Rising China puts politics back into EU merger reviews

15 August 2018 8:14am

14 August 2018. By Matthew Newman and Natalie McNelis

The biggest test of Margrethe Vestager’s resolve to keep politics out of her merger reviews comes not from Paris or Berlin, but from China.

The EU competition chief has no qualms about dismissing arguments from national capitals concerning job losses or failing companies. Last year, she forced Lufthansa to scale back its plans to purchase assets from failing Air Berlin, despite loud protests from the German government.

But competition from China, which is muscling in on global markets for increasingly sophisticated products, has given rise to compelling arguments that European companies have to bulk up or risk getting caught under the wheels of China’s state-backed industrial juggernaut.

Two ongoing reviews will show how these concerns play out: the Siemens-Alstom railway merger, and the union of steelmakers ThyssenKrupp and Tata Steel. Executives involved in both deals have invoked the threat of Chinese rivals to justify their plans to consolidate their respective industries.

Vestager must now weigh arguments about maintaining Europe’s industrial might in the face of a rising China against the usual competition metrics of merger reviews.

She hasn’t yet shown any signs of giving ground. Last week, in response to an EU lawmaker’s question about potential job losses if she scuppered the Siemens-Alstom deal, she reiterated that her mandate is to preserve competition; other EU programs and laws exist to help workers who have lost their jobs.

But the political pressure is only likely to grow as China ramps up its goals to transform its manufacturing sector into a global powerhouse as part of its “Made in China 2025” — focusing on high-tech industries such as robotics, batteries and electric cars — Europe could soon feel the heat.

— Trains —

The creation of Chinese train-making behemoth CRRC in 2015 shunted Siemens’ transport division and Alstom together last year. Although the deal will merge Europe’s two biggest train makers and closest competitors, the combined company will still be smaller than CRRC.

“We need to strengthen our ability to compete,” Siemens chief Joe Kaeser said when announcing the deal in September 2017. “A dominant player in Asia has changed global market dynamics.”

He returned to this theme in a speech in January 2018, saying that the “consolidation of the Chinese train industry has created a dominant competitor that has already clearly staked its global claims.”

But the commission has already thrown cold water on arguments about increased competition from China in the Siemens-Alstom deal.

In announcing the opening of its in-depth review, the EU watchdog said that entry of new competitors “appears unlikely to occur in the foreseeable future”. The “foreseeable future” generally means two years in merger reviews.

Siemens and Alstom, then, will need to convince the commission that Chinese competition will hit in less than two years. Any longer, and the commission might consider that CRRC can’t act as a competitive constraint on the merged entity.

They could point to CRRC’s success in landing contracts for metro cars in Boston, Chicago and Los Angeles. But their competitors argue that the Chinese are far from being able to compete for the contracts that really matter in Europe, such as high-speed trains and signaling equipment.

CRRC hasn’t really cracked European markets yet. Beyond peripheral countries such as Bulgaria and Serbia, it has won only minor contracts for metros, trams or shunters — not mainline trains or signaling equipment, where the Chinese aren’t currently able to meet regulatory requirements.

— Steel —

One might expect the commission’s competition department to be more receptive when it comes to steel. After all, their colleagues in the trade department are working furiously to avoid a flood of Chinese imports resulting from new US tariffs.

Indeed, massive global overcapacity in the steel industry has prompted concern that the EU will become a dumping ground for global excess supply, which reached a record 737 million tons in 2016, according to World Steel Association estimates.

In 2017, China was the world’s leading steel exporter with 74.8 million tons, the association said.

But arguments about increased Chinese competition in steel recently fell on deaf ears when the competition department considered another merger in the sector.

When reviewing ArcelorMittal’s plans to buy Italian rival Ilva, the commission said that it considered imports from third countries. However, the regulator said that “imports are not a sufficiently strong and stable alternative to fully offset the likely negative effects on price due to the loss of competition between Ilva and ArcelorMittal.”

In that case, rather than embracing a global view, the competition watchdogs even flirted with a narrower division, between northern and southern Europe. In the end they approved the deal, but only on the condition that the companies should divest significant assets.

EU merger watchdogs often argue that China is not a real competitive threat, because its products are not advanced or sophisticated enough to compete with European ones.

In light of this, ThyssenKrupp and Tata Steel might have trouble convincing competition watchdogs that the influx of commodity steel from China would threaten their “premium flat carbon steel” for the “demanding” automotive and industrial goods industry.

— Political pressure —

Yet Vestager is under intense political pressure to consider how Europe can weather China’s ambitions, and national governments are increasingly clamoring for the EU to allow European companies to bulk up to compete in global markets.

The Siemens-Alstom deal in particular has seen an unusual level of support from national governments in getting the deal through. Germany and France have thrown their weight behind the rail merger in a way that will be hard for Vestager to ignore.

French Economy Minister Bruno Le Maire welcomed the creation of a “global champion” to reinforce the “competitiveness and strength” of European companies in “an increasingly concentrated global market”.

The issue of global competition has also cropped up in the debate surrounding the EU’s plans to increase its scrutiny of foreign direct investments. For instance, in the context of the Siemens-Alstom merger, the commission has noted import barriers to high-speed trains in China, Japan and Korea, potentially putting European companies at a disadvantage.

Franck Proust, the EU lawmaker leading the investment-screening file for the European Parliament, has bemoaned the lack of reciprocity in access of EU companies to foreign markets and said it’s time for the bloc “to redefine, in the context of globalization, a competition policy adapted to today’s stakes”.

— Primary objective —

Still, protecting European companies on the world stage could run counter to Vestager’s primary goal of protecting Europe’s competitive backyard. If Europeans are obliged to pay more for train gear and steel because of industrial consolidation, they won’t appreciate that these mergers were approved in the name of global industrial policy and combating China’s goals.

After all, Vestager could argue that the way to make the EU industry stronger is precisely to make sure it still has to grapple with the full force of global competition.

That’s what her chief mergers official, Carles Esteva Mosso, said in a conference in Beijing earlier this month. The best way to keep companies competitive is to ensure they operate in “open and dynamic markets,” he said.

But in the current political climate, Vestager is going to have to walk a fine line between her antitrust convictions and the calls for an aggressive, globally-minded European industrial policy.

The solution may be for her to approve the deals — but at a heavy price, squeezing significant concessions out of the companies as a condition of approval.

If that’s the approach she chooses, the challenge will be to avoid handing valuable chunks of the crown jewels to foreign competitors.

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