United Technologies, Rockwell Collins deal may stir competition concerns in China

plane at sunset

8 September 2017.

Jet engine manufacturer United Technologies' proposed acquisition of avionics maker Rockwell Collins may prompt antitrust challenges in China, as the $30 billion deal may be deemed to harm competition and the interests of local players in the industry.

United Technologies announced the takeover agreement on Monday, and expects to close the deal by the third quarter of 2018. The Farmington, Connecticut-based company didn't identify the jurisdictions in which it would have to seek antitrust approval, but the fact that both merging parties have notified China's Ministry of Commerce of previous transactions suggests that they may face the same obligation for their latest deal.

The two companies spoke of "complementary offerings" in their announcement, pointing to only a small overlap between United Technologies' engines and systems portfolio and Rockwell's avionics, seats and interiors businesses, in a move seen to downplay antitrust problems.

Nevertheless, as soon as the deal was made public Chinese industry players began to question whether the merged entity would move towards bundling its products.

The tie-up will not only strengthen the negotiating power of the combined entity with Chinese customers, but also create incentives for it to bundle products and sell them at lower prices. Although cheaper product may appear to benefit buyers, bundling could enable the merged company to squeeze other standalone equipment suppliers out of the market and eventually reduce customer choice.

That scenario hints at a broader problem for China's ambitious industrial plans as it could put Chinese aircraft parts makers at a disadvantage, making it even harder for them to compete for orders. At present, the two firms' Chinese counterparts still lag far behind their foreign rivals in terms of international recognition.

Bundling looks especially worrisome when any merging parties have significant market power, and United Technologies appears to fit into that category, based on data released by Mofcom when it conditionally approved the industrial giant's takeover of aerospace manufacturer Goodrich in 2012. According to that Mofcom decision, United Technologies had a 72 percent share of the global market for AC generating systems, putting it in a strong position in that specific market.

Some Chinese industry participants also say the merging companies would be able to offer certain integrated systems for aircraft by resolving adaptability issues among different aircraft parts. That could eat into the planemakers' integration business and erode their profit margins.

However, those concerns are likely to be offset by increased efficiency and faster deliveries of aircraft.

Either way, the transaction is likely to require Mofcom clearance. Both companies have filed previous transactions to the ministry, indicating that they exceed the turnover thresholds that require them to seek Chinese antitrust clearance.

United Technologies obtained Mofcom approval for its proposed acquisition of about 70 percent of Italy's Riello Group in March 2016. Rockwell Collins' $8.6 billion purchase of B/E Aerospace, a US maker of aircraft cabin interior products, was unconditionally approved by Mofcom in March this year.

Under China's current rules, transactions must be notified to Mofcom for antitrust approval if, in the previous financial year, the combined global turnover of the merging parties exceeded 10 billion yuan ($1.6 billion), or their combined sales in China exceeded 2 billion yuan, and at least two of the parties in a merger involving more than two companies each had China turnover of more than 400 million yuan.

United Technologies recorded full-year sales of $57.2 billion last year, and Rockwell Collins registered sales of $5.26 billion, according to the companies' websites.

Shares of both United Technologies and Rockwell Collins are traded on the New York Stock Exchange.

	Eliot Gao