Intercontinental champions and the case for reform

Neil Hodge

In February, the European Commission blocked the merger between Germany’s Siemens and France’s Alstom, prompting renewed calls for reform to help industry compete on a world stage. Global Insight assesses the decision, the fallout and whether Europe should finally embrace its ‘champions’.

It’s rare for a merger to become a ‘test case’ for the merits of creating a ‘European champion’ of industry to fend off challenges from American, Chinese and other competitors. On 6 February 2019 the European Commission blocked a deal that would have seen Germany’s Siemens acquire France’s Alstom and form such a ‘champion’ in the railway sector.

Both companies – described as global leaders by Johannes Laitenberger, Director-General of Competition at the Commission – said the deal was necessary to preserve the EU market for EU companies and to stave off competition from Chinese rivals.

But the Commission blocked the deal because neither party was prepared to make sufficient remedies to stamp out industry and consumer concerns over unfair competition.

The decision has prompted France and Germany to push for reform. Both countries want EU Member States to have a say in overriding Commission merger decisions. They also want a review of the EU’s stance towards fair competition in comparison to countries where industrial growth and innovation is strongly linked to state aid.

Insufficient remedies

The Commission described the proposed merger as raising serious concerns in two main areas: signalling systems and very high-speed trains. With regard to the former, the Commission’s key concern was the complexity and viability of the remedy package: the companies offered to divest an assorted mix of assets, transferring some, keeping others, and offering licensing arrangements, rather than making clear-cut asset transfers.

‘The merged company would have become, by far, the largest player in Europe and in some signalling markets there would be no competition left,’ said Margrethe Vestager,

the European Commissioner for Competition, in her statement on the deal.

As for very high-speed trains, the Commission thought the divestment package was insufficient because it did not allow for a competitor to develop a similar competing product.

The Commission opened an in-depth investigation in July 2018 to assess whether the merger would hamper competition within the EU and issued a statement of objections outlining its concerns about the deal at the end of October. Before reaching its decision, the EU’s executive body had reviewed more than 800,000 documents in just seven months.

Siemens and Alstom suggested late changes to their remedy package. For example, Siemens offered to license its high-speed train technology for a decade and sell some signalling units. For the Commission, these measures were only a ‘limited improvement which did not fully address the competition concerns’. It likened the tactic of delaying remedies to the last minute as a ‘poker game’.

What’s the criteria for a ‘European champion’?

In the week following the European Commission’s decision to block the Siemens–Alstom tie-up, Johannes Laitenberger, Director-General of Competition at the Commission, addressed calls to change the EU Merger Regulation by questioning what criteria the EU would need in order to have a ‘champion’. He listed seven considerations:

  • How can the EU define and examine the requirements that turn an undertaking into a ‘candidate champion’? Is a self-assessment sufficient? Is there a rule-based procedure or, at least, an accountable process? Is market power the decisive factor? Or rather, is it a specific ability to innovate?
  • How can the EU define the level of advantage that champions should benefit from and the corresponding level of disadvantage other economic operators in the Single Market, Member States and European society have to accept in the champions’ interest?
  • How can the EU make sure that the benefits champions are supposed to obtain will also benefit the EU as a whole and not only translate into shareholder value?
  • Is a change of law the best way to create a champion? Do other economic areas achieve higher competitiveness and better social inclusion through the softening of competition law or voluntary interventions in competition law? Which ‘champions’ promoted the public good in retrospect and which did not?
  • What is the benefit–cost ratio of a change in existing law compared to the consistent application of all the instruments available under the existing law?
  • How would any change in EU law affect the debate about the proper enforcement of competition law in the digital economy, where a recurrent complaint is an insufficient level of competition law and enforcement?
  • Would ‘power economics before market economics’ be the correct answer to the society-wide loss of confidence in the economy and its governance since the financial crisis? ‘During those years, the cost of liquidating alleged champions, which proved to be too big to fail, was not always borne by their owners and beneficiaries but by the general public,’ says Laitenberger.

The two companies’ argument that a European ‘champion’ is necessary did not persuade the Commission either. It found that despite China’s state-owned operator, CRRC, having a 90 per cent market share domestically, no Chinese supplier has ever participated in a signalling tender in Europe or delivered a single very high-speed train outside China. The Commission concluded that ‘there is no prospect of Chinese entry in the European market in the foreseeable future’.

Commissioner Vestager did concede that there’s a potential threat to EU companies from state-subsidised rivals from outside the EU. ‘Control of subsidies is weaker outside the EU and market access does not necessarily go both ways,’ she said. The EU is currently pushing the World Trade Organization (WTO) to strengthen the rules on subsidies, and has started a dialogue with China on the subject. The Commission also intends to identify before the end of 2019 how to fill gaps in EU law to address fully the distortive effects of foreign state ownership and state-aid financing in the Single Market.

