CELEX: 31996M0700
Language: en
Date: 1996-05-31 00:00:00
Title: Commission Decision of 31/05/1996 declaring a concentration to be compatible with the common market (Case No IV/M.700 - Emerson / Caterpillar) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

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31996M0700

Commission Decision of 31/05/1996 declaring a concentration to be compatible with the common market (Case No IV/M.700 - Emerson / Caterpillar) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)  

Official Journal C 195 , 06/07/1996 P. 0014

 COMMISSION DECISION of 31/05/1996 declaring a concentration to be  compatible with the common market (Case No IV/M.700 - Emerson /  Caterpillar) 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 To the notifying parties Dear Sirs, Subject :<ind> Case No IV/M.700  EMERSON/CATERPILLAR <ind> <ind> Notification of 24.04.96 pursuant to Article 4 of Council  Regulation No 4064/89 1.<tab> The above mentioned notification concerns the creation of a joint  venture between Emerson Electric Co. (Emerson) and Caterpillar Inc.  (Caterpillar) which will control and run F.G. Wilson (Engineering) Limited  (FGW), a wholly owned subsidiary of Emerson. I<tab> THE PARTIES 2.<ind> Emerson is an American company manufacturing a range of products  which can be classified into two main segments: commercial and industrial  components and systems such as industrial motors and machinery sold for  manufacturing and heavy commercial applications, and appliance and  constructionrelated components such as fractional horse power motors,  heating, ventilating, air conditioning components and tools. 3.<ind> Caterpillar is a USbased company mainly active in the design,  manufacture and marketing of construction, mining and agricultural  machinery, engines and the provision of financial products. 4.<ind> FGW, a whollyowned subsidiary of Emerson, is a British company  manufacturing diesel generator sets II<tab> THE OPERATION 5.<ind> Emerson will form a Limited Liability Company (LLC) incorporated  in Delaware (USA) to which it will transfer its subsidiary FGW.  Caterpillar will then purchase a 30% ownership interest in the LLC. 6.<ind> The LLC's only initial activity will be to own the entire issued  share capital of FGW. Also, the LLC will be granted a perpetual royalty  free licence to use the trademark for Caterpillar's Olympian brand diesel  generator set business. III. <tab> THE CONCENTRATION <tab> JOINT CONTROL 7.<ind> At the meeting of members, which is the LLC's equivalent to a  shareholders' meeting, each of Emerson and Caterpillar will hold a number  of votes corresponding to their percentage owner interest. Consequently,  Emerson will hold the majority of the votes at the decision making body of  the joint venture.  8.<ind> As regards decisions by the "meeting of members", unanimity is  required in decisions regarding the approval of the initial business plan,  the appointment and removal of the Chief Executive Officer (which has the  power to make all decisions related to the daytoday operations of the  company) and the amount of Additional Capital Contributions to be required  in any fiscal year as set out in any Annual Operation Plan. 9.<ind> Furthermore, for all other decisions which require a majority  vote, including those related to business plans and budgets for subsequent  years, Caterpillar has the right to be consulted.  If Caterpillar objects  to a proposal by Emerson a moratorium of 60 business days must be observed  to allow the parties to reach an agreement.  In the event that an  agreement cannot be found Caterpillar has the option, by means of a  "dispute call" mechanism established in the LLC Agreement to acquire the  entire Emerson's shareholding in the LLC at a price which will be  established by independent auditors taking into account the market value  of the joint venture at the moment of the dispute. 10.<ind> The "dispute call" option together with the other rights  mentioned in paragraph 8 will in practice allow Caterpillar to have veto  rights concerning major business decisions of the JV and consequently the  possibility to exercise a decisive influence.  Therefore, the joint  venture will be jointly controlled by Emerson and Caterpillar. <tab> AUTONOMOUS FULL FUNCTION UNDERTAKING 11.<ind> The joint venture will have its own resources and personnel and  will sell its own branded products on the market.  Although both parents  are present in upstream markets their sales to the JV account for only a  small percentage of its purchases.  The JV will therefore perform on a  lasting basis all the functions of an autonomous economic unit. <tab> COORDINATION 12.<ind> Emerson has no generator set business outside FGW and will not  retain any generator set business following the transaction. Caterpillar  has an independent generator set business which it will retain. Given the  Emerson's lack of its generator set business, there is no scope for  coordination of the competitive behaviour of Emerson and Caterpillar in  the joint venture's product markets.  