COMMISSION DECISION

of 26 October 2004

declaring a concentration compatible with the common market and the functioning of the EEA Agreement

(Case No COMP/M.3436 — Continental/Phoenix)

(notified under document number C(2004) 4219)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/896/EC)

On 26 October 2004 the Commission adopted a Decision in a merger case under Council Regulation (EEC) No 4064/89 of 21 December 1989 on the control of concentrations between undertakings

(1) (the Merger Regulation) and in particular Article 8(2) of that Regulation. A non-confidential version of the full Decision can be found in the authentic language of the case and in the working languages of the Commission on the website of the Directorate-General for Competition, at the following address: http://europa.eu.int/comm/competition/index_en.html.

I. THE TRANSACTION

(1) On 12 May 2004, the Commission received a notification of a proposed concentration by which the undertaking Continental AG acquires within the meaning of Article 3(1)(b) of the Merger Regulation control of the whole of the undertaking Phoenix AG by way of a public bid announced on 26 April 2004.

1. The parties

(2) Continental AG (‘Continental’) is a leading producer of tyres, brakes, suspension systems and other technical rubber products, mainly for automotive use.

(3) Phoenix AG (‘Phoenix’) is also specialised in the production of technical rubber products (e.g. suspension systems, anti-vibration systems, hoses and conveyor belts), but not active in the production of tyres. Both companies are based in Germany.

2. The operation

(4) Continental intends to acquire sole control within the meaning of Article 3(1)(b) of the Merger Regulation of the whole of Phoenix. The transaction was notified to the Commission on 12 May 2004; on 28 June, Continental acquired 75,51 % of the shares in Phoenix by way of a public bid.

II. THE RELEVANT MARKETS

(5) The concentration leads to horizontal overlaps in a number of product markets in the field of technical rubber products. The Commission has identified potential competition problems on four markets:

— air springs for commercial vehicles;

— air springs for passenger cars;

— air springs for rail vehicles;

— heavy steel cord conveyor belts.

1. Air springs for commercial vehicles (OEM/OES)

(6) Both parties are active in the production of air springs for commercial vehicles(2). Air springs usually consist of a rubber bellow and a metal plate made of steel. They are used in commercial vehicles to reduce the vibrations between axle and chassis and to adapt the chassis to various loads(3). Although Continental proposes to define a market encompassing all types of suspension systems for commercial vehicles (spiral steel springs, flat compound springs and air springs), the market investigation has confirmed the Commission's position that air springs constitute a distinct product market. The investigation also confirmed the distinction between

air springs sold to vehicle manufacturers (OES/OEM)

and air springs sold to the

independent aftermarket (IAM)

. A further delineation of smaller markets (e.g. for air springs for trucks/buses on the one hand and for trailers/axles on the other hand) has not been supported by the market investigation and would — in any event — not change the competitive assessment.

(7) As to the geographic market, Continental argues that the geographic market for air springs for commercial vehicles is worldwide in scope. However, the market investigation has demonstrated that market conditions for air springs for commercial vehicles in Europe differ significantly from other regions. Due to different technical requirements (e.g. bigger trucks) and different customer preferences (European springs being technically more sophisticated), springs used in US trucks cannot be used in Europe and vice versa. As a result, there is no significant competitive impact from outside Europe on the European market. Only one company (the US-firm Firestone) is currently importing air springs to Europe. These air springs are designed specifically for the European market. They contain metal components which are bought in Europe, shipped to the USA, built into the air spring and then re-shipped to Europe. Another cost-disadvantage is caused by tariffs and transport costs. Although these imports accounted for approx. 12 % in 2003, imports are likely to decrease significantly in the near future, since Firestone is in the process of building a production plant in Poland, which will be ready for production in 2005. Therefore, the Commission is of the opinion that the relevant market for air springs for OEM/OES is Europe.

(8) With regard to air springs sold by independent dealers in the after market (IAM), the question of the relevant geographic market can be left open since the market investigation has shown that no competition concern will occur in the IAM market.

2. Air springs for passenger cars

(9) Both, Continental and Phoenix/Vibracoustic, also produce

air springs for passenger cars

. In passenger cars, air springs (bellow/plate unit) are part of a more sophisticated air spring

system,

consisting of an air spring and other components (e.g. air pressure system, control units, etc.). Continental's and Phoenix' activities overlap only in the field of air springs. Air springs are currently a niche product, mainly used in luxury cars. The market investigation has confirmed that air springs for passenger cars have to be assessed separately from other spring types (e.g. steel springs). It does not, though, seem appropriate to further distinguish between different customer segments in the market for car air springs (e.g. ‘limousines’, ‘SUVs’ and ‘light trucks’), as the production process and the customers are similar for all three segments.