In a joint statement, both companies said they ‘regret’ that the ‘extensive’ remedies offered were considered ‘insufficient’ by the Commission. Alstom added that the blocked merger was ‘a clear set-back for industry in Europe’.

The Commission’s decision does not prevent the two companies from attempting to merge again in the future, as long as they suggest ways of stripping away parts of their businesses so they do not have a dominant position in any market segment. Other companies have done this. Examples include BASF’s acquisition of Solvay’s nylon business; Gemalto’s acquisition by Thales; Linde’s merger with Praxair; GE Power’s acquisition of Alstom’s power generation and transmission assets; and cement firm Holcim’s acquisition of Lafarge in 2015. However, neither Alstom nor Siemens show the appetite to do so.

There is little point in taking strong measures to preserve a fair market in Europe for European players when other major economies like the US and China do not play by the same rules

Guy Harles
Co-Chair, IBA Corporate and M&A Law Committee

Matthew Hall, an antitrust/competition partner at McGuireWoods in London, is not surprised by the Commission’s decision. ‘It was always going to be difficult to push this merger through,’ he says. ‘Siemens and Alstom are the two biggest operators in a sector with only a small number of players, so in competition terms, this was always the most likely outcome in the absence of far-reaching remedies of the type which ultimately the parties were not willing to put forward.’

Alongside the scrapped Alstom–Siemens merger, the Commission also blocked Wieland’s proposed acquisition of Aurubis, which would have created a dominant player in Europe’s rolled copper products sector. The merged entity would have resulted in a company with more than a 50 per cent share of the European Economic Area market, while its nearest competitor, KME/MKM, holds only a 20 per cent stake. Rolled copper is used extensively in the automotive and electronics industries. Demand for these products is rising rapidly due to the growth of hybrid and electric cars, which use up to four times the amount of rolled copper than diesel or petrol engine cars. The Commission decided the merged entity would have easily resulted in market dominance and increased prices for European manufacturers.

For Berlin and Paris, the veto of the Alstom–Siemens deal underlines how the EU’s stringent competition rules are a relic of a bygone era. For them, it suggests the Single Market is at risk of being undercut within its own borders by non-EU rivals as a result.

Manifesto for the 21st century

Just days after the decision, the French and German governments jointly published their Manifesto for a European industrial policy fit for the 21st Century (the ‘Manifesto’). The Manifesto includes proposed changes to the EU’s merger control rules, including enabling the Commission to take a more ‘flexible’ approach in its assessment of competition issues by contrasting global, current and future market conditions. The Manifesto also proposes taking into greater consideration the state-control of, and subsidies for, undertakings within the framework of merger control, and allowing politicians in the Council of the European Union to override Commission merger control decisions in certain cases.

Hall believes that any attempt by France and Germany to change the rules around EU competition policy is going to be difficult to push through. ‘I doubt there will be much appetite among the rest of the EU Member States to change competition policy so that the likes of France and Germany can allow their companies to form “European champions” to ward off non-EU companies while strangling competition within the EU at the same time.

‘The argument about needing “European champions” has been around for a long time and it has never been successful, and nor is it likely to be so in future,’ he says. ‘As many observers have commented, the better way to ensure the development of world-leading

EU-based companies is to deepen and strengthen the EU Single Market and continue with strong competition policy enforcement as now.’

Hall believes there are other ways to ensure a level playing field worldwide for EU companies, such as implementing foreign direct investment (FDI) rules in a targeted way where national security is genuinely an issue.

Trading the benefits of competition for 500 million customers in the European Single Market for possibly better protection against China’s expansion is the wrong approach

Oliver Foerster
Board member, Globalaw

Others are similarly unconvinced by the ‘European champions’ argument, and even less convinced by France and Germany’s protests that there needs to be more political oversight of EU merger policy and decisions. ‘Big isn’t always beautiful,’ says David Amiach, a partner at French law firm Cohen Amir-Aslani. ‘The notion of creating European champions overlooks the fact that companies don’t need to dominate their domestic markets in order to hold their own in competitive international markets. China, furthermore, doesn’t have a share in the European rail market, and the competitive disadvantage of the two European companies is exaggerated.’

In Amiach’s opinion, ‘the Commission makes technical, economic and legal assessments on mergers – not statements of policy’. He also dismisses the notion that the Commission is ‘anti-merger’ in any way, noting that it has blocked fewer than 30 mergers since the EU Merger Regulation was adopted in 1989 and approved more than 6,000.

Amiach concedes that fears of unfair competition from players outside the EU may need to be checked. Other measures may have the desired effect, however, rather than creating giants within the EU. Amiach believes that ‘proponents and opponents of the [Siemens–Alstom] decision would agree to strengthen the EU competition framework with massive support in innovation investment, a foreign investment-screening framework and a reciprocity mechanism for public procurement with third countries, even though the real challenges lie beyond sole defensive instruments.’

