First Experiences with the New Merger Regulation : Piaggio / Aprilia Mario TODINO, Directorate-General Competition, Unit
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Competition Policy Newsletter First experiences with the new merger regulation : Piaggio / MERGER CONTROL Aprilia 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 Italy, 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. Number 1 — Spring 2005 79 Merger control The global market for two wheeled motor vehicles and ‘Moto Laverda’, 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% motorcycles (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 Vespa, 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 scooter 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., Malaguti, Kymco and ‘Piaggio’, ‘Vespa’, ‘Gilera’ and ‘Derbi’. Aprilia, Peugeot) produce scooters with engines of less whose main brands are ‘Aprilia’, ‘Moto Guzzi’ than below 50cc segment, while the Japanese 80 Number 1 — Spring 2005 Competition Policy Newsletter leaders, with the exception of Yamaha, are practi- showed that there were non-negligible price differ- MERGER CONTROL 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.