(10) Continental claims the market to be worldwide in scope. The market investigation has supported a

European

geographic market definition, though. In fact, there is currently only one non-European supplier — Gates from the US — active in Europe. Imports accounted only for about [5-10(4) ] % in 2003. Recently, Gates has opened a new production facility for air springs in Aachen/Germany in order to serve the European market from Europe. In fact, most customers are not inclined to buy imported air springs. This is mainly because the development of passenger car air springs requires a close cooperation between customers, since air springs are technologically sensitive products. What is more, the development of an entire air spring system involves also other component suppliers, who are regularly based in Europe. As a result, most car manufacturers prefer to source from the two European manufacturers (Phoenix/Vibracoustic or Conti).

3. Air springs for rail vehicles

(11) Both parties produce also suspension products for

rail vehicles

. Again, Continental proposes to define one product market for all kinds of different suspension and anti-vibration systems used in rail vehicles (e.g. steel springs, hydraulic systems, air springs, rubber-metal parts). Though, the market investigation has confirmed the Commission's view that secondary air spring systems (rubber bellow plus rubber-metal parts) form a distinct product market, separate from other primary or secondary suspension parts. This is mainly because most customers buy the air spring separate from other suspension parts and the production know-how for air springs varies significantly from the know-how for other products. Unlike in the field of commercial vehicles, there is no IAM for rail suspension products.

(12) Continental claims the market to be worldwide in scope. The market investigation has rather supported a

European

geographic market definition, most European customers dealing with European manufacturers. The geographic market definition, however, can be left open, since even on a European wide market the transaction would not lead to a dominant position of Continental and Phoenix.

4. Heavy steel cord conveyor belts

(13) Phoenix and Continental are also specialised in the production of conveyor belts. Conveyor belts, made of rubber, textile or PVC, are designed for the transport of goods. There are three main types of conveyor belts:

light conveyor belts

heavy conveyor belts

and

specialty belts

. Heavy conveyor belts are used for the transport of heavy goods such as coal, ore, gravel or sand. Two main types of heavy conveyor belts can be distinguished,

steel cord

conveyor belts and

textile

conveyor belts. The parties are particularly strong in the field of steel cord conveyor belts. Continental argues that both types (textile and steel cord belts) belong to the same market for heavy conveyor belts. This market delineation, however, has not been confirmed by the outcome of the market investigation.

(14) From the supply side, textile belts and steel cord belts involve a significantly different production process, since steel cord belts are made of rubber and steel ropes whilst textile belts are woven of different layers of technical fibres. What is more, competitors and customers have explained that both types have their respective fields of application, due to their manifestly different product characteristics: While textile belts can be used for smaller applications (short distances, smaller loads), the transport of heavy loads over long distances (e.g. for open cast mining applications) requires imperatively steel cord conveyor belts. This is because textile belts are by far more elastic than steel rope belts and can, therefore, only surmount relatively short distances. Although Continental rightly claims that for some applications both belt types can be used, the market investigation indicates that only 5-10 % of steel rope applications can be substituted by textile belts. Accordingly, heavy steel cord conveyor belts do not seem to belong to the same market as heavy textile conveyor belts and should be assessed separately.

(15) According to Continental, the relevant geographic market for heavy conveyor belts is

worldwide

in scope. However, the outcome of the market investigation militates clearly in favour of a European-wide market. This is due to the fact that steel cord conveyor belts are in many cases tailor-made for a specific application. What is more, transport and logistic problems play an important role. As a result, non-European producers play only a minor role in the European steel cord conveyor belts market. Therefore, the Commission has analysed the competitive situation on the basis of a European market.

III. ASSESSMENT

1. Air springs for commercial vehicles (OEM/OES)

(16) Continental and Phoenix would have a combined market share on this market of [55-65] %. The main competitors are CF Gomma [10-15] %, Firestone [10-15] % and Goodyear [5-10] % .

(17) Such a high market share would already in its own be indicative of a dominant position(5) of Continental. A dominant position is also likely with a view to the market structure: The combined entity's market share will be four times higher than the one of the closest competitor.

(18) Potential competition problems are not excluded by the mere fact that the merged entity's customers are, at least to a certain extent, big automotive companies. Although it is true that some of the bigger truck producers have not raised series concerns about the merger, many smaller axle/trailer producers are afraid of a negative impact of the transaction on prices.

