CELEX: 31994M0368
Language: en
Date: 1994-01-17 00:00:00
Title: COMMISSION DECISION of 17.01.1994 declaring a concentration to be compatible with the common market (Case No IV/M.368- SNECMA / TI) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)

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31994M0368

COMMISSION DECISION of 17.01.1994 declaring a concentration to be compatible with the common market (Case No IV/M.368- SNECMA / TI) according to Council Regulation (EEC) No 4064/89 (Only the English text is authentic)  

Official Journal C 042 , 12/02/1993 P. 0000

 COMMISSION DECISION of aaa declaring a concentration to be  compatible with the common market (Case No IV/M.368- SNECMA /  TI) 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 parties Dear Sirs, Subject: <tab> Case No. IV/M.368 - SNECMA / TI  <tab>  <ind> Notification of 9.12.1993 pursuant to Article 4  of Council Regulation No. 4064/89  1. <tab> On 9th December  1993, Group SNECMA ("SNECMA") and TI  Group ("TI") notified jointly the creation of a new joint  venture company Messier-Dowty International Ltd ("MD") to which  the aircraft landing gear business of TI's Dowty  Aerospace  Division and SNECMA's Messier-Bugatti subsidiary will be  transferred.  2. <tab> After examination of the notification, the Commission  has concluded that the notified operation falls within the  scope of the Council Regulation No. 4064/89 and does not raise  serious doubts as to its compatibility with the common market.  I <tab> THE PARTIES  3. <tab> SNECMA is a large French group, active internationally  in the manufacture and maintenance of aircraft engines and  landing gear, and related areas.  4. <tab> TI is a UK-based specialised engineering group active  internationally in aircraft landing gear and other aircraft  components, engineered sealing systems and fluid carrying  systems.  II <tab> THE OPERATION  5. <tab> The parties will establish a new 50/50 holding company  called Messier Dowty International Limited (MD).  This company  will hold 90% of the share capital of Dowty Aerospace Landing  Gear Limited (the remaining 10 % being held by Dowty [Material  error:  read "TI".]), 80 % of the share capital of Dowty Canada  Limited (the remaining 20 % being equally held by Dowty  [Material error:  read "TI".] and SNECMA) and 90 % of the share  capital of ERAM SA, a subsidiary of SNECMA, the holding company  which controls Messier-Bugatti (the remaining 10 % being held  by SNECMA).  Dowty Aerospace Landing Gear Limited, Dowty Canada  Limited and ERAM SA have been previously restructured so as to  be active only in the design, production and sale of landing  gear.  III <tab> JOINT VENTURE  6. <tab> The equity of MD will be held equally.  TI and SNECMA  will each have equal voting rights.  Any further contribution  of finance of any nature to MD will be made by each of the  parties in the same amount, at the same time and on the same  terms.  7. <tab> The Board of directors of MD will have responsibility  for running the business.  It will be composed of eight  directors of whom four will be nominated by TI and four by  SNECMA.  The first eight directors have nevertheless been  mutually agreed by the parties.  The Board will take its  decisions by simple majority vote.  If the parties are not  represented at a meeting by an equal number of directors, one  of the directors nominated by the party represented by the  fewest directors will have additional votes so that each party  have an equal number of votes.    8. <tab> [Future appointment of the Chairman confirms joint  control.]  9. <tab> The top management of MD will consist of a Chief  Executive, a Managing Director, a Finance Director and a Deputy  Finance Director who do not need to be members of the Board.  [The way they are appointed confirms joint control.]  10. <tab> In practice, it will be MD which will take  operational decisions and not the operating subsidiaries.  In  any case, the minority interests retained by each of the  parties in the operating subsidiaries are balanced.  Furthermore, they will not operate as independant voting  interests because, unless the board of MD decides otherwise,  each party will exercise its votes in the same manner as the  votes exercised by MD itself.  In addition, the parties have  agreed that neither will exercise its votes in the operating  subsidiaries without first consulting the other.  IV <tab> CONCENTRATIVE JOINT VENTURE  A <ind> Joint venture performing on a lasting basis all the  functions of an autonomous economic entity  11. <tab> MD will be a full self-financing entity with its own  research and development, design,  manufacturing, marketing,  sales and product support capabilities.  All the necessary  intellectual property rights will be assigned or licensed to  it.  MD will have the possibility to contract for the supply of  certain components from the parent's other business but these  components can be obtained from a number of alternative  suppliers.  In addition, these components currently represent  only 5 % of the sales value of the landing gear.  