Competition Policy Newsletter

First experiences with the new merger regulation : / CONTROL MERGER Mario TODINO, Directorate-General Competition, unit F-3

Introduction As regards the substantive assessment, the case illustrates well a gradual shift in emphasis which is progressively being recorded in the analysis of the On 22.11.2004, the Commission authorised under effects on competition stemming from a merger the Merger Regulation, the proposed acquisition of relating to differentiated products. While the anal- Aprilia S.p.A. by Piaggio & C. S.p.A. subject to a ysis was conducted based on the traditional condition intended to safeguard competition in the concept of single dominance and conventional Italian market for small scooters, where the two market definition, consistent with the new motorbike producers are strongest. The transaction Commission guidelines on horizontal mergers the raised serious doubts that competition might be investigation was mainly focused on the issue of reduced to the detriment of Italian customers of closeness of substitution of the models manufac- scooters with engines up to 50cc. However, tured by Piaggio and Aprilia. Piaggio was able to allay these doubts by offering to supply its most advanced 50cc engine to all producers that express an interest. The most cogent evidence substantiating the Commission concerns resulting from the merger came from the pattern of substitution which was The Commission decision in this case is inter- recorded in the segment of "up to 50 cc scooters" esting in many respects as it shows a number of over the first semester 2004 in , as a result of a novel features relating to the application of the dramatic drop in Aprila's sales due to its financial procedural and analytical framework set out by the troubles. new merger regulation. A third noteworthy aspect of the case concerns the The case is one of the first competition sensitive remedies submitted by the parties. As a result of transactions to be referred to the Commission the investigation it was concluded that a ‘pure’ based on the new pre-filing referral procedure structural remedy, i.e. a traditional divestiture of a pursuant to Article 4(5) of the new Merger Regula- ‘stand alone business’ was somehow ‘unrealistic’, tion. According to the new rules governing the given the features of the industry. Conversely, referral system of Regulation 139/2004, before a Piaggio's commitment to supply its unique, state of formal filing has been made in any EU jurisdic- the art four stroke engine to competitors enables tion, the parties to a merger can request their trans- them to fill part of the gap and exercise more effec- action, lacking Community dimension, to be tive competitive constraint on the merged entity by referred by the Member States competent to broadening the range of their models' motoriza- review the deal to the Commission for the purpose tion. of its competitive assessment.

In this case the referral to the Commission was Background appropriate for a number of reasons. The central- ised treatment by the Commission avoided the The operation concerns the sector of two-wheeled costs of multiple filings in a large number of coun- motor vehicles. Like the automobile sector, this tries (the transaction was reviewable in seven industry is going through a process of consolida- Member States) as well as the risks of conflicting tion. Over the last few years, four factors seem to decisions in parallel national proceedings. More- have been driving this industry: i) the need to attain over the transaction was genuinely cross-border as a critical mass in order to obtain economies of it affected competition in almost all the Member scale and to reduce production costs; ii) invest- States in which it was reviewable. The fact that a ments in research and development in order to number of national markets were significantly ensure technological innovation; iii) the need to affected by the transaction militated in favour of develop a complete range of models; iv) marketing the European Commission dealing with the case and advertising to promote the brand. These char- with a view to securing a coordinated investigation acteristics lead competitors to either consolidate or and a coherent set of remedies across the EU. leave the market.