(19) There are additional factors which underpin such competition concerns. First, in case of a price rise of the merged entity, customers would not be able to switch easily significant volumes to competitors. This is not only because any new supplier would have to undergo a qualification procedure with most customers. What is more, all competitors are capacity constraint. Both CF Gomma and Goodyear are utilising almost all their capacity. Firestone's new production plant in Poland will probably be filled by its current supply contracts.

(20) Second, the transaction would combine the two leading firms in the OEM/OES market. Indeed, the current market position of Phoenix does not seem to reflect its true potential. Phoenix brought its OEM/OES business with trucks and buses into the joint venture with Freudenberg, Vibracoustic. However, the joint venture focused its marketing efforts on air springs for passenger cars and achieved a rather minor position in the market for trucks and buses. Phoenix is contractually bound to refrain from participating in requests for quotations by truck and bus manufacturers. However, Phoenix managed to negotiate a suspension of the penalty clause and was able to participate in two recent competitions. In both of these two competitions it ended up as runner up behind Continental. Customers rank Phoenix close to Contitech when it comes to technical skills and even better in terms of pricing.

(21) Third, contrary to what Continental claimed, the market investigation has shown that patents are used to prevent competitors from stepping in as a second supplier in an ongoing delivery contract. A competitor told the Commission that especially Continental is using claimed IP rights aggressively to exclude competitors from competitions.

(22) For all these reasons the Commission believes that the proposed takeover of Phoenix by Continental would lead to a dominant position of the merged entity in the market for air springs for commercial vehicles in Europe.

2. Air springs for passenger cars

(23) The takeover of Phoenix/Vibracoustic by Continental would combine the two only European producers of passenger car air springs. The market share of the combined entity in Europe would be around [85-95] % for 2003. Although all customers of air spring modules are big automotive companies and have usually some buyer power over their suppliers, even some of the big customers have raised concerns about the transaction. Indeed, the investigation has shown that many car producers have only one supplier for air springs. The merger would eliminate the ability from car manufacturers to instil competition between Continental and Phoenix, leaving them with only one supplier active in Europe. On the other hand, the Commission has found some evidence that new players from outside Europe might enter the European market in the near future.

(24) The question, whether the transaction would lead to a dominant position in the passenger car air springs market can be left open, since Continental has recently committed to divest Phoenix' activities in this market by selling Phoenix' share in the joint venture Vibracoustic to Freudenberg. The acquisition of Phoenix' shares in Vibracoustic by Freudenberg removes the competition concerns in the field of air springs for passenger cars, since Phoenix is only active in the market for passenger car air springs through Vibracoustic.

3. Air springs for rail vehicles

(25) The market investigation revealed that the combined market share for Continental and Phoenix for secondary air spring systems would be approx. [55-65] %. Other competitors (e.g. Paulstra, Schwab, Trelleborg or Toyo) would hold only minor shares of 5 % or less.

(26) Despite these relatively high market shares, the Commission has come to the conclusion that no dominant position is to be expected in the market for railway air springs for two main reasons: Firstly, all competitors (including the parties) have to buy up to 70 % of the parts of the air spring system from their competitors who are either manufactures of the rubber bellow or the metal parts. Indeed, Continental was able to demonstrate that is has recently increased its supplies of rubber bellows to a competitor of the air spring system underpinning the fact that in this industry cross-supplies are a common practice. Secondly, there are enough potential competitors in the market who could prevent the parties from raising prices independently. Toyo and Sumitomo from Japan have significantly strengthened their European presence through subsidiaries in Europe. They were able to gain new business through their newly created subsidiaries in Europe and are most likely to further increase their market position in the near future. Given the long lifetime of trains (up to 30 years), customers will have enough time to qualify new suppliers.

(27) Therefore, the Commission believes that the proposed takeover will not lead to the creation of a dominant position in the market for railway air springs.

4. Heavy steel cord conveyor belts

(28) The operation would combine Europe's two leading suppliers. Indeed, the in-depth market investigation led to the conclusion that the combined market share of Continental and Phoenix would be [>70] %. Remaining competitors are Sempertrans [5-15] %, Bridgestone [0-5] % and several small, mostly regional suppliers with market shares of less than [0-5] %.

