Volvo Scania Merger

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Volvo Scania Merger

• Emma Bredin
• Maja Bukovak
• Jean-Marc van Dril

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Volvo Scania Merger

• General features
• The firms
• Economic and legal basis
• 2. Case analysis
• A. Heavy-trucks
• B. Buses
• C. Undertakings
• 3. Remarks on EC conclusions

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A. The Firms

• Volvo proposed to acquire control of the whole of
  Scania (Sept 1999)
• Volvo
• manufacture and sale of trucks, buses, marine and
  industrial engines, construction equipment,
  aerospace components
• Scania
• manufacture and sale of heavy trucks, buses,
  marine and industrial engines

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Volvo - insights

• 70s shareholders rejected mergers with
• Saab-Scania and Renault
• 90s sold auto business to Ford
• 52 of turnover in 1997
• concentrate in core business trucks, buses,
  engines
• Reasons for merger with Scania
• To compete in emerging markets
• Economies of scale in heavy trucks and buses
  industry

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B. Economical Basis

• EC Approach to Merger Cases
• Will the merger create unilateral effects?
• Would firm unilaterally exercise market power
• Is efficiency increased (positive welfare effect)
• Will the merger create pro-collusive effects?
• Merger may facilitate collusive behaviour and
  trigger other mergers (stronger price effects)

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B. Legal Basis

• EC Merger Regulation 139/2004 Art. 2.3
• A concentration which would significantly
  impede effective competition, in the common
  market or in a substantial part of it, in
  particular as a result of the creation or
  strengthening of a dominant position, shall be
  declared incompatible with the common market.
• EEA Agreement Art. 57.1
• Concentrations the control of which is provided
  for in paragraph 2 and which create or strengthen
  a dominant position as a result of which
  effective competition would be significantly
  impeded within the territory covered by this
  Agreement or a substantial part of it, shall be
  declared incompatible with this Agreement.

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B. Legal Basis

• European Community Treaty Art. 82
• Any abuse by one or more undertakings of a
  dominant position within the common market or in
  a substantial part of it shall be prohibited as
  incompatible with the common market insofar as it
  may affect trade between Member States
• EC Merger Regulation Art. 2.1(b)
• The Commission shall take into account the
  market position of the undertakings concerned and
  their economic and financial power, the
  alternatives available to suppliers and end
  users, their access to supplies or markets,, the
  interest of the intermediate and final consumers,
  and the development of technical and economic
  progress provided that it is to the consumers
  advantage and does not form an obstacle to
  competition.

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Volvo Scania Merger

• 1. General features
• 2. Case analysis
• A. Heavy-trucks
• B. Buses
• C. Undertakings
• 3. Remarks on EC conclusions

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A. TRUCKS

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Unilateral Effects

• Will firm be able to impose higher prices after
  merger, by decreasing consumer surplus and total
  welfare?
• Define relevant market (product and
  geographical)
• Focus on substitutability (demand and supply
  side)
• between different products
• Asses the degree of market power by merged
  company
• EC analyses separately relevant product and
  geographical market

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Product Markets

• EC uses various qualitative indicators
• the views of customers
• competitors
• past substitution
• 3 truck market segments
• Light duty (below 5 tonnes)
• Medium duty (5-16 tonnes)
• Heavy duty (above 16 tonnes) single relevant
  market
• Rigid trucks (integrated)
• Tractor trucks (detachable)

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Geographical market (i) - EU or member states?

• Volvo claimed EEA
• Price differentials not substantial (/-10)
• 7 largest producers are present throughout the EU
  (Volvo Scania in 1998 exported gt80)
• Appearance of big buyers and dual sourcing
• Product standardization
• Absence of entry barriers
• Later on, in reply to EC, state that primary
  focus should be on price discrimination

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Geographical market (ii) - EC claims member
states

• EC disputed Lexecon Neven report
• Prices are within 5 to15 band throughout the
  Community with the exception of Sweden.
• Own calculations
• Used the same methodology as in previous reports
  but different data set
• Existence of bilateral price variations up to 20
• Analysed margin differences to back up the
  conclusion
• Volvo and other suppliers have applied
  significantly different prices and margins for
  comparable products in different member states

