Fincantieri's shipbuilding 'European champion' may not float with EU regulator

Shipbuilders Fincantieri and Chantiers de l’Atlantique have all the hallmarks of a “European champion” in the making, but that may not help get their deal past the EU merger regulator.

EU competition chief Margrethe Vestager has made clear that her job is to determine whether a merger would harm competition at home in Europe, not whether it would help European companies abroad. European "champions" mustn't be built on the foundations of “undermining competition” in the EU's internal market, she said earlier this month.

A draft EU prohibition of the rail merger between Siemens and Alstom also bodes poorly for the shipbuilders, and shows that the European Commission is willing to shrug off political pressure and review deals strictly on the basis of EU competition law.

Fincantieri and Chantiers de l’Atlantique haven’t indicated that they’ll play the “European champion” card, but their similarities to Siemens and Alstom are impossible to ignore. They enjoy state patronage from major EU powers, employ thousands of workers, and develop advanced technology with military applications.

They’re also big players in a market with limited competition: The only other cruise-ship builder of a comparable size is Germany’s Meyer Werft. This means the combination of the Italian and French companies could leave cruise-ship operators such as Carnival with only two viable suppliers of supersized liners.

And, as with Siemens and Alstom, the evidence for looming Chinese competition in this market is patchy, at best.

The commission has already raised concerns about the merger. “The transaction could significantly harm competition in shipbuilding,” the EU regulator said on Jan. 8 in accepting the referral of the case from the French and German competition authorities.

Storied companies

French and Italian politicians are bound to bring pressure to bear on Vestager, citing the importance of these companies to jobs, the economy and national security.

Italy’s Fincantieri, the biggest shipbuilder in Europe, boasts a 239-year history, saying it has produced more than 7,000 boats since 1780. Its yards have launched vessels ranging from yachts to aircraft carriers.

Its merger partner is a long-standing rival, Chantiers de l’Atlantique, with a sprawling shipyard in Saint-Nazaire, on France’s Atlantic coast. Founded more than 150 years ago, this yard makes cruise ships, frigates and other military vessels.

Together, the companies have employed generations of local workers and today have more than 20,000 people on their payrolls. Entire economies are built around these manufacturers: Fincantieri says it has more than 5,000 suppliers in Italy alone.

Despite some initial reservations about giving the Italians control over the joint company, France ultimately embraced the deal, with Finance Minister Bruno Le Maire hailing it as the “creation of a Franco-Italian naval industry giant” and a “world champion.”

Three to two

Yet regulatory approval might stand in the way, particularly if EU case handlers focus on civilian cruise ships — as MLex indicated when Fincantieri won the bid two years ago.

Global cruise-ship building is “dominated” by three European companies, according to 2018 statistics from the Organization for Economic Cooperation and Development — Fincantieri, Chantiers de l’Atlantique and Meyer Werft. It won’t be easy for Vestager to accept a merger combining two of those three.

One justification the shipbuilders might offer to ease the deal’s passage is the need to facilitate the creation of a European champion to face down foreign competition, particularly from China, which has earmarked “high-tech shipbuilding” as a priority in its “Made in China 2025” strategy.

Citing the threat of rising Chinese competition is much in vogue these days, and not just in high-profile merger cases. It also underpinned the EU’s adoption of rules for screening foreign investments in strategic sectors.

Siemens and Alstom have leaned heavily on the threat of competition from CRRC, the world’s largest rail company, to justify their merger. The German and French governments have thrown their weight behind them, calling for the creation of a “European champion” with the scale and resources to compete against the Chinese threat.

Europe “can’t make the industrial decisions of the 21st century based on competition rules which were defined in the 20th century,” French Finance Minister Le Maire has said in his defense of the Siemens-Alstom deal.

Fincantieri, Chantiers de l’Atlantique and their respective government backers are poised to make similar arguments to support their shipbuilding deal.

Enter China?

Let’s suppose that China really is a looming threat to European shipbuilders. The question, then, is by how much and how soon? Are Chinese companies already able to enter the cruise-ship market — or might they do so soon? That is what matters to antitrust watchdogs.

Here, the evidence is mixed. China is actively promoting cruising to its burgeoning middle class, who have shown an eagerness to experience this type of holiday. And we know that shipbuilding ranks among the 10 “key sectors” on the “Made in China 2025” to-do list. Already, Beijing is gearing up to build cruise ships in its own yards.

The world’s fifth-largest cruise company, Chinese Genting HK, entered the cruise shipbuilding market in 2016 under the name MV Werften, buying three shipyards in Germany. And Fincantieri itself has struck a joint venture with state-owned China State Shipbuilding Corp. to build cruise ships in China for the local market.

That JV helps explain why French politicians are pushing the European champion argument so hard. They worry that CSSC will just use the venture to gain access to valuable know-how and training, only to emerge as an independent competitor later.

The shipbuilders might try arguments similar to those we’ve heard for rail: Namely, that Chinese state-backed company, buoyed by generous loans and a lenient competition policy at home, can take over a market in a flash.

But when?

The counterargument is that European companies today have a lock on the global cruise-ship industry, and foreign competition isn’t nipping at their heels. Together, European manufacturers command at least 60 percent of this market, with some customers saying their share is even higher.

The joint venture with Fincantieri in China would see the first cruise ships ever built in China for the local market. It’s a long way from these embryonic steps to CSSC being able to operate independently on the world stage, in competition with companies whose order books are full for the next ten years.

And Genting’s investment in Germany was driven by its own needs, MLex understands — indeed, the big players’ backlogs meant Genting wasn’t able to place orders with the market leaders. It bought the shipyards to build its own cruise ships, and it’s not looking to supply others.

While the EU watchdogs might concede that China could someday emerge as a player on the world stage, it’s unlikely to think these fledgling steps make it a credible competitive threat today. 

When competition isn’t close on the horizon — meaning within the next couple of years — it won’t move Vestager.

Siemens and Alstom’s experience shows us that she won’t hesitate to quash the companies’ ambitions if they can't convince her that competition won’t be harmed — regardless of the pressure on her from two industry titans and their respective governments.