(29) The transaction thus reduces the number of main European competitors from four to three, the two remaining (Sempertrans and Bridgestone) being very small compared to the merged entity. One the one hand, the market investigation has revealed that the main customers — big energy companies such as RWE — have certainly some buyer power which they will use to defend competition in the market. However, they admit that they had only limited — if any — alternative suppliers after the merger. The market position of the merged entity would be particularly strong in the segment of belts for lignite mining and belts with a width of more than 2,4m. Lignite mining customers account for more than 50 % of the entire demand for steel cord conveyor belts. For some belt widths (>2,4 m), the merged entity would even enjoy a de facto monopoly position in Europe.

(30) For the above reasons the proposed takeover of Phoenix by Continental is likely to lead to a dominant position in the market for heavy steel conveyor belts in Europe.

5. Conclusion

(31) The decision, therefore, concludes that the notified concentration raises serious doubts as to its compatibility with the Common Market with regard to the markets of

air springs for commercial vehicles (OES/OEM)

and

heavy steel cord conveyor belts

IV. UNDERTAKINGS SUBMITTED BY THE PARTIES

(32) In order to address the aforementioned competition concerns, the notifying party has submitted undertakings on 1 October. Continental commits

to sell Phoenix' 50 % share in Vibracoustic to the joint venture partner Freudenberg(6);

to sell Phoenix' entire production for passenger car air springs (OES/OEM), located in Nyireghyza in Hungary, to Freudenberg;

to sell a production line for 3,2 m heavy steel cord conveyor belts to its competitor Sempertrans.

(33) The divestiture of Phoenix' shares Vibracoustic will allow Freudenberg/Vibracoustic to offer the full range of air springs for commercial vehicles, including springs for trailers/axles and springs for the IAM market. Controlling Vibracoustic, Freudenberg can use a strong research & development and an experienced distribution team to compete in the markets for air springs. With the acquisition of Phoenix' air spring production in Hungary, Freudenberg/Vibracoustic will have their own air spring production facility, which will enable them to sell air springs not only to van/bus customers but also to trailer/axle manufacturers. The divestiture also comprises the existing supply contracts with Phoenix' customers.

(34) The complete divestiture of Phoenix' activities in the market for air springs for commercial vehicles (OES/OEM) eliminates the overlap in this market.

(35) The commitment to sell a whole production line for steel cord belts with a width of more than 2,4m to Sempertrans is also an appropriate remedy to solve the competition problems in the market for heavy steel cord conveyor belts. In fact, the main concerns in this market relate to the segment of belts for lignite mining customers. The acquirer Semperit/Sempertrans, already qualified with some belts in this segment, will get access to the production technology for wide belts through the divestiture, this capacity being a key factor for the success in the steel cord belt market. The market test has confirmed the effectiveness of the commitment, since all major customers have indicated to the Commission that they regard the divestiture of a production line as an effective measure to instil competition in the steel cord belt market. Therefore, the Commission believes that the divestiture will solve the competitive concerns in this market.

V. CONCLUSION

(36) The Decision, therefore, reaches the conclusion that, on the basis of the commitments submitted by the Parties, the notified concentration will not lead to a dominant position of the Parties in the markets for air springs for commercial vehicles (OEM/OES), for passenger cars, for rail vehicles and for heavy steel cord conveyor belts, as a result of which effective competition would be significantly impeded in the common market or a substantial part thereof. The merger should therefore be declared compatible with the common market and the EEA Agreement subject to full compliance with the obligations contained in the Annex under Article 2(2) and Article 8(2) of the Merger Regulation and Article 57 of the EEA Agreement.

(1)

OJ L 395, 30.12.1989, p. 1

. Regulation as last amended by Regulation (EC) No 1310/97 (

OJ L 180, 9.7.1997, p. 1

(2)

Phoenix

markets its OES/OEM air springs for trucks and buses in a joint venture (‘

Vibracoustic’

) with the German component producer

Freudenberg

(

ee case M.1778 — Freudenberg/Phoenix/JV). Vibracoustic has, however, no own production for air springs for commercial vehicles but sells springs produced by Phoenix.

(3) By varying the pressure of the air in the air spring, the height of the chassis can be regulated.

(4) Parts of the original decision are omitted in this summary to ensure that confidential information is not disclosed; those parts are enclosed in square brackets.

(5) It should be noted that the case was notified under the old regulation 4064/89.

(6) It should be noted that Freudenberg has a call option for Phoenix' 50 %-share in Vibracoustic in case of a takeover of Phoenix by a third undertaking. In absence of the commitment, it was, however, not clear, if Freudenberg would exercise this call option or not.