As stated above (see paragraph 11)  both parents are also present in upstream markets of the JV.  However,  Emerson and Caterpillar manufacture different type of components.  Emerson  carries activities in upstream markets related to the manufacture of  alternators and switching gears through its subsidiaries LeroySomer and  Asco, while Caterpillar manufactures engines.  Therefore there is not an  overlap of the JV's parents activities in upstream markets. 13.<ind> The creation of the JV will therefore be a concentration since  FGW is an autonomous full function undertaking which will be jointly  controlled by its parents,  Emerson and Caterpillar, and the creation of  the JV will not give rise to the coordination of the activities of the  parent companies neither in the relevant markets of the JV nor in any  upstream, downstream or neighbouring markets. IV. <tab> COMMUNITY DIMENSION 14.<ind> Both Caterpillar and Emerson have an aggregate worldwide turnover  of more than ECU 5 billion each (Caterpillar : 12,287 million Ecu; Emerson  : 7,767 million Ecu). Moreover, they have each Communitywide turnovers  exceeding ECU 250 billion. Neither Emerson nor Caterpillar have more than  twothirds of their respective EU turnovers in one and the same Member  State. The notified operation therefore has a Community dimension. V.<ind> COMPATIBILITY WITH THE COMMON MARKET <tab> PRODUCT MARKETS 15.<ind> FGW manufactures and supplies only one product, namely diesel  generator sets ("diesel gensets").  A diesel genset is in essence a  standalone electricity generator powered by a diesel engine. <ind> Diesel gensets range in size and power output from 1 kVA to over  7500 kVA and are manufactured by assembling the components (of which the  most important are a diesel engine, alternator, switching gear and  assorted control systems) on a platform.  The assembled unit is often  enclosed in a casing which can be soundproofed (by the manufacturer adding  sound attenuation materials to the casing).  Where no bulk fuel supply is  available, diesel oil tanks will also be added allowing the diesel genset  to be operated in locations where there is no regular supply of diesel  oil. 16.<ind> Diesel gensets may be used to generate electricity either on a  continuous mode or intermittently.  The different modes in which they may  be operated, which are effectively related to the frequency and intensity  with which they are used are the following : <tab> i)<ind> standby : intermittent use for example as an emergency  source of electricity <tab> ii)<ind> peak shaving : intermittent use but at regular intervals  which are known generally in advance <tab> iii)<ind> prime power : this is the case of frequent use of supply  of intermittent emergency electricity which occurs where the local  electricity supply grid is unreliable <tab> iv)<ind> baseload : the diesel genset is the user's only source of  electricity and it is used to provide continuous power. 17.<ind> The parties submit that the diesel genset market would be most  appropriately viewed as a single relevant product market since on the one  hand a basic diesel genset can be used for both continuous and stand by  power applications and, on the other hand, the power of the output is  based on individual customer's specific requirements. 18.<ind> However, the parties also acknowledge that despite the fact that  all diesel gensets have a multipurpose functionality, diesel gensets of a  certain size are nevertheless predominantly purchased for similar uses in  different areas of the world and that theconditions of competition may  vary somewhat over different segments of this single product market.   Based in the intended use by the client and also on the type of engine  used the parties submit that the whole market for diesel gensets can be  divided in four segments : under 150 kVA (KilovoltAmpères) 151  1000 kVA 1001  2500 kVA over 2500 kVA  19.<ind> The parties have submitted that a different type of segmentation  is used <tab> namely for customs purposes.  For instance, the Community CN  codes for diesel genset are based on the following segments : 175 kVA;  76375 kVA; 376750 kVA; over 750 kVA. <ind> However, the notifying parties consider that the CN codes are based  on an arbitrary segmentation of the market and do not correspond to either  manufacturer's operating considerations nor any identifiably different  customer applications nor any particular feature or characteristic of the  diesel engines and components. 20.<ind> The investigation which has been carried out among the main  competitors of the parties within the EU did not allow the Commission to  reach a definitive conclusion on this matter. For instance, some view the  diesel genset market as a single product market, others consider that a  segmentation should be made between diesel gensets under and above 2500  Kva and that for this last segment diesel gensets would be in competition  with gas turbines.  Finally, there was also indications that the  segmentation should instead be made between gensets under and above 1000  Kva. 21.