Affected market: Security locks
The OFT's decision on reference under section 33 of the Enterprise Act 2002 given on 2 September 2003
Assa Abloy AB (AA) is a Swedish company, formed in 1994 following a merger between Assa AB of Sweden and Abloy of Finland. AA is one of the world's leading manufacturers and suppliers of locks and associated products. In 2002 it had worldwide sales of approximately 2,779 million euro. Black & Decker Corporation (B&D) of the US, is the parent company of the European Security Hardware Group, comprised of three businesses DOM Sicherheits-technik GmbH & Co KG (DOM KG), Nemef B.V. and Corbin SRL. These companies have manufacturing interests in Germany, the Netherlands and Italy respectively. All three companies are active in the European locks market and sell their products into the UK through DOM UK, a branch of DOM KG. DOM UK acts only in a sales capacity (see [note 1]) and had sales in the UK of approximately [ ] (see [note 2]) during 2002.
On 18 March 2003, AA entered into a conditional agreement with B&D to acquire the European Security Hardware Group (ESHG). The transaction is conditional on merger clearance in the Netherlands and Germany. At the date of this advice, decisions in each authority are still outstanding.
Details of the transaction were notified on 16 July 2003. The OFT's 40 day administrative target expires on 11 September 2003.
As a result of this transaction AA and the ESHG of B&D will cease to be distinct. The parties overlap in the supply of door locks and padlocks and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met in respect of each of these products. A relevant merger situation has therefore been created.
The parties overlap in the supply of door locks and padlocks.
Door locks are fitted to doors to provide security. Door locks all serve the same basic function but differ in terms of the security they offer. Three types of door lock are available: cylinder rim locks, mortice locks, and multipoint locks. Historically the most popular locks in the UK have been cylinder rim and lever mortice locks, although the increasing preference for u-PVC and aluminium doors has seen an increase in sales of multipoint locks. In the commercial sector, cylinder locks are the most popular type of lock, which at the high security end are master-keyable. The major lock manufacturers all supply a range of products, and modest retooling is required to change the manufacturing process.
Padlocks are available in a range of security levels, from simple deterrent padlocks ('domestic') to products for very high security applications ('commercial'). Commercial locks have special features and customers may need specialist advice. While there may be demand side differences, on the supply side, most manufacturers make a range of padlocks.
There appears to be some supply side substitutability between locks and padlocks as lock manufacturers generally make padlocks (and vice versa). Some companies have established brands in different sectors of the market; for example, AA owns the Yale, Chubb and Union brands of locks and padlocks. Chubb and Union are well established in the lever mortice lock sector, while Yale is strong in cylinder rim locks and in padlocks, but the brands cover several other products. However Europe-wide CEN standards, covering six grades of resistance to attack, were adopted for locks and padlocks in 2001 which suggests that brand name is no longer the only indicator of quality. In addition locks and padlocks are frequently re-branded by wholesalers and retailers.
The merger only impacts on the supply and distribution of locks and padlocks into the UK since ESHG does not manufacture in the UK. A distribution presence is required in the UK. There is a significant degree of imports of locks and padlocks into the UK – cheaper manufacturing and labour costs overseas have resulted in locks and padlocks being manufactured throughout the world. In view of this, it is likely that the scope of the geographic market is at least UK wide but it is not necessary to reach a conclusion since competition concerns do not arise from the merger.
AA considers itself to be the global market leader, with annual sales approaching Euro three billion and a share of supply globally of 10-12 per cent. It considers the second biggest player globally is Ingersoll Rand, followed by Kaba, Black & Decker, Stanley and Dorma (see [note 3]). The security product industry is growing steadily at two-three per cent in real terms because of increasing wealth in the developing world and an increasing sense of vulnerability.
Taking a narrow geographic frame of reference, AA has been the market leader in the UK for some time in both door locks and padlocks. The parties estimate that AA accounts for [25-35 per cent] (see [note 4]) and ESHG [less than five per cent] (see [note 4]) of locks supplied in the UK. The main competitors are Ingersoll Rand, ERA, Guardian and Kaba Grundman. In the supply of padlocks, AA estimates its share of supply in the UK as [40-50 per cent] (see [note 4]) and ESHG's as [less than five per cent] (see [note 4]). The main competitors are Squire, Abus and Master. Information available to the OFT suggests that the shares of suppliers have fluctuated over the last five years or so, suggesting competition is present, with imports taking an increasing share. Imports of door locks were estimated at 31 per cent in 2002 and have increased from 48 per cent in 1995 to 73 per cent in 2002 in the padlocks sector.
Barriers to entry and expansion
The parties consider that barriers to entry are low because the technology is mature, the products are commodity products and easy to copy, and manufacture can be sub-contracted. Previous information provided to OFT in 2000 suggested that the costs of establishing a facility capable of producing a range of products was estimated as being no more than [ ] (see [note 2]) – no evidence has been received to suggest that costs have materially changed. This compares to sales of security products in the UK of approximately £190 million.
Trade customers, wholesalers, distributors and DIY multiples, are likely to have, and exercise, buyer power. This is because they source imports directly, with many selling own brand products, and can seek to influence terms to their suppliers. Domestic customers are not likely to have or exercise any buyer power.
No vertical issues are raised by this transaction.
THIRD PARTY VIEWS
A number of third parties were contacted by OFT in the usual way. Only a small number responded but no competition concerns were raised. One third party was concerned that the merger might have an adverse effect on employment in the UK locks industry.
Door locks and padlocks are manufactured in Europe and the Far East and a significant proportion of UK sales of door locks and padlocks are sourced from these regions. While the merger allows AA to increase its share of supply to the UK market, the increment is extremely small at less than [five per cent] (see [note 4]) in each product sector. Barriers to entry are low and buyer power from trade customers appears to be present which should act as a constraint on the merged business. It is therefore unlikely that this merger will create a substantial lessening of competition. While AA is the clear market leader in the UK, shares over recent years exhibit some volatility which is evidence of competition between players in the market.
The merger does not appear to result in a substantial lessening of competition within a market or markets in the United Kingdom for goods or services.
This merger will therefore not be referred to the Competition Commission under section 33(1) of the Act.
- The parties state that DOM UK is also involved in cylinder assembly to a limited extent.
- Text deleted at the request of the parties.
- Data taken from AA’s website: www.assaabloy.com
- Actual figures replaced by a range at the request of the parties.