Introduction
Safe harbours for competitor collaboration
Industry agreements on capacity reduction unlawful
Failed industry attempts to justify restructuring
Rebutting the presumption of unlawfulness
An uphill battle
Introduction
Globalisation and Europe's protracted economic crisis have taken a heavy toll on many manufacturing industries: cheap imports and weak demand often mean overcapacity. EU trade defence laws afford some protection from the threat of unfair trade from outside Europe. EU state aid rules allow public funding of rescue and restructuring subsidies in limited circumstances. But to what extent do Europe's competition laws offer any respite to industries feeling the pain?
In the 20th century the European Commission exempted from the competition rules two schemes to reduce structural overcapacity in the synthetic fibres sector (1984) and the Dutch bricks sector (1994). The factors it took into consideration included the following:
- The measures were temporary;
- Market forces had failed to achieve the same outcome; and
- The arrangements would ensure security of supply.
Although this may sound like a sensible approach, these cases are outliers and are therefore unreliable precedent.
For the past 20 years there has been little sign of any willingness to tolerate such so-called 'crisis cartels' – schemes designed to downsize a sector in an orderly fashion. At the height of the recent financial crisis, Europe's competition authorities went out of their way to stress that, in enforcement terms, there would be no retreat on the principles and they would be particularly vigilant to the potential rise of cartels in a recession. At a 2011 Organisation for Economic Cooperation and Development roundtable on crisis cartels, the consensus was against departing from two decades of tough anti-cartel enforcement.
Safe harbours for competitor collaboration
European competition rules offer limited safe harbours for collaboration among competitors. Structural changes (eg, acquisitions or full-function joint ventures) may lawfully facilitate the withdrawal of production assets from the market subject to merger control clearance, but these are costly options and leave one or two participants bearing all of the costs and associated risks. Properly structured, competitors with a combined market share of less than 20% can lawfully engage in joint production or 'specialisation' agreements, whereby they agree unilaterally or reciprocally to cease manufacturing a product and source it from the other. Joining forces to achieve cost savings through joint purchasing or joint research and development is also acceptable. However, these options will rarely be sufficient to improve fundamentally the dynamics of a sector in decline.
Industry agreements on capacity reduction presumed unlawful
Beyond these limited exceptions, there is zero tolerance towards any coordination of market conduct among competitors; this includes any attempt – directly or indirectly – to influence the available production capacity on a market. The commission's 2010 guidelines on horizontal agreements categorise any exchange of forward-looking information on prices and quantities as a hard-core restriction of competition 'by object'. Any such exchange is presumed unlawful without the authorities having to prove that it had any appreciable effect in the market. Rebutting that presumption is a theoretical possibility, but in the past two decades, no one has come up with any successful justification. Governmental support for an industry-wide restructuring scheme and threats of bankruptcies and mass redundancies in the absence of such a scheme, are routinely rejected as insufficient to outweigh the risks that managed capacity reductions will lead to increased prices. Businesses entertain thoughts of coordinating capacity reductions at their peril.
Failed industry attempts to justify restructuring
In 2008 the Irish Department of Agriculture facilitated discussions among producers aimed at reducing beef processing capacity by 25% in an orderly fashion. The Irish Competition Authority objected to the scheme. The European Court of Justice(1) ultimately concluded that it was irrelevant that the parties did not actually intend to restrict competition and wanted to remedy a crisis in the sector. It found that the arrangements were a restriction of competition 'by object', even if they pursued other legitimate aims. There was no state compulsion to shield the scheme from the normal application of the competition rules, and government support was not viewed as a mitigating factor, although no fines were imposed since the arrangement was ultimately abandoned and never implemented.
The Irish Competition Authority also expressed scepticism about calls in a 2009 report commissioned by the Irish Hotels Federation for the formation of a stakeholder group with the aim of agreeing "a speedy and orderly decommissioning of supply". It noted, approvingly, that the government had resisted attempts to get involved - presumably because it realised that surplus capacity in the sector would drive prices down and help the Irish hospitality sector to recover some of its lost competitiveness internationally.