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The global market for two wheeled motor vehicles and ‘Moto ’, is a smaller producer with a is characterized by the preponderant presence of more mixed portfolio, and some popular brands in Asian producers, who supply approximately 90% (Aprilia and Guzzi). It has a share of of worldwide demand. Among these, the Japanese about 6% in the EU. producers — in particular the leader Honda, followed by Yamaha and Suzuki — are active In the course of 2004, Aprilia experienced a practically in all the developed areas of the globe, serious financial crisis, with a debt exposure of with a presence in both the Asian and the western approximately 320 million Euro. The company markets (mainly Europe and United States). The was forced to interrupt its production for approxi- Japanese producers have i) a complete range of mately two months in the course of the first models (from small scooters to high powered semester of 2004, which caused serious negative motorbikes), focused on the most profitable niche repercussions on its market position. of the market. i.e. motorcycles above 400 cc; ii) Through the acquisition of Aprilia, Piaggio aimed impressive production volumes (Honda and at increasing its own critical mass in terms of Yamaha produce respectively approximately 9 production volumes and reaching considerable and 7 million models a year); iii) renowned brands, economies of scale in components sourcing and supported by huge advertising investments; iv) a research and development. The operation would reliable distribution network based mostly on also enable Piaggio to widen its range of models exclusive relationships. and enter the segments of motorcycles thanks to Against this global background, the European the renowned Aprilia brands (among which market appears to be still quite fragmented. The Aprilia and Motoguzzi). Japanese producers are well established on the The Commission's analysis covered numerous continent with local production, a complete model European countries, and focused on the markets range and leading market positions (both Honda for scooters and for small motorbikes, where the and Yamaha have market shares of around 18%, activities of the two companies overlapped. and Suzuki is third with 12%). European producers, on the other hand, lack a complete range of models and cannot count on important Market definition volumes of sales. The European companies are essentially operating in "niches", usually special- The product markets izing in a few segments of the two wheels sector (e.g. Piaggio, which created the famous , has Following a thorough market investigation, the traditionally focused on scooters). Commission concluded that two distinct markets for scooters could be identified: (a) scooters with The market for two wheeled vehicles in Europe engines smaller than 50cc; and (b) scooters with has some pro-competitive characteristics, both at engines bigger than 50cc. the level of production where there are numerous, aggressive competitors who market a wide range The existence of a distinct market for scooters of models, and at the distribution level where, below 50cc is due mainly to the fact that demand unlike in the automobile sector, multi-brand for these models is largely captive. Indeed, in the distributors constitute the main sales channel (70% three main European markets (Italy, France and of total sales in Europe). The contractual power of Spain), young people between 14 and 16 years can the producers is greater vis-à-vis exclusive dealers only drive scooters with engines below 50cc. This than multi-brand ones. Another pro-competitive category of consumers has progressively become element, particularly for low-powered two wheel the most important source of demand for small vehicles, is the wide-spread presence of sub- scooters, while older consumers increasingly dealers, distributors that source from the official prefer larger engines. The market has shrunk dealers and have no direct contractual link with the considerably in the last ten years (from 96% of all producer. scooters sold in Italy in 1994 to 37% in 2003), and some industry experts forecast that it may all but Both Piaggio and Aprilia are Italian motorcycles disappear, should legislation on driving age manufacturers. Piaggio is the fourth largest Euro- become more restrictive in the countries pean manufacturer, with a market share, in value, mentioned above. As regards supply-side sub- of 10% in the EU and is the market leader in the stitutability, this segment can be distinguished segment. It has a marginal presence in the from that of scooters with larger engines. In partic- other two-wheel segments. Its main brands are ular, smaller operators (i.e., , Kymco and ‘Piaggio’, ‘Vespa’, ‘’ and ‘’. Aprilia, Peugeot) produce scooters with engines of less whose main brands are ‘Aprilia’, ‘’ than below 50cc segment, while the Japanese

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leaders, with the exception of Yamaha, are practi- showed that there were non-negligible price differ- CONTROL MERGER cally absent from such segment. ences for the same model scooter from country to country. These differences varied from a minimum Some competitors have suggested that the market of 5% difference to up to 20-30%, with an average of scooters with engines larger than 50cc could be of 10% price difference. As regards distribution further subdivided into those whose engines are and retail sales, no significant parallel imports between 50cc and 125 cc and those above 125cc, were recorded, with the exception of small coun- due to the fact that the 50cc-125cc segment is also tries (e.g. Slovenia). In view of the above, the captive, since in many countries youth between 16 Commission concluded that the geographic and 18 years-old are only allowed to drive scooters markets were national. of up to 125cc. This phenomenon is similar to the one that explains the segmentation of scooters up to 50cc and above 50cc. Nonetheless, there is a Assessment: horizontal aspects substantial proportion of older customers, particu- larly women, that opts for scooters below 125cc The investigation focused on the market of for urban usage. As a consequence, a considerable scooters up to 50cc in Italy, where the main part of the demand is not captive, and is subject to competition concerns were identified. greater price elasticity (as these customers can opt for a more powerful scooter), and therefore The market of scooters up to 50cc in Italy scooters between 50cc and 125cc should not constitute a separate relevant market. Further, The evolution of the market of the scooters up to from the supply point of view, there is a high 50cc in Italy clearly indicates declining trend, in degree of substitutability between the two sub- terms of both volume and value. Unit prices have segments, since the models in between 50-125 are also fallen in the last decade. The factors that have the generally same as the less powerful ones, contributed to the decline of the market include the except for the obvious difference of a more significant increases of the cost of insurance of this powerful engine. Finally, the competitive picture type of vehicles and the competitive pressure is homogeneous, since more or less all the compa- exerted by the neighbouring market of more nies operating in the lower segment are also active powerful scooters. The recent introduction of in the higher one. In any case, further investigation licensing requirements has accelerated this down- proved unnecessary, since, regardless of the ward trend. For these reasons, the market of motor- market definition, the operation would not cause cycles with engines of less than 50cc is progres- any reduction of competition for scooters with sively becoming a residual market, that serves the engines larger than 50cc. demand of young people between 14 and 16 years- old who are not allowed to drive more powerful Geographic market motorcycles. The notifying party claimed that the geographic From a competition stand-point, Piaggio is the market had a community dimension in view of the leading supplier in the market (with a market share following considerations: i) the competitive of 35-40% in 2003) and Aprilia number 2 (market picture is quite homogenous within the EU terri- share of 16-20%). The combined market share is tory, and there are no pronounced differences from between 55% and 60%. The next competitors country to country; ii) producers have centralised (Yamaha and Malaguti) have relatively small their production in a few productive plants that market shares (between 10 and 15%), while Honda serve the whole European territory; iii) transport has withdrawn from the market and is planning to costs are not excessive; iv) there are no barriers to re-enter only with a niche product. trade between Member States; v) technical specifi- cations have been harmonised at EC level; vi) driv- In its assessment of the transaction, the Commis- ers' licenses regulation are being harmonised; vii) sion analysed the models offered by the various models' selling prices do not vary much; and viii) producers with the of understanding the close- national distribution systems are substantially ness of substitution of the models manufactured by comparable. Piaggio and Aprilia. To this end, two main sub- segments of small scooters were identified: i) high However, the Commission ascertained that there wheels scooters and ii) sport scooters. In the stra- were still a number of elements militating in tegic high wheels segment, Piaggio was the uncon- favour of national geographic markets, such as tested leader (Liberty 50cc, which accounts for price differences, driver's licence regulations and approximately half of the sales), followed by distribution channels. Particularly regarding Aprilia (Scarabeo, with around a quarter of the prices, the results of the preliminary investigation segment's sales). The evolution of market shares in