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EC claims member states

• Lack of market integration in EU (no arbitrage)
• Customer preferences
• Technical requirements
• After sales markets important
• Purchasing is done at national level
• EC analyse mainly demand side substitutability
• leads to overly narrow definition of relevant
  market

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EC Results

• EC analysed separately Sweden, Denmark, Norway,
  Finland, Ireland
• Creation of dominant position is found in Sweden,
  Norway, Finland, Ireland
• Found to be likely in Denmark
• Proceed by assessing the degree of market power

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Assessment of the degree of market power

• Would the proposed merger lead to the creation or
  the strengthening of a dominant position?
• Assessment of anti-competitive effects
• EC dont investigate beneficial effects
  (efficiency gains)
• EC analyse
• Joint market shares of merged firms
• Strength of competition and potential entry
• Demand variables
• Econometric study (Ivaldi Verboven)
• VS are predicted to raise prices by 10 in
  several countries

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Heavy duty trucks market shares (1998)
Source EC Report, 2000 (based on official
registration figures)
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Time series of market shares
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EC assessed qualitative factors

• Considerable brand loyalty in analysed countries
• Dispersed customer structure (small operators)
• Volvo price discrimination between large and
  small customers is not possible
• shrinkage effect supported by JP Morgan study
• GfK surveys of large customers and small
  customers in Nordic countries EC found
  methodological problems
• EC claims in sharp contrast with Volvos
  internal documents
• Entry costs are estimated to be high
• Small markets, low population density
• The cab crash test (Sweden)

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EC conclusion on the markets for heavy trucks

• the proposed concentration would create a
  dominant position on the markets for heavy trucks
  in Sweden, Norway, Finland and Ireland. There are
  strong indicators that this would also be the
  case in Denmark.

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B. BUSES

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Product markets

• Volvo the overall bus market
• EC
• Differences in technical characteristics
  (low/high-floor engine power)
• Distinct buyer groups
  (public/private operators small vs large
  customers)
• ?
• 3 relevant bus markets
• City buses
• Inter-city buses
• Touring coaches
• Buses are heterogeneous products with low
  demand side substitutability      

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Geographic markets

• Volvo EEA
• Price differences are not substantial (/-10)
• Absence of entry barriers
• Price discrimination and import penetration
  should constitute the appropriate focus (but
  difficulties to compare prices between buses)

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Geographic markets

• EC market shares vary significantly
• between Member States
• Combined market share of Volvo and Scania for
  1998
• Source Council Regulation (EEC) N 4064/89,
  p.58

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Geographic markets

• EC
• Price levels differ significantly between Member
  States
• Purchasing on national basis
• Technical requirements (and preferences) vary
  between Member States

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Geographic markets

• EC conclusions
• Touring coaches market has to be assessed on a
  
• national basis for FINLAND and the U.K.
• City and inter-city buses market has to be
  assessed on a national basis for the
• FOUR NORDIC COUNTRIES and IRELAND.

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Assessment of the degree of market power

• Would the proposed merger lead to the creation or
  the strengthening of a dominant position?
• Shrinkage effect
• Volvo refers to the Mercedes/Kässbohrer case
• EC no possible comparison
• (German market, expected potential competition
  even if compared, only 3 or 5 shrinkage)

• Touring coaches
• FINLAND
• U. K.

• City- and inter-city buses
• SWEDEN
• FINLAND NORWAY and
• DENMARK
• IRELAND (City buses)

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Assessment of the degree of market power

• Market size and market shares
• Demand characteristics
• Barriers to entry and potential competition

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EC conclusions on the bus markets

• The proposed concentration would create a
  dominant position on the markets for touring
  coaches in Finland and the United Kingdom, as
  well as on the markets for city and inter-city
  buses in Sweden, Finland, Norway and Denmark as
  well as on the Irish city bus market.