<ind> The majority of the competitors which were contacted also submit  that the diesel genset market was part of a wider market for power  generation which will also include portable (mobile) diesel, gasoline or  dual fuel gensets at the lower end and gas turbines at the upper end. 22.<ind> FGW does not manufacture neither portable gensets nor gas  turbines.  Furthermore FGW does not have a significant activity in the  segment above 2500 Kva (see below) where according to the information  gathered diesel gensets could be in competition with gas turbines.   Therefore the assessment of the notified concentration will be limited to  the activities of the joint venture which are exclusively limited to the  production of stationary (non portable) diesel gensets up to 2500 Kva  since FGW activity related to the upper segment (above 2500 Kva) is not  significant. 23.<ind> For the purposes of this case, it is not necessary to reach a  definitive conclusion concerning the relevant product markets and  therefore this issue may be left open since even on the assumption of the  narrowest market definition based on the segmentation proposed by the  parties the notified operation will not raise competition concerns. <ind> GEOGRAPHIC MARKETS 24.<ind> According to the parties the relevant geographic market is at  least Communitywide considering the following elements : <tab> <ind> All diesel genset manufacturers undertake their manufacturing  operations at a few locations throughout the world and export from these  locations to many different countries. <tab> <ind> There are no legal or regulatory barriers to trade between  Memberstates.  The Machinery Directive provides that diesel gensets  manufactured in conformity with the regulations applicable in one Member  state and the health and safety standards set out in the directive  benefits from the principle of free movement of goods through the  Community. <tab> <ind> Transport costs represent only a small percentage of  manufacturing costs and of the final sales prices. <tab> <ind> The pattern of distribution in the EU varies significantly  among manufacturers.  In principle manufacturers use three different  channels : direct sales from factory; establishment of a sales subsidiary  or sales through independent distributors. <tab> <ind> It is not absolutely necessary to be physically established  either through a subsidiary of through an independent dealer to do  business in a country within the EU.  Customers very often acquire  directly from the factory and for the after sales service rely frequently  on the servicing of parts manufacturers' such as those providing engines,  alternators, etc.  When technical service is required from the  manufacturer normally a team from the headquarters travel abroad to  provide these services. <tab> <ind> Imports account for a significant part of sales within the EU.   In 1993, 17.745 units (all segments included) were imported which  represents about one half of total deliveries within the EU.  For 1994,  10.658 units were imported (about 1/3 of total deliveries). <tab> <ind> [Deleted business secret] 25.<ind> The majority of the parties' main competitors within the EU which  have been contacted indicated that the geographic scope of the market is  worldwide.  However there may exist some degree of differentiation of the  conditions of competition between major geographic areas which could be an  indication that the markets are narrower than worldwide in scope.  For  instance, the parties in their business plan consider three main  geographic areas namely the Americas, Asia and the area which comprises  Europe, Africa and Middle East.  It may also be noted that the importance  of establishing a distribution network is greater in the USA than in other  parts of the world.  Finally, it deserves mention the fact that Cummins,  the second largest diesel gensets producer worldwide has only a very  limited presence in the EU which fact could be interpreted as an  indication of a market narrower than worldwide as penetration rates of  main competitors within different major geographic areas may be  substantially different. 26.<ind> However, for the purpose of the present case the exact  determination of the geographic scope of the diesel genset market can also  be left open since even if the analysis is carried at the level of the EU  which is, according to the parties and all their main competitors, the  narrowest geographic scope to be taken into account, this concentration  will not create or reinforce a dominant position within the EU. <tab> COMPETITIVE ASSESSMENT 27.<ind> FGW has no significant activities in the upper segment of the  market (diesel gensets over 2500 kVA). Therefore only 3 segments of the  overall diesel genset market are affected by this concentration namely the  segment below 150 kVA and those comprised between 1511000 kVA and 1001  2500 kVA. 28.