Competition & Global Rivalry in Industries Worldwide: advice on a global merger

Posted: August 14th, 2013

Competition & Global Rivalry in Industries Worldwide: Advice on a Global Merger

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Competition & Global Rivalry in Industries Worldwide: Advice on a Global Merger

Introduction

The main incentive of a global merger between two multinational companies revolves around the aspect of dominance in the respective market. Usually, large corporations establish global mergers in order to extend their geographical presence and thus reduce competition within the external environment. Therefore, establishing a competitive edge on basis of a merger strengthens or develops a dominant player in the market. In other words, the dominant player possesses a considerable market share over other firms and therefore, impedes competition, which is vital within the business environment. Nevertheless, the concept of dominance presents a considerable issue within European Union (EU) Competition Policy Law. With respect to this case involving a Sino-European merger between Geely and Volkswagen Group within the same industry, it is important to assert the potential restrictions and the perspectives of the EU Commission on mergers in instances of possible dominance and recommendations.

Dominance in EU Competition Law

Out of all the policy sections that the EU Competition Law covers regarding dominance, Cartels, Market Dominance and Mergers comprise the main areas concerned. Regarding the law on cartels, Article 101 of the Treaty on the Functioning of the European Union (TFEU) curbs restrictive practices that exemplify market dominance such as cartels and oligopolistic behavior. In addition, market dominance relates to sole control of a market by a firm. In addition, it is important to note that the issue of dominance gains governance from Article 102 of the TFEU, which intervenes in instances where dominant players possess a market share of 38 percent. As such, the market share of 33 percent predicted regarding the merger of Geely and the Volkswagen Group is enough to warrant possible intervention from the EU. Alternately, the EU Competition Law covers merger regulation. The Council Regulation 139/2004 EC controls proposed mergers concerning firms with a definite, clear quantity of turnover within the EU (EC, 2013).

Tests of Dominance Used by the EC

The EU Commission conducts four tests in investigating a global or international merger, which possesses the probability of inducing industry dominance. The first test, Relevant Market delineates the market that a single or more commodities compete. As such, the EC defines the market that will facilitate whether two or more commodities gain consideration as substitute goods and whether they comprise a specific and segregated market for analysis of competition. The second test, Market Share constitutes the quantity accounted by a particular firm in a market represented in percentages. The third test, Vertical Integration involves the merger of two firms that are in dissimilar phases of production. As such, this strategy provides organizations with greater ability to control right to use to inputs and inadequate physical resources. The last test, Access or Barriers to Entry refer to obstacles or impediments that complicate the entry of other firms into a specific market.

Application of Tests of Dominance

Nevertheless, it is important to note the manner in which the tests apply to merger between the Chinese firm, Geely and the European firm, Volkswagen. Based on the Relevant Market facet, the EC will consider consumer surplus in the event of a merger. In context, the merger between Geely and Volkswagen is a high-end merger considering that both firms, if combined, possess a massive global turnover and market share of €5 billion and 33 percent respectively. As such, the implications of the merger will affect consumers negatively based on the absence of standardized substitutes and competitive prices and as such, limit the occurrence of consumer surplus.

Additionally, the EC also utilizes the notion of market share to determine the possibility of a dominant position within the industry. The EC governs the merger among firms that have amalgamated global sales of more than €5 billion and minimal sales of €250 million for each company. As such, with respect to the merger between Geely and Volkswagen, the EC is likely to investigate the merger based on the implication of a level competing edge for other firms. As such, the EC will perform this by assessing the market share of both firms if combined. Concerning Article 102 of the TFEU, firms possessing a market share of a minimal 38 percent warrant intervention by the agency on the speculation of dominance. Nevertheless, the proposed merger between Geely and Volkswagen would amount to 33 percent of the market share, which comprises relative dominance.

As such, the fact that dominance is evident in the previously mentioned merger does not provide sufficient reason for EC to block the merger. However, in order to block the merger, the EC will have to determine if there is the probability of the abuse of dominant position. This is evident in the instance comprising the merger between the British investment group, HgCapital and the United States firm, Denton ATD that comprised two of the largest crash-test dummy manufacturers in the world. Based on the deduction of the EC, if the two firms combined, then a quasi-monopoly would rise and thus, lead to an abuse of the dominant position since both firms would control global sales of anthropomorphic experiment devices (Chow, 2007). In addition, the proposed merger for the two firms will be an overlap since both firms manufacture and own high-end models. For instance, Volkswagen owns Skoda whereas Geely owns Volvo, both of which are high-end car models respectively.

Regarding vertical integration, the EC will determine abuse of the dominant position based on the effect the merger will possess on the supply chain. With respect to the merger, both firms will possess control over distribution if integration occurs. This is evident where Geely will possess the ability to access Volkswagen’s distribution channels and thus gain unfair advantage in Europe. This corresponds to the fact that Volkswagen will also gain control over Geely’s distribution channels in China and thus enforce a monopolistic competitive edge over the existing firms.

Merger Risks

The Sino-European merger comprises various risks. The merger between the two large corporations, Volkswagen and Geely, has a considerable impact on European business. Both firms possess a significant global turnover of €5bn and a market share of 33 percent. As such, the both firms possess the ability to abuse the dominant position by manipulating business opportunities and thereby destabilizing reasonable practices. This can have a negative effect on consumers since they are unable to access standard commodities and competitive prices. Furthermore, the susceptibility of both firms towards potential dominance will incur a negative impression within the market domain and therefore, warrant the intervention of the EC in rejecting the merger.

Recommendations

Both firms, Volkswagen and Geely, will need to delineate the notion of dominance by comprehending the effect the restrictive practices, monopolistic behavior and merger will have on influencing abuse of a dominant position. This is vital for the Board of Directors of CEOs for both firms. As such, comprehending the merger’s implications with respect to dominance will allow both firms to restrict the success of the merger process.

Conclusion

            Indeed, the EU Competition Policy focuses on mitigating the issue of dominance within the European market. By recognizing the different instances in which abuse of dominance may arise such as cartels and mergers, the policy regulates the impact actions such as the Sino-European merger between Geely and Volkswagen are likely to impose on the competition in the industry and the consumers in the market.