Number 1 — Spring 2005 81 Merger control the first semester of 2004 with respect to the segment, the market investigation shows that previous year was then analysed, to understand Aprilia's Scarabeo, Honda's SH and Piaggio's which models had benefited most from Aprilia Liberty are perceived as very close substitutes. sudden sales drop following the production cuts The figures of the first semester 2004 showed that, induced by its financial difficulties. The figures unlike the situation for smaller scooter (below 50 showed that Piaggio's Liberty 50cc gained almost cc), Aprilia's big losses were to the advantage of all of Aprilia's losses, increasing its market share Yamaha, Piaggio, and Honda (the latter gained byabout 11%. primarily in the up to 125 cc sement). Despite this evidence, the parties argued that the In the light of all the above, the Commission market was tiny in terms of value, in constant concluded that Japanese manufacturers would decline and likely to disappear over the time as a provide strong post-merger competitive result of the toughening of the driving license constraints . In particular, Honda has the best requirements. Moreover, it was a trendy, fashion- selling model in the low-end of the segment (SH able and volatile market. This implies that if a 125), while Yamaha, and to a lesser extent Suzuki, manufacturer meets the tastes of the youth with a are very strong in the upper end (400 and 500 cc). particular model, its sales will immediately More importantly, the Japanese manufacturers increaseonly to fall once the fashion is over. have a broad portfolio, a strong brand image, Finally, according to the parties, large competitors supported by massive investments in marketing as with small market shares in this segment, yet well well as an established own distribution network, established in neighbouring segments (Honda and mainly based on exclusive dealerships. Yamaha), can easily expand their sales. The scooter markets outside Italy However, based on the evidence collected in the course of the investigation, the Commission As to the competitive assessment of the transaction concluded that the acquisition of Aprilia by with respect to markets other than Italy, the merger Piaggio raised serious doubts as to its compati- would give rise to some overlaps in a number of bility with the common market. The merger would countries. On average, in both scooters markets enable the new entity to dominate the Italian (below and above 50cc), the merging entity would market for scooters with engines below 50cc reach aggregate market shares of something in the through a broad portfolio (Vespa in classic range of 35-40% in the UK, France, Spain (with scooters, Piaggio and Aprilia in the segment high Piaggio between 30-40%, and Aprilia between 5- wheel, Aprilia and Gilera in the sports segment) of 15%), with peaks of 45% in one or the other very well-known brands and models, some of segment. In Slovenia, the merging entity would which are close substitutes. reach an aggregate market share of 65%, although the market was minuscule, and heavily influenced The market of scooters above 50cc in by cross-border trade. Italy However, after the market investigation the Regardless of the product market being retained Commission reached the conclusion that no (i.e., a single market of all scooters above 50cc, or competition concerns should arise from the a further break down into i) scooters between 50 merger. First, the market investigation has shown and 125cc, and ii) scooters above 125cc), the that Aprilia is not considered a sufficiently strong competitive situation would be similar. The player outside Italy. Aprilia suffered a significant merger involves the market leader and the number drop in sales over the first semester of 2004. It lost 4, number 2 being Honda, and number 3 Yamaha. something between 30-40% of its market share. Further, Aprilia does not have a well established In the first semester of 2004, aggregate market distribution system in all countries, which has on shares of the merging entity varied between 39% some occasions affected its after sales service. (scooters above 50cc) and 47% (scooters between Additionally, in all these countries, the Japanese 50 and 125cc). Honda and Yamaha have both a players are very well established and capable of strong presence (roughly 20% each). exerting a strong competitive constraint over the merging entity. Typically, Yamaha has a very As regards closeness of substitution, most respon- strong presence in the low end of the spectrum of dents have indicated that players like Piaggio, scooters (segment of scooters up to 50 cc) and in Honda, Yamaha, and Aprilia, produce inter- top-end (scooters of 500 cc), while Honda is changeable models across the whole range of generally the market leader in mid-range scooters scooters with engines above 50cc. With respect, (125-200 and 250cc). Moreover, the Japanese for example, to the best selling models in this producers are present across the whole portfolio.