<ind> The size of the world market for the diesel genset industry up to  2,500 kva was estimated to reach in 1995 a value of about US$ 5.3 billion,  of which US$ 1.9 billion for the segment below 150 kVA, US$ 2.5 billion  for the segment comprised between 151 and 1,000 kVA and US$ 900 million  for segment 1,0012,500 kVA.  The volumes shipped worldwide were  respectively 220 thousand units for the lower segment, 68.5 thousand units  for the middle segment and 7.1 thousand units for segment 1,0012,500 kVA. 29.<ind> Taking into account the value of the shipments, the main players  worldwide were in 1995 Caterpillar ([Deleted market share  between 10 and  15 %] market share), Cummins  [between 5 and 10 %], FG Wilson [between 5  and 10 %] and SDMO, Kohler and Denyo with about [less than 5 %] each.   There is low concentration in this market as the total market share held  by the six most important players does not exceed 35%.  Combined market  shares of Caterpillar and FG Wilson in 1995 amounted to [between 15 and 20  %], and Caterpillar has thus reinforced its position as worldwide leader  of this market but it will not be in a position to significantly imped  effective competition worldwide (see below). 30.<ind> The total EU market for diesel gensets up to 2,500 kva in 1995  was about 518 million Ecus (US$ 678 million) which represents less than  15% of the total world market.  For the same year, the combined market  shares of FG Wilson and Caterpillar, based on the value of the shipments,  all relevant segments included, reached [less than 25 %] (FG Wilson  [between 10 and 15 %], Caterpillar [between 5 and 10 %]. 31.<ind> Within the EU, combined market shares were [ less than 20 %] for  the lower segment (FG Wilson [between 15 and 20 %]; Caterpillar [less than  1 %]); [ less than 20 %] for the middle segment 1511,000 kva (FG Wilson  [between 10 and 15 %]; Caterpillar [between 5 and 10 %]) and [between 20  and 25 %] for the segment 1,0012,500 kva (FG Wilson [less than 5 %];  Caterpillar [between 15 and 20 %]).  Caterpillar and FG Wilson together  will be the most important player within the EU in all the relevant  segments of the diesel genset market up to 2,500 kVA and consequently for  the whole diesel genset market below 2,500 kVA.  However, a significant  number of important competitors will be present in each segment.. For  instance, the french undertaking SDMO will remain the most important  competitor of the parties within the EU and will be present in allrelevant  segments of the market with market shares comprised between 5% and 10%.   For the lower and middle segments another important competitor will be the  german firm Kirsch with market shares which are estimated to be above 5%  for each of these two segments.  Finally, in what regards the middle and  in particular the upper segment the German undertaking MTU, which belongs  to the Daimler Benz group will also be an important competitor. 32.<ind> Both worldwide and in the EU there are a great number of players.   In the EU alone there are more than 200 diesel gensets manufacturers.  All  the large players in the EU market are active at an international level  and most of them sell worldwide.  Even some small players can export and  maintain a significant international activity. 33.<ind> Entry barriers are very low.  The basic technology is widely  known and the supply of main components such as engines and alternators is  widely available.  Although some players among which the parents of the  joint venture are also present in upstream markets such as the manufacture  of basic components (engines, alternators, switching gears, etc.), there  are a number of independent suppliers.  For the supply of diesel genset  engines there are the manfuacturers of truck and van engines, such as Mack  and Mercedes, and also manufacturers of industrial engines such as Lister,  Lombardini and Perkins.  With regard to the supply of alternators, there  are several independent suppliers such as Marathon, MeccAlte and Syncro. 34.<ind> The proposed concentration will not create or reinforce a  dominant position neither at worldwide level nor within the community.   Although the new entity will be the market leader in both cases, combined  market shares will not in any circumstance exceed 25%.  Furthermore, there  are a great number of players in each relevant segment, a number of  important independent suppliers of main components, and low barriers to  entry as well as strong competitors being some of them part of diversified  industrial groups with substantial financial resources. <tab> VI<tab> CONCLUSION 35.<ind> Based on the above findings, the Commission has come to the  conclusion that the proposed concentration does not raise serious doubts  as to its compatibility with the common market and the functioning of the  EEA Agreement. 36.<ind> For the above reasons, the Commission has decided not to oppose  the notified operation and to declare it compatible with the common market  and with the functioning of the EEA Agreement. This decision is adopted in  application of Article 6(1)(b) of Council Regulation No 4064/89. <tab> For the Commission,