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C. Remedies and undertakings
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Merger Remedies

• EC might approve merger if certain remedies are
  taken (Motta, chap.5)
• Structural
• Modify the allocation of property rights
• Include divestitures of an entire or partial
  ongoing business
• Behavioural
• Set constraints on merged firms property rights

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Undertakings proposed by Volvo and EC response
heavy trucks

• Volvo
• Divestiture of Bilia AB
• Effort to ensure the abolition of the Swedish cab
  crash test
• Suspension of the Scania brand name during 2
  years
• Opening up dealer and services network

• EC
• would continue to be economically dependant.
• could only be abolished by the Swedish
  government.
• limited significance.
• would basically leave the existing structure of
  the Volvo and Scania organisations intact.

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Undertaking proposed by Volvo and EC response
buses and coaches

• Volvo
• Divestiture of 3 bus and coaches bodybuilding
  plants
• Access to bodybuilding capacities in Finland
• Opening of the sales and services network
• Suspension of the Scania brand name for 2 years

• EC
• does not improve market access for competitors.
• competitors wont contract if it is a subsidiary
  wholly owned of Volvo.
• incentive for dealers to sale new brands is even
  lower than for the heavy trucks.
• same reason as for the heavy trucks.

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Overall conclusion (March 2000)

• In view of the above, the Commission has come to
  the conclusion that the notified concentration is
  incompatible with the common market and the
  functioning of the EEA Agreement, since, even
  assuming full compliance with the proposed
  undertakings, it would create dominant positions
  in the markets for heavy trucks in Sweden,
  Norway, Finland and Ireland, for touring coaches
  in Finland and the United Kingdom, for inter-city
  buses in Sweden, Finland, Norway and Denmark, and
  for city buses in Sweden, Finland, Norway,
  Denmark and Ireland, each of which would result
  in effective competition being significantly
  impeded in the common market within the meaning
  of Article 2(3) of the Merger Regulation and
  Article 57 of the EEA Agreement.

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The aftermath of Volvo-Scania case (September
2000)

• The European Commission has decided not to oppose
  the acquisition by Volvo of Renault Vehicule
  Industriels ("RVI").The decision follows a
  careful investigation of the affected markets, in
  the course of which the parties have made
  significant undertakings that will remove the
  competition concerns resulting from the
  acquisition of RVI.
• Mr. Monti, the Commissioner responsible for
  competition policy
• We can now see the final results of the
  Commission's prohibition decision. Since then not
  only Volvo has teamed up successfully with RVI.
  Also Scania has found an alternative strategic
  partner in Volkswagen, which was not previously
  active in the production of heavy trucks and
  buses. These transactions will hopefully
  contribute to the development of a more
  competitive situation in the European markets for
  heavy vehicles.

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Volvo Scania merger

• 1. General features
• 2. Case analysis
• A. Heavy-trucks
• B. Buses
• C. Undertakings
• 3. Remarks on EC conclusions

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Remarks on EC conclusions

• Volvo maybe entered the case too confidently.
  Did not bring the case to Court.
  Merged shortly after with Renault

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Remarks on EC conclusions

• Volvo maybe entered the case too confidently.
  Did not bring the case to Court.
  Merged shortly after with Renault
• Our impression reasonable decision but not
  supported with sufficient arguments.

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B. Insufficient arguments

• Too narrow definition of relevant market
• assessed only demand side factors
• non-transparent assessment of price differentials
  
• should have considered some subset of countries
• Didnt take into account possible efficiency
  gains
• Ivaldi Verboven (2000) estimated efficiency
  gains, regional vs pan-European mergers
• Does EC approach impede companies from small
  countries to grow and use economies of scale for
  competing at EU market? Not if merge with
  Renault!
• But prevented the creation of dominant position
  in Sweden and other Nordic countries

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Remarks on EC conclusions

• Volvo maybe entered the case too confidently.
  Did not bring the case to Court.
  Merged shortly after with Renault
• Our impression reasonable decision but not
  supported with sufficient arguments.
• EC report lack of transparency. Leads to an
  impression of subjectivity. No precise procedure.

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Remarks on EC conclusions

• Volvo maybe entered the case too confidently.
  Did not bring the case to Court.
  Merged shortly after with Renault
• Our impression reasonable decision but not
  supported with sufficient arguments.
• EC report lack of transparency. Leads to an
  impression of subjectivity. No precise procedure.
• EC did not want to create a precedent?

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• Thank you for your attention!