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Another important element is the fact that, in a Piaggio's 50cc scooter Liberty, to any competitor, CONTROL MERGER number of countries there are also important local under competitive terms and conditions. After an players, such as Peugeot in France. Finally, a in-depth market testing, the Commission number of new entrants from Asiatic countries concluded the remedy would address the competi- (above all the Taiwanese Kimco), favoured by the tion concerns stemming from the operation more ease of entry due to multi-brand distribution effectively than other pure structural remedies. In systems, are aggressively penetrating the Euro- particular, the Commission market survey showed pean market with cheap and good models. that a traditional divestiture of a ‘stand alone busi- ness’ was considered ‘unrealistic’ by the actors of Vertical foreclosure the market, given the features of the industry. First, the parties had no plants to divest, and in any event The Commission also considered carefully there was spare capacity, thus every manufacturer whether foreclosure could arise at the distribution was attempting not to expand its capacity, rather to level in Italy as a result of the merger. improve productivity, by running production sites at full capacity in order to improve economies of However, the investigation has shown that, in scale. Moreover, it was argued that there is little contrast to car distribution, multi-brand dealer- added value in a plant, as two wheel vehicle manu- ships are popular for two-wheel vehcles both in the facturers are largely brand owners, the bulk of the form of multi-brand dealers (official dealers who value added of a scooter being supplied by compo- purchase from several manufacturers), and multi- nent manufacturers. The market expressed no brand sub-dealers, i.e. those retailers that have no interest for a solution involving the divestiture of a contractual relation whatsoever with the manufac- brand. Finally, such a remedy would have also turer and source from various official dealers. raised an issue of proportionality as it would have These two channels are by definition open and significantly affected a number of markets in contestable. About 70% of the total sales of motor- which no competition concerns were identified. cycles in the EU is performed by multi-branding dealers, and similar figures apply at national level. Conversely, the feedback from the market of the Moreover, while Piaggio, as well as Aprilia, typi- remedy proposed by Piaggio was positive in all cally resort to this channel, the Japanese leaders respects. First, supply of engines by motorbikes seem to opt for the exclusive dealership. manufacturers to competitors proved to be a common practice in the industry. Thus, no or In Italy, post-merger, Piaggio would have its limited problems of monitoring would arise, given models sold in roughly 63% of the total number of that a contractual model, including pricing, outlets active in Italy, while Aprilia in 30% of the already existed,and could be used a relevant outlets, with some of Piaggio and Aprilia outlets benchmark. Second, Piaggio was the only scooter overlapping due to multi-brand dealerships selling manufacturer to market in the EU a four stroke both marques. However, only a fraction of these engine for a 50cc scooter. Third, Piaggio's sales outlets were tied to Piaggio/Aprilia by exclusive figures showed that its models equipped with such contracts(about 12% of the total number of an engine (Liberty 4t, and Vespa), were quite dealers, and about 6% of the total number of successful and were outperforming the sales of the outlets). In terms of volume of sales Piaggio/ same but cheaper models equipped with a two Aprilia exclusive channel would make about 32% stroke engine. Moreover, the industry expressed a of Piaggio/Aprilia aggregate sales, which repre- certain interest in purchasing this engine, and sented around 16% of the total market in volume in acknowledged its value, in terms of technical char- Italy. None of the multi-brand dealers proved to be acteristics, performance and environmental de facto exclusive dealers for Piaggio or Aprilia, as impact. Against this background, the Commission it appeared from their sales mixes. concluded that the availability of this engine to competitors at competitive conditions would Remedies enable some of them to exercise more effective competitive constraint on the merged entity's posi- In order to address the competition concerns iden- tion by broadening the range of engines available tified in the investigation with respect to the for their models. As a result of this, the merged market for scooters up to 50cc in Italy Piaggio entity would come under stronger pressure from offered to supply, for an indefinite duration, competitors acting as a more effective constraint to Piaggio's four stroke engine currently mounted on the parties' ability to raise prices.

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