Affected market: Rail fastenings
The OFT’s decision on reference under section 33 given on 23 September 2003
Delachaux S.A. (Delachaux) is a French company active in: electrification systems; magnetisms; special steels; metals; injection systems; and rail and urban transport. In the rail segment Delachaux designs, manufactures and supplies a range of rail fastenings and rail fastening systems.
Pandrol Holdings Ltd (Pandrol) is a UK company active in the design, manufacture and distribution of rail fastenings and rail fastening systems for use in railway and urban transport sectors. In the year ended 31 December 2002 Pandrol’s UK turnover was £16.4 million.
Delachaux proposes to acquire Pandrol. The merger has also been notified in France and cleared in Spain. The administrative deadline is 23 September 2003.
As a result of this transaction, Delachaux and Pandrol will cease to be distinct. The parties overlap in the manufacture and supply of rail fastenings and rail fastening systems and the share of supply test in section 23 of the Enterprise Act 2002 (the Act) is met. It is therefore probable that a relevant merger situation will be created.
The parties overlap in the manufacture and supply of rail fastenings and rail fastening systems. In the UK, Delachaux is only active in the supply of rail fastenings, while Pandrol is active in the supply of both fastening and fastening systems.
Rail fastenings are designed to hold the rail in place on the sleeper. They are procured for maintenance and repair work, often called legacy work, where the sleeper is not changed. Rail fastenings come in a variety of formats: round-bar, flat-bar, threaded, non-threaded, resilient (with greater elasticity) and non-resilient. All these fastenings perform the same function, however historically different rail networks have favoured a particular type of fastening.
Rail fastening systems are more complex and consist of a number of components including the rail fastening. The principal pre-assembled fastening systems are protected by patents. Fastening systems are used in renewal and upgrade work and when replacing track (known as project work). In project work, the sleeper is either changed or new track is laid.
Demand side substitutes
The parties consider that rail fastenings and rail fastening systems are part of the same product market. In this regard, it may be possible to switch between purchasing and assembling individual components of the system and the entire pre-assembled system. However, as mentioned above, fastenings and systems are generally used in different situations.
It may be appropriate to delineate between types of rail fastening and system: the parties and their main competitors do not produce homogenous fastenings and systems. In legacy work, the type of fastening used must be the same as the one being replaced, thus there is no possibility for users to substitute between the types of rail fastenings. However in project work switching may be more prevalent as there is no need to use the same fastening system.
Supply side substitutes
On the supply side, substitution between fastenings and fastening systems is asymmetric. Since fastenings are a component of the system, it is expected that systems manufacturers are able to move into the supply of fastenings with relative ease. Conversely, manufacturers of fastenings are less able to move into the production of systems, due to the research and development resources that would be required to develop an entire system that does not infringe existing patents.
Regarding the different types of fastenings, the parties argue that they can switch production to another type with relative ease and have expanded their range in line with demand. Indeed, all of the principal suppliers in the market provide a range of different types of rail fastenings.
On the basis of the discussion above no firm conclusion has been reached as to whether fastenings and systems should be considered as part of the same product market. The impact of the merger on each of these segments is considered under the horizontal issues section of this paper.
There are a large number of manufacturers of rail fastenings and systems based outside of the EEA. As far as the Office is aware, of those located outside Europe only one is currently accredited to supply rail networks within the EEA. Safety is a key concern of customers and they confirmed they are reluctant to source fastenings and systems from companies whose products do not have a proven safety track record. Although, currently they do not compete directly, those manufacturers located outside the EEA may place some constraint on those inside and their presence may increase in the future following rigorous testing.
The relevant geographic focus is narrower than global although no firm conclusion has been reached on whether the relevant frame of reference in this case is the EEA or UK. The impact of the merger on the relevant geographic areas is considered under the horizontal issues section of this paper.
It is estimated that the parties post-merger will supply [45-55] per cent [see note 1] of all fastenings and systems in the EEA and [70-80] per cent [see note 1] in the UK. The post-merger HHIs and increments for the EEA (HHI above 4000 [see note 1] – increment above 1000 [see note 1] and UK (HHI above 5000 [see note 1] – increment above 1500 [see note 1] are significant.