Oliver Foerster, a board member of international law group Globalaw, also agrees that the Commission has acted correctly. ‘No facts have been made publicly available that indicate a breach of the rules by the Commission,’ he says. In his opinion, France and Germany’s complaints are ‘purely political arguments’ that should have no place in the Commission’s competition investigations for two main reasons. First, Foerster says, the Commission’s decisions would become unpredictable if based on politics, and second, frequently changing political views on market conditions would possibly harm customers in the long run.

‘Trading the benefits of competition for 500 million customers in the European Single Market for possibly better protection against China’s expansion is the wrong approach,’ says Foerster.

‘If Germany, France and the EU want to push back against China’s unfair trading practices, it seems more promising to reduce bureaucratic obstacles, support research and development, and make use of all available political and judicial channels, such as the WTO. The negotiations between the US and China will show whether China can be persuaded by other means than competition regulations to act within the framework of fair trading,’ Foerster says.

On 18 March, the European Political Strategy Centre, the European Commission’s in-house think tank, published a policy paper called EU Industrial Policy After Siemens-Alstom. It says that relaxing merger control, antitrust or state aid rules ‘presents no panacea to alleged weaknesses and competitiveness challenges of European industry’ and ‘carries significant risks… if this translates into authorising anti-competitive transactions’. It adds that relaxing conditions for the assessment of mergers, even if limited to a given case or sector, ‘would inevitably entail systemic consequences, limiting the European Commission’s scope to intervene against clearly anti-competitive transactions elsewhere’.

It also suggests that the Council being able to overrule competition decisions or allowing for non-competition considerations to play a decisive role in vetting mergers ‘would result in more opaque decisions, with fewer internal checks and balances, and imply an unfair arbitrage between benefits for specific companies versus costs accruing to consumers and workers elsewhere’.

One rule for the US

Guy Harles, Co-Chair of the IBA Corporate and M&A Law Committee and a partner in the Luxembourg office of Arendt & Medernach, says that ‘from a pure legal perspective, the Commission’s decision is in accordance with EU law and so is not surprising’.

However, Harles takes issue with the reasoning behind the Commission’s decision. ‘There is little point in taking strong measures to preserve a fair market in Europe for European players when other major economies like the US and China do not play by the same rules. While Chinese players may not be present in some EU industrial sectors at the moment, there is little doubt that in a few years state-backed Chinese companies will gain traction in the EU because they have the power to undercut European companies that do not have the benefits of state backing.’ Harles suggests that, for this purpose, EU merger rules should be reviewed and possibly relaxed.

There is nothing to prevent a Chinese operator from entering the market in three-five years, and because they are state-backed, they’ll have an unfair advantage

Philippe-Emmanuel Partsch
Partner, EU Financial & Competition Law practice, Arendt & Medernach

The Commission is aware of the advantages some global, non-EU companies have because of their governments’ benevolence. The French and German governments, for example, pointed out in the Manifesto that only five of the top 40 biggest companies in the world are European. The inference is that some of the other 35 companies are as large as they are due to ‘unfair’ government subsidies – through preferential contract awards, subsidies, tax breaks and so on.

On 17 April, the Commission launched a six-week public consultation on a preliminary list of US products the EU may take ‘countermeasures’ on – namely, additional import duties – in protest over the US government’s continued practice of providing subsidies to Boeing to fend off competition from its European rival, Airbus. A dispute over Boeing has been ongoing at the WTO, and on 11 April 2019, the WTO published its final compliance report on the matter. In this report, among other things, the WTO supported the EU position that Boeing benefits from an illegal tax concession granted by the US, already deemed an illegal subsidy earlier in the dispute.

The European Commission’s 11-page list includes products as wide-ranging as nuts, freshwater fish, wine, tobacco and polythene. Overall, the products under review represent around $20bn worth of US exports into the EU. At an earlier stage of this dispute in 2012, the EU made a request to the WTO to authorise the adoption of countermeasures worth up to $12bn. This was equivalent to the estimated damage caused to Airbus by US support to Boeing at that time.

Some experts believe that, in the face of such practices taking place in other major markets globally, the EU needs to take stronger action and revise its focus. Philippe-Emmanuel Partsch, partner in charge of the EU Financial & Competition Law practice of Arendt & Medernach, feels the European Commission’s priority to protect consumers is too focused on short-term considerations. ‘The Commission’s thinking is that if you have a lot of nationally strong players in the EU market, rather than a European champion, then you have a competitive environment that helps keep prices low for consumers,’ he says. ‘But that only works if you have control over non-EU rivals entering the same market, and the EU does not. There is nothing to prevent a Chinese operator from entering the signalling market in three to five years, and because they are state-backed, they will have an unfair competitive advantage, even in a foreign market.’

Neil Hodge is a freelance journalist specialising in legal and business issues. He can be contacted at

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