Finally, with  respect to certain services rendered by the parents or the use  of certain premises, the relationships will be regulated by  specific contracts in order to guarantee the independance of  MD.  MD has been created for an indefinite period of time  B <ind> Absence of coordination  12. <tab> The parties will transfer all their landing gear  business to MD.  The only exception will be the [Deleted  business secret] which will be transferred gradually for  practical reasons and will act as a subcontractor to MD in the  meantime.  TI and SNECMA have undertaken not to compete with MD  in the landing gear business.  In the case of an acquisition by  TI or SNECMA of an undertaking partially involved in the  landing gear business, the acquiring party will offer the  competing business to MD at a price equivalent to the price  paid.  It can therefore be concluded that SNECMA and TI have  withdrawn from the landing gear business with no realistic  prospect of reentering it.  13. <tab> The parties remain active in three principal  businesses related to landing gear : repair and overhaul,  wheels and brakes and certain hydraulic components.  Repair and  overhaul is a separate activity carried out independently from  the manufacturing and supply of original equipment.  It  involves different customers (the airlines) and competitors  (major airlines, independent companies).  The same applies for  wheels and brakes which in addition involve different  technology and require separate certification procedures.   Finally, hydraulic components are very often supplied  independently of the landing gear, at the discretion of the  aircraft manufacturer.  In the case of the parties, only 5 %  for SNECMA and 15 % for TI by value is supplied to their  respective landing gear businesses.  14. <tab> It follows from the above that the joint venture will  not result in the coordination of the competitive behaviour of  the parties.  V <tab> COMMUNITY DIMENSION  15. <tab> The enterprise concerned have a combined aggregate  worldwide turnover in excess of 5.000 million ECU.  Both SNECMA  and TI have Community-wide turnover in excess of 250 million  ECU, but do not achieve more than two-thirds of this turnover  in one and the same Member State.  Thus the operation has a  Community dimension.  VI <tab> THE RELEVANT MARKET  A <ind> The relevant product market  16. <tab> The proposed concentration affects the aircraft  landing gear market.   17. <tab> The landing gear of an aircraft forms part of the  structure of the aircraft. There are three principal components  of a landing gear system: nose gear, main gear and, if required  on large aircraft, centreline.  Each of these differs in design  and role from the others.  Their combined function is to enable  an aircraft to move on the ground, to take off and to absorb  impact on landing.  18. <tab> Landing gear is designed, developed and manufactured  on an application specific basis for each type of aircraft, no  two types of aircraft have identical landing gear.   Accordingly, landing gear is manufactured across a spectrum of  sizes  depending on a nomber of factors, principally the size  and weight of the aircraft.  19. <tab> Given these characteristics of landing gear, there is  no substitute for landing gear in a functional sense.  Further,  although at the design stage different solutions may be  proposed, once the aircraft manufacturer has awarded the  original equipment manufacturer a contract for the landing gear  for an aircraft model, there is effectively no substitute for  the landing gear for that particular model.  Normally the  landing gear manufacturer will be contractually committed to  supplying spare parts for the useful life of the aircraft.  20. <tab> As the design and manufacture of landing gear are  necessarily tied to the particular aircraft for which they are  supplied, the aircraft manufacturer will have a substantial  input in the design and development of the landing gear.  The  landing gear market is divided into two customer segments,  civil and military.  Both customer segments are highly  concentrated, there being three major civil customers, and one  major miltary customer, the US military (see below under  section VII).  B <tab> The relevant geographic market  21. <tab> The market for landing gear for civil applications is  worldwide.  The aircraft manufacturers commission and purchase  civil aircraft components world-wide and in a single currency  (US $).  For example, Menasco, one of the world's major landing  gear manufacturers, has been chosen to supply the landing gear  on the Fokker 100/130, and Messier-Bugatti has recently  obtained a sub-contract for the Boeing 777 through Menasco.   The global nature of the aircraft manufacturer's businesses is  also reflected in the operation of aircraft of multiple origin  by each of the world's major airline companies.  22. <tab> With regard to the market for landing gear for  military applications, purchases are influenced by nationality  considerations.  Markets for defence-related  equipment within  and outside the Community tend to remain closed to foreign  suppliers and therefore remain national where a domestic  supplier exists.  