However, Delachaux, as discussed above, is not active in and is not an accredited supplier of fastening systems in the UK. As such the structure of supply in this segment will not change post merger and further analysis will focus on the fastenings segment.
The parties have had difficulties providing shares of supply for the fastenings segment and have only been able to provide broad estimates. Contracts for supplying rail fastenings are awarded through competitive tender. From information supplied to the Office on recent bids in the UK that the parties have made, it appears that they were often the only bidders. All but one customer asked only sought bids from either or both of the merging parties.
The Office recognises that in bidding markets, market shares are often lumpy and not a good indicator of market power. Between 1998-2002 there have been fluctuations in the parties’ and competitors’ sales volumes in the UK for rail fastenings and systems. In this period Pandrol was clearly the leading supplier, but volumes fluctuated year on year. In order to tender for contracts firms must qualify as a supplier and achieve accreditation for their product. The Office has learnt that there are other accredited suppliers in the UK, however these suppliers are presently smaller than the parties although they are seeking to expand. The Office is also aware that one significant potential competitor is actively seeking accreditation at the present time.
Further entry into the supply of fastenings in the UK could come from generic and non-EEA manufacturers. In the EEA there are some companies which manufacture generic alternatives and who are not accredited in the UK to supply. Outside the EEA there are a substantial number of generic manufacturers in the US, Brazil, India, China and Mexico.
The parties submit, using Delachaux as an example, that achieving accreditation is not difficult. It takes between 6 to 12 months and costs approximately £50,000 for each product accredited. This includes preparing the technical documentation, laboratory testing and testing on track. Third parties have stated that the process is costly in terms of time and money and that safety is the prime concern of network providers. As such reputation and experience of suppliers is important, which may make entry more difficult for those manufacturers from outside the EEA, however entry into the UK by a non-EEA manufacture has occurred.
Successful entry appears to be dependent on the support of network operators who have the ability to expand their range of suppliers by sponsoring manufacturers in the accreditation process. In effect network providers have the ability to expand their range of suppliers by seeking out, testing and accrediting other manufacturers. Therefore customers are able to manage their supply base effectively by sponsoring entry when they believe there is insufficient competition. However, this ability may be constrained to some extent by the number of suitably reputable and experienced suppliers and by the cost of sponsoring.
Some customers have confirmed that due to the scale of their purchases they are able to obtain discounts. The parties submit that customers are cost-sensitive buyers. For example, Network Rail announced its intention in July to reduce its spending on track replacement and signal repairs from £6 billion in 2003 to £4 billion in 2008 [see [note 2]. Third parties have confirmed that they would seek to switch if prices rose 5-10 per cent, however their ability to switch may be reduced, at least in the short term, as the merger will remove an alternative provider.
THIRD PARTY VIEWS
Of those customers and competitors contacted, the majority were either unconcerned or did not wish to express a view. Third parties did identify that the merger was between the two largest players in rail fastenings, but considered that the entry of alternative suppliers and the ability of customers to assist entry would place some constraint on the parties post merger.
The merger qualifies on the share of supply test for rail fastenings and systems. In the UK the parties overlap in the supply of rail fastenings.
The parties’ estimate of their shares of supply, seem to be lower than evidence collated by the Office. However, rail fastenings are supplied through a bidding process and it is recognised that in bidding markets, market shares are not always a good indicator of market power. In addition to the parties there are other accredited suppliers of rail fastenings in the UK, although these are much smaller suppliers looking to expand. Evidence received from the parties and third parties also suggests that a new entrant may soon enter the market for rail fastenings in the UK. As this new entrant appears to have capacity to meet increased demand, it is expected that it will place a constraint on the parties post merger.
Further entry from generic and non-EEA manufacturers may also occur and network operators are in a position to sponsor new entry in the face of insufficient competition. As such 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.
- Actual figures replaced by a range at the request of the parties
- Factual correction - This announcement in July was made by the rail regulator not Network Rail. However on 23 September, Network Rail issued a press release announcing that it had published its Cost Submission to the rail regulator and that it was spending £24.5 billion over the next five years, a reduction of £5 billion compared to the previous forecast published in June.