Despite the support of several government ministries, fish farming companies in Greece were fined in 2010 after seeking clearance from the Greek Competition Authority of plans to stabilise quantities and prices for six months to avoid bankruptcies in the sector. Exemption was denied. The scheme was found not to address a long-term crisis on a permanent basis, but rather to look after the participants' short-term interests.
Most recently, on January 31 2013, the European Commission issued a press release announcing the closure of an informal investigation into two German cooperatives set up to coordinate activities of the owners of short-sea transport vessels (the first and last link in the maritime transport chain) operating in northern Europe. Some of the activities were unobjectionable, such as the joint purchasing of fuel. However, the commission challenged a compensation scheme for owners laying up their vessels (ie, keeping them idle), suspecting that it would act as an incentive to withdraw capacity from the market, which would in turn lead to higher prices. Since the case was informally settled (the scheme was abandoned before it was implemented), there is little information about the specifics of the scheme, which was likely to have had only an indirect effect on capacity absent an express agreement to keep capacity idle artificially. That the commission acted on its own initiative in this instance, "after receiving information from the market", is a salutary reminder that customers can and do complain, and they can do so anonymously without fear of reprisal. The case could just as easily have come to light as the result of a leniency application by one of the participants seeking immunity from cartel fines.
Rebutting the presumption of unlawfulness
In periods of economic crisis, competition may force the least efficient firms to exit a market. The orthodox view is that this is the normal functioning of the competitive process, requiring no regulatory intervention. However, in its amicus curiae brief submitted in the course of the Irish beef case, the European Commission recognised that:
"There may be situations where problems of overcapacity are not likely to be remedied by market forces alone within a reasonable period of time which would imply that the overcapacity is of a structural nature (as opposed to the result of a cyclical downturn)".
A type of 'prisoner's dilemma' may occur where firms will not want to release unutilised capacity because they anticipate that, sooner or later, other firms will leave the market, thus presenting an opportunity to increase capacity and gain market share. This is most likely where giving up capacity is costly in industries with significant sunk costs or high fixed costs and/or marginal costs that decrease with output, coupled with stable, transparent and symmetric market structures in which firms' interests are sufficiently aligned to maintain capacity at an excess level.
Does this signal a willingness to take a more strategic, industrial policy view of managed structural redundancies? Probably not. It seems likely that only industries exhibiting these specific features may have at least a theoretical possibility of obtaining competition law exemption for a sectoral restructuring plan.
A detailed economic analysis demonstrating that each of the following criteria is met would be a prerequisite to rebut the presumption of unlawfulness:
- On implementation, any industry restructuring plan should produce appreciable, objective and verifiable efficiency gains sufficient to outweigh any restrictive effects;
- There should be no other economically practicable and less restrictive means of achieving those efficiencies;
- Consumers should be likely to receive a fair share of the resulting benefit; and
- The plan should not threaten to eliminate competition in respect of a substantial part of the products concerned.
Although schemes designed to reduce structural overcapacity may well result in efficiencies (increased capacity utilisation and lower costs of production), quantifying those efficiencies and weighing them up against the remaining criteria is a complex exercise fraught with danger.
Any credible economic and legal analysis would have to be based on a granular plan that addresses some tricky questions:
- What capacity will remain on the market?
- Who will leave (or are there objective criteria according to which capacity exiting the market can be identified)?
- What are the residual competitive constraints in the market (actual and potential competition and buyer power)?
- What are the anticipated cost savings, based on an analysis of actual production costs and output (reductions in variable costs may be viewed as more likely to be passed on to consumers than reductions in fixed costs)?
- Are output limitations part of the mix and, if so, for how long?
Embarking on such an analysis requires both significant resources and principled commitment. Lawfully structuring even exploratory discussions is a challenge in itself, since close regulatory scrutiny from an early stage is likely, and even advisable. This is not an option for the faint hearted: any scheme designed to protect short-term interests and minimise disruption without addressing long-term structural reform will be doomed to failure with a concomitant risk of potentially significant cartel fines.
For further information on this topic please contact Fiona Carlin at Baker & McKenzie by telephone (+32 2 639 36 11 ), fax (+32 2 639 36 99 ) or email ([email protected]).
Endnotes
(1) Competition Authority v Beef Industry Development Society, C-209/07.
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