However, where there is no domestic supplier,  then, subject to other barriers such as export restrictions and  national preferences, military landing gear suppliers compete  with each other worldwide.  VII <tab> COMPATIBILITY WITH THE COMMON MARKET  A <tab> Market position of the joint venture  23. <tab> The estimated market shares of the global landing  gear market (both civil and military applications) in 1993 if  the concentration had already been put into effect are as  follows :  Supplier <tab> Units % <tab> Value % MD [* ] <tab> ... <tab> [less than 30%] CPC (US) <tab> ... <tab> [less than 40%] Menasco (US) <tab> ... <tab> [less than 25%] Others <tab> ... <tab> [less than 20%]  Total <tab> 100% <tab> 100%  [* MD's market share may vary somewhat according to the extent  to which the degree of "dressing" of landing gear is taken into  account; if "dressing" is excluded, the unit and value  percentage may be estimated at {business secret} and  {business  secret} respectively.  The highest estimation of MD's 1993  market share of which the Commission is aware is about  {business secret} (on a value basis).]  (The units calculation has been weighted according to the  physical weight of the aircraft for which the landing gear is  supplied in order to take into account the greater size and  complexity of landing gear units supplied for larger  aircraft).  24. <tab> A separate examination of 1990-1993 market shares by  EU Member State for military applications only, reveals the  continuation of national buying preferences, Messier-Bugatti  and Dowty being predominant in France and the UK respectively.  However the concentration will not lead to any overlap in any  single Member State, since the military application sales of  Messier-Bugatti and Dowty throughout the EU have been in  different Member States.  25. <tab> It should be noted that market share figures for  products such as landing gear should be viewed in the  perspective of the long product life-cycles of the aircraft  manufacturing industry (see below).  Most of the available  landing gear business for the next 3 or more years is already  determined by existing contracts which have already been won by  competitive tender.  Future competition will be for new long- term contracts for new aircraft-specific landing gear units and  existing market shares may only be a rough indicator of the  relative competitive strengths of companies which will  bid for  those new contracts.  B <tab> Evaluation of the competitive situation  (i) <tab> Supply - demand relationships  26. <tab> The major aircraft manufacturers normally manufacture  the aircraft fuselage and wings themselves, then buy the  landing gear, engines, and electronic and other operational  systems, from outside suppliers, and assemble the final  product.  As already stated, the aircraft manufacturing  industry is characterised by long product life-cycles.  A  particular model of aircraft (eg. a boeing 737) once designed,  manufactured and launched successfully on the market, may have  a life-cycle of ten to twenty years. Further, as stated  earlier, a landing gear unit is designed, developed and  manufactured on an application-specific basis for each model of  aircraft; no two models have identical landing gear, the main  two variables being weight and volume (when retracted).  Thus a  landing gear manufacturer who obtains a contract for supplying  units for a new aircraft model will in turn be supplying a  specific product (and necessary spare parts) for the useful  life of the aircraft.  27. <tab> Competition in the landing gear market therefore  takes the form of competitive bidding for long-term contracts  to supply specifically designed units over the life cycle of a  particular aircraft.  The bidding process, from initial  studies, short-listing, formal invitations to tender, tender  evaluation, and contract award may take up to four years.  The  landing gear supplier to whom an aircraft-specific contract is  awarded may or may not choose to work in collaboration with  another supplier or to sub-contract work, in order to fulfill  the contract.  28. <tab> The relationship between aircraft manufacturers and  landing gear suppliers has in recent years become increasingly  characterised by "co-development" or even "co-makership".   Aircraft constructors will look to the landing gear supplier to  share the risk of a new model development by :  - <ind> bearing the whole of the landing gear supplier's own  fixed costs associated with the design, development and  production of the new gear, leaving those costs to be recovered  (it is hoped) out of subsequent sales by the landing gear  supplier linked to successful sales of the aircraft over its  useful life.  - <ind> making a positive contribution to the development costs  incurred by the aircraft manufacturer - a sort of "launch aid"  recoverable (again it is hoped) by the landing gear supplier  through a fixed payment by the aircraft manufacturer to the  landing gear supplier per aircraft subsequently sold.  29. <tab> The aircraft constructor may adopt a "target pricing"  system, which consists of analysing what the customer (the  airline operator) is willing to pay compared to competitors,  and then working backwards together with landing gear and other  key component suppliers, to cost every component so that the  aircraft can be profitably sold at the target price.  