Affected market: Winding wires
The OFT's decision on reference under section 33(1) given on 7 October 2005. Full text of decision published 19 October 2005.
Please note that square brackets indicate information excised, or exact figures replaced by a range, at the parties' or third parties' request.
Superior Essex Inc (Superior) is active in the development, manufacture and supply of a wide range of cable, wire and electrical insulation products. Through its subsidiary Essex International Limited, it is active in the supply of winding wires and other related products in Europe. Superior's turnover in the UK for the financial year 2004 was around £ [ ] million.
Nexans S.A. (Nexans) is active in the development, manufacture and supply of cables and cabling systems mainly in the energy infrastructure, telecommunications and electrical wires sectors. Through its subsidiary Hi Wire Ltd, Nexans is active in the supply of winding wires and ancillary products in the UK. Nexans' turnover in the UK for the financial year 2004 was around £ [ ] million.
Superior and Nexans intend to create a joint venture (JV) to which they will transfer assets and shareholdings in their European affiliates relating to the European-based business of development, manufacture and supply of winding wires and related products.
The transaction was announced on 28 July 2005. The administrative deadline is 19 October 2005.
The JV satisfies the share of supply test set out in section 23(1)(a) of the Enterprise Act 2002 ('the Act') in respect of the supply of winding wires in the UK.
The JV participants overlap in the manufacture and supply of winding wires. There are no other areas of overlap between the JV participants in regard to related products.
Winding wires are used in the production of a variety of electromagnetic devices, such as motors, generators, pumps, control devices and transformers. They are made of bare copper and coated or enamelled with different types of varnish and other insulating materials.
On the demand-side, customers use a broad range of winding wires. The differences between them are the diameter and the coating. The JV participants maintain that the choice of winding wires depends on the specific end use application and the specific customer requirements. Most third parties agree. This indicates that the level of demand-side substitutability between the different winding wires is limited.
On the supply-side, the JV participants maintain that the level of substitutability is very high. In their view, all winding wires are produced in a similar way hence switching production from one type of wire to another can be done relatively quickly on customer demand. This could be achieved within a short period of time (from one hour to up to 12 hours) and at relatively low cost (average cost would be approximately £350) depending on the complexity of the change-over, labour, conductor size and the volume of scrap produced. This view was supported by most third parties.
On the basis of supply-side considerations, the relevant frame of reference will be the manufacture and supply of winding wires.
The JV participants submit that the relevant frame of reference for the
manufacture and supply of winding wires is at least EU wide.
On the demand-side, UK customers appear to use European manufacturers. Evidence suggests that some customers (e.g. Original Equipment Manufacturers (OEM)) are turning to European procurement.
On the supply-side, manufacturers supply across Europe either through a distributor (approximately 20 per cent of UK sales) or directly to end-customers. The level of imports to the UK appears to be high (approximately 50 per cent), which may indicate that the market is wider than national. While Superior has manufacturing facilities in the UK, Nexans has manufacturing facilitates in France, Portugal and Germany. Competitors supplying in the UK are located in Austria, Germany and Italy. In this respect, the JV participants submit that 47 per cent of Nexans sales are allocated to countries outside the three countries in which Nexans has manufacturing plants.
The JV participants also maintain that transport costs are low; products are standardized on a European basis to the International Electro-technical Commission specifications; and prices are based on customer volumes and are not set on a national basis.
Third parties agree that the geographic frame of reference should be at least EU-wide.
In the light of the above considerations, the appropriate frame of reference will be the EU manufacture and supply of winding wires.
Table one below provides the JV participants' and their competitors' shares of supply for the manufacture and supply of winding wires in the EU. Post-transaction, the JV's combined share of supply will amount to [20-25] per cent with an increment of [0-5] per cent.
Table 1: EU Shares of Supply 2004 (see [note 1])
Superior Essex - [0-5]
Nexans - [20-25]
Combined - [20-25]
IRCE - [10-15]
Dahrentradt - [10-15]
Invex - [10-15]
Schwering - [5-10]
ACEBSA - [5-10]
ZML - [0-5]
Ederfil - [0-5]
Others - [15-20]
Total - 100.0
The JV participants indicated that there are over 25 manufacturers of winding wires in the EU and described the market as fragmented: post merger six players comprise 73.3 per cent share of EU supply and some 19 others comprise the remainder. There is evidence that the JV will continue to face significant competitive pressure in the UK from EU players. For instance, evidence suggests that IRCE Group has been an effective competitor through Wire Electric Suppliers and FD Simms.
In addition, the JV participants maintain that there is a considerable level of over-capacity in the sector (around 15 per cent, see [note 2]) and that demand in the EU has been declining resulting in prices decreasing by an average of one to three per cent per annum. Third party evidence supports this view.
Barriers to entry and expansion
The JV participants consider that barriers to entry into the UK are low but this has not been supported by third parties.
The primary barrier appears to be cost. The JV participants estimate that the cost involved in building a plant capable of competing effectively with the JV participants would be around £16 million. Third parties estimate the cost to be in the region of £10-30 million. There has been no new entry in the last five years and de novo entry is unlikely given the capital required and decreasing price trend.
The evidence the OFT has found indicates that expansion can be feasible. The parties submit that Euro Metals, a small player, expanded its winding wire distribution business two to three years ago.
The JV participants maintain that customers are extremely price sensitive and have strong bargaining power. The majority of customers are large OEMs or distributors that are able to exercise significant pressure on prices. There is a trend toward electronic bidding for some large customers, increasing downward pressure on price and price transparency.
There is no third party evidence to support the JV participants' view but it is not necessary to conclude given the lack of competition concerns.
THIRD PARTY CONCERNS
The majority of third parties were unconcerned about this merger.
A third party raised concerns about the limited number of providers of varnishes in the EU. Given the absence of any overlap in this segment (Superior does not supply varnishes to third parties in the EU) and that nothing changes concerning the supply of varnishes as a result of the transaction, this segment has not been considered further in this decision. Another third party noted that the JV participants' combined share of supply would be significant within the UK. As discussed above, evidence indicates that the market is EU-wide in scope and on a EU basis, this concern is unsubstantiated.
The JV participants overlap in the manufacture and supply of winding
Post-transaction, the JV will have a share of supply of [20-25] per cent (increment [0-5] per cent) in the manufacture and supply of winding wire in the EU. The JV will face competition from a large number of European players. Moreover, the OFT believes that the sector is competitive with prices falling and a relatively high level of over-capacity. Finally, as noted above, the majority of third parties were unconcerned about the transaction.
Consequently, the OFT does not believe that it is or may be the case that the creation of this merger situation may be expected to result in a substantial lessening of competition within a market or markets in the United Kingdom.
This merger will therefore not be referred to the Competition Commission under section 33 (1) of the Act.
- Source: The JV participants' best per cent estimates.
- European Winding Wire Group's estimates.