ThyssenKrupp-Tata: Is the EU merger regime fit for purpose?

Old notes, up to date conclusions 

Working on the ThyssenKrupp-Tata Steel attempted joint venture I spent a lot of time thinking about market definition and how the case could inform the wider debate about whether the current European regulatory framework is fit for purpose for assessing mergers of big European companies that compete, or want to compete, on the global stage. 

For those of you (like me) that struggle to remember much about 2019, the basic facts of that debate were the following:

• in early February 2019 the Commission blocked the planned merger between Siemens and Alstom, dismissing the case put forward by the Parties for a global geographic market definition;
• only a couple of weeks later, the French and German governments (who had been loudly supporting the transaction throughout the merger review process) published a manifesto calling for – amongst other things – updating “the current merger guidelines to take greater account of competition at the global level, potential future competition and the time frame when it comes to looking ahead to the development of competition to give the European Commission more flexibility when assessing relevant markets”; and
• in the aftermath of that the Commission continued to defend their Siemens/Alstom block and the legal and economic anti-trust community raised various issues about how difficult it would be to implement such proposals.

The expression “Doubting Thomas” originates from Saint Thomas the Apostle, who gained fame by allegedly refusing to believe that the resurrected Jesus had appeared to the other Apostles until he could see and feel the wounds received by Jesus on the cross for himself.

The economist in the room always feels a bit like St Thomas ("show me the data"), and so I felt I could sympathise (albeit with limited information as I was not directly involved on the case) with the Commission when, defending their Siemens/Alstom block decision, they essentially said:

1.      we are right to be ‘Doubting Thomas’,

2.      we have looked for the wounds and there was no trace for them anywhere,

3.      we have therefore made the right decision, and

4.      all of this debate is therefore unnecessary.

But I challenged point 4 – that this debate is unnecessary – as I recognised that Siemens/Alstom was simply not the most relevant case around which to have an engaging discussion on this topic. The simple fact at the time was that China’s CRRC had yet to bid on even a single contract in the EU.

In the tk/tata deal the situation could have not been more different. China wasn’t just active in supplying steel to the EU, it’s imports were widely recognised in the industry as playing a decisive role in determining the EU steel price (the chart below, taken from the Decision, shows the lockstep movements in the basic price of steel between China and the EU). So there were numerous wounds on display, and yet the Commission still doubted. 

Of course correlation isn’t always causation – and much of the doubting in geographic market definition rests on that criticism. But take, as another example, Grain Oriented Electrical steel (GOES). This is a type of steel that is used in large power transformers, distribution transformers, power generators and electrical cores. It is:

• an homogenous product whose technical characteristics (which result in a range of different qualities) can be easily tested – i.e. if you can make the steel in such a way that electricity can travel fast and without getting lost within it, you are good (and numbers go beyond language barriers);
• it is a relatively expensive product, which means that transport costs do not play a crucial role;
• the market leaders (even for EU sales) are based in countries outside the EEA – mostly Japan, South Korea, China and Russia; and
• there is high and growing volume of both import and export trade in GOES between the EEA and the rest of the world).

To me, those looked like wounds not even just in the hands, feet and chest but all over the body.

And yet, despite all of this evidence, the Commission kept its concerns in the Grain Oriented Electrical steel all the way to the Statement of Objections stage in Phase 2 of the investigation making preliminary conclusions “towards an EEA dimension as regards the relevant geographic market definition for GOES”. At the end, the Commission did not keep its concerns in this product market in the final decision and, being it a block, they have benefitted from the possibility to remain silent on it and therefore we do not know whether the argument around the global nature of the market was the winning one. But even the fact that this type of steel made it to the Phase 2 Statement of Objections already shows that, in the most optimistic of cases whereby the concerns were dropped on the basis of a global market finding, the Commission had to be shown and feel the wounds for at least 8-10 months before accepting to believe their existence.

 And that is interesting because the EC merger guidelines do indeed say that it is right to start from a Doubting Thomas assumption – i.e. that the EEA geographic dimension can be used as an initial working hypothesis. But then they go on to say that it would be right to have the courage to believe otherwise, once evidence for a wider market is brought forward.

And the key to all this is exactly around that starting level of scepticism and how that affects the level of evidence required to change one’s mind. 

My experience suggests that the Commission is starting off being as sceptical as one can be, thinking that Europe is special and different from everywhere else in the world. And so requiring an incredibly high standard of evidence to change its mind. But it would be possible to remain a sceptic and still soften the position on global market definition considerably from its current puritanical outlook. This is something that, if there was policy will for it, would not require any amendments to the actual guidelines.

It would simply require a change in the mindset the Commission is in when assessing these cases – accepting that we are for sure special, but perhaps not quite as much as we would like to believe.