30. <tab> It seems reasonable to assume that in such a  situation a particular aircraft constructor will prefer to form  close long-term relationships with a smaller number of large  (though still inter-competing) landing gear suppliers, since,  given the high development costs and long product life-cycles  involved, this will be more cost-efficient than a procurement  policy based on inviting competitive bids from a larger number  of financially and technologically weaker suppliers, who may be  unable to share development risks, or guarantee supplies of  units and spares over the useful life of a particular  aircraft.  31. <tab> This is confirmed by the answers supplied to the  Commission by the large aircraft manufacturers which have not  expressed complaints about the concentration, and in some cases  have even expressed a favourable opinion.  Furthermore, the  manufacturers have strongly suggested that the concentration is  likely to augment the rate of technical innovation, which is of  great importance in the aeronautical sector.  32. <tab> It may be noted that the "co-makership" tendency does  not seem to extend further up the manufacturing chain to the  relationship between Dowty and Messier-Bugatti on the one hand,  and their component suppliers on the other.  Both Dowty and  Messier-Bugatti procure components from a wide range of  suppliers, none of whom depend to a large extent on their sales  to either Dowty or Messier-Bugatti.  Moreover, only one of  these suppliers is common to both companies.  Therefore no  supplier will be dependent on its sales to the new joint  venture.  (ii) <tab> Supply structure  (a) <tab> Actual competition  33. <tab> As indicated by the market shares given above, MD  will have about [Less than 30%.] of the global landing gear  market.  As such, it will be in a position roughly equivalent  to the two major US-based suppliers, Menasco Aerospace Ltd and  Goodrich Aerospace Cleveland Pneumatic Corporation (CPC), who  are currently seeking to extend their geographic spread  (particularly in Europe) and extend the range of their landing  gear downwards to commuter and regional aircraft (for example,  in 1990 Menasco gained the contract for the Fokker F100/130  displacing Dowty which had traditionally supplied Fokker  landing gear).  The British company AP Precision Hydraulics  (with about [Less than 10%.] of the global market) also now  supplies the full range of landing gear from large civil  aircraft to military. At the smaller end of the market, other  significant competitors are Magnaghi (Italy) and Servo  Hydraulic Lod (Israël)  (b) <tab> Potential competition  34. <tab> New entry into the landing gear market frequently  occurs in stages.  For example, a company may start by  manufacturing under licence arrangements or as a sub-contracor  for landing gear components, and, with the benefit of the  experience, begin to compete as a prime contractor for  subsequent projects.  35. <tab> For example, Sumitomo, the Japanese landing gear  manufacturer, began by making landing gear under licence for  Japanese military aircraft in 1956.  It subsequently  manufactured civil and military landing gear for Japanese  aircraft.  In 1986, on the basis of its accumulated experience,  it bid for the first time as a prime contractor outside Japan  to make both the nose and main landing gear for the ATR 72.   This sort of leap forward could properly have been described as  new entry in that, as a prime contractor, the manufacturer has  full contractual responsability for the design and development,  must be geared up to supply all future spares and after-sales  services and must be able to write the detailed manuals  required by the ultimate customers and repair and overhaul  companies.  36. <tab> Several large aircaft manufacturers have indicated in  answers supplied to the Commission that they expect new landing  gear competitors to emerge in the medium to long term, in Japan  or Eastern Europe, for example.  (c) <tab> Oligopolistic market structure  37. <tab> Although the three largest landing gear suppliers,  MD, CPC and Menasco may be expected to account for some  [Between 75 and 85%.] of the global market (see table at 'A'  above), there would seem to be no possibility that the current  operation would increase the risk of oligopolistic dominance.   Actual competition between these three companies does not seem  likely to diminish, in view of the considerable buying power of  the major customers (see (iii) below) of the continuing  emergence of potential competition (see (b) above), and of the  non-transparent character of the competitive bidding process  for new long-term contracts (see (i) above).  Moreover, landing  gear systems, as already explained, are heterogeneous products,  specifically designed for specific aircraft models, and always  subject to a substantial degree of innovation over time.  (iii) <tab> Demand structure  38. <tab> There are approximately thirty aircraft constructors  world-wide.  However, three constructors -Boeing, Mc Donnell  Douglas and Airbus - account for approximately 80 %  by value  of all purchases of landing gear for civil applications.  The  US military alone accounts for [At least 70%.] by value of all  purchases of landing gear for military applications.  The  aircraft manufacturers are confident of their ability to  continue to be able to negotiate reasonable prices with their  landing gear suppliers.  The currently depressed state of the  civil air travel market, which is resulting in fewer orders for  new aircraft, may be expected to enhance the risk-sharing co- makership relationship between aircraft manufacturers and  landing gear suppliers as described above.  As far as the  military sector is concerned, as already stated at 'A' above,  even where national markets may continue to exist, th9e current  operation will not lead to any overlap in any single Member  State.  C. <tab> Conclusion  39. <tab> In view of the existence of strong actual  competition, of longer-term potential competition, of the  concentrated buying power of major customers' and the latters'  apparent preference for procurement policies based on long-term  contracts with fewer suppliers, it does not seem likely that  the concentration will create or strenthen a dominant position  as a result of which effective competition will be  significantly impeded in the common market.  VIII <tab> ANCILLARY RESTRAINTS  Conduct of business up to completion and tax affairs  40. <tab> TI and SNECMA respectively accept certain  restrictions on the conduct of Dowty and Messier-Bugatti's  activities which only apply prior to the completion of the  Formation Agreement setting up the joint venture.  TI and  SNECMA agree that the businesses of Dowty and Messier-Bugatti  will be conducted in the ordinary and normal course and that  their prior consent will be required for certain major  decisions or major changes in connection with these businesses.   Additionally, TI and SNECMA agree not to take actions  concerning pre-completion tax affairs which could adversely  affect the joint venture.  These provisions are necessary to  the implementation of the concentration, given the gap between  contract and completion.  Non-competition clause  41. <tab> As already mentioned, TI and SNECMA have undertaken  not to compete with MD in the landing gear business.  This  clause reflects the definitive withdrawal of the parties from  the market and can therefore be seen as a restriction directly  related and necessary  to the implementation of the  concentration.  Intellectual property rights and trade marks  42. <tab> According to clause 8.6 of the Formation Agreement,  the intellectual property rights owned by the parties which  have direct application to the landing gear business but can be  used for other business will be fully licenced to MD.  This  clause is intended to ensure the independence of MD and it  directly related and necessary to the implementation of the  concentration.  43. <tab> It can be considered that clause 8.4, which requires  MD to licence back to the parties the intellectual property  rights used exclusively for the landing gear business, is  covered by the present decision, insofar as the intellectual  property rights involved are used for purposes other than the  manufacture of landing gear.  The same applies to clauses 8.9  and 8.10.  Clause 8.8, which allows MD to use the trade marks  of its parents, is in line with Commission Notice of 14.10.1990  and can therefore be accepted.  Service agreements  44. <tab> According to certain clauses of the Formation  Agreement and other agreements certain administrative,  professional and commercial services will continue to be  provided to MD by the parties  Equally, MD will provide certain  limited services locally to its parents.  These services will  be regulated by specific contracts and will in most cases give  rise to a remuneration.  These clauses are intended to ensure  the independence of MD and are therefore an integral part of  the concentration.  Exclusive supply agreement [Deleted business secret.]  45. <tab> The exclusive supply agreement by which [Deleted  business secret.] will act as a sub-contractor of MD for the  production of landing gear reflects the withdrawal of the  parties from the market.  It is therefore an integral part of  the concentration.  46. <tab> [Deleted business secret.]  IX <tab> CONCLUSION  47. <tab> It follows from the above that the proposed  concentration would not create of strengthen a dominant  position as a result of which competition would be  significantly impeded in the common market or in a substantial  part of it.  For the above reasons, the Commission has decided not to oppose  the notified concentration and to declare it compatible with  the common market.  This decision is adopted in application of  Article 6(1)(b) of the Merger Regulation.  For the Commission