [Deletion - between 35 and 45%], followed by Wabco with  [Deletion - between 35 and 45%], The total value of this market  in the EC is around 18 million ECU, In respect of operating  cylinders, the market share increment will be minimal since AS  has [Deletion - below 10%] of the market, KB's current market  share is [Deletion - below 30%]. The value of this market is  around 9 million ECU. Finally with regard to clutch servos, a  market valued at around 14 million ECU in the EC,  the JV will  have a market share of 30-35%. Wabco remains the leader with an  estimated 55-60% market share.   48. <ind> On this basis and in the light of the arguments made  above in respect of air actuation system components, the  proposed operation does not create or strengthen a single or  oligopolistic dominant position for the JV as a result of which  competiton would be significantly impeded on the common market  or a substantial part thereof.   <ind> AIR FOUNDATION BRAKES  49. <ind> The parties estimate their combined share of the EC  free market for air foundation brakes to be less than 10 %,   Competitors on this market(s) include Lucas, Rockwell and  Perrot. In addition, in-house production by vehicle  manufacturers accounts for around one and a half times the size  of the free market. On this basis the proposed operation does  not give rise to any competitive concerns.   <ind> INDEPENDENT AFTERMARKET  50. <ind> Following the proposed operation, the parties  estimate their combined EC market share of overall IAM  replacement sales, valued at around 200 million ECU, will be  [Deletion - between 30 and 40%]. Wabco, the market leader in  this sector has a market share of [Deletion - between 50 and  60%], while Bosch has [Deletion - between 25 and 35%]. It  follows that while the degree of concentration on the market  concerned is significantly increased by the proposed operation,  it does not lead to a dominant position for the joint venture  on the EC market as a whole.  51. <ind> In France and the UK the estimated market shares of  the parties are [Deletion - between 40 and 50%],  and [Deletion  - less than 20%]  in Italy.  As stated above IAM sales tend to  follow OEM historical market shares. This will become less so  in future as a result of standardisation taking place under  national and EC legislation. These market shares are thus the  result of the historical competitive situation and would in any  case persist in the short term irrespective of the joint  venture.  52. <ind> In addition, it should be noted that the IAM accounts  for some 50% of overall sales of replacement parts.  Strong  competition comes from  parts sold through the OES network  which are identical. Component manufacturers' ability to raise  prices in the independent aftermarket is thus limited by the  price at which OES parts are sold through the vehicle  manufacturers' own concessionaires.  These prices, in turn,   reflect the buying power of truck manufacturers in the OES  market.  53. <ind> The parties also contend that there is strong  competition from recycled parts sold by independent  reconditioners.  This may be true although other component  suppliers have pointed out that users are  very sensitive as  regards product safety and potential product liability  problems.   54. <ind> In the light of these factors the proposed operation  does not create or strengthen a  dominant position on the  independent aftermarket for the JV as a result of which  competiton would be significantly impeded on the common market  or a substantial part thereof.   VI. <ind> FINAL ASSESSMENT  55. <ind> Based upon the above findings the Commission has come  to the conclusion that the proposed operation does not raise  serious doubts as to its compatability with the common market.  For the Commission,