Commission, December 10, 2015, No M.7796

Dear Sirs,

Subject:  Case M.7796 – LINAMAR / MONTUPET

Commission decision pursuant to Article 6(1)(b) of Council Regulation No 139/20041

(1)     On 6 November 2015, the European Commission received a notification of a proposed  concentration  pursuant  to  Article  4  of  Council  Regulation  (EC)     No 139/2004 by which Linamar Corporation ("Linamar", Canada) intends to acquire 100% of the shares in Montupet S.A. ("Montupet", France) (the 'Transaction').2 Linamar and Montupet are designated hereinafter as 'the Parties'.

1.      THE PARTIES

(2)     Linamar is a diversified group, whose activities include machining of precision metallic  components,  modules  and  systems  for  the  automotive  industry, in particular concerning engines, transmission and driveline systems. Among others, Linamar offers pre-machining services to automotive component manufacturers.

(3)     Montupet is active in design and production of automotive component through casting process. Its core business is the production of aluminium cylinder heads for the automotive industry.

2.          THE OPERATION AND THE CONCENTRATION

(4)   By a cash voluntary tender offer announced on 15 October 2015, Linamar intends to acquire 100% of the shares in Montupet. The offer is subject to the condition  that Linamar can acquire more than 50% of the share capital and voting rights of Montupet on a fully diluted basis. The Transaction, therefore, constitutes a concentration within the meaning of Article 3(1)(b) of the Merger Regulation.

3.      UNION DIMENSION

(5)     The undertakings concerned have a combined aggregate world-wide turnover of more than  EUR  2  500  million3  (Linamar:  EUR  2  800  million;  Montupet:  EUR 452 million). In each of France, Germany and the United Kingdom, the combined aggregate turnover of all the undertakings concerned is more than EUR 100  million  (France:  Linamar  EUR  […]  million,  Montupet  EUR  […] million; Germany: Linamar EUR […] million, Montupet EUR […] million; United Kingdom: Linamar EUR […] million, Montupet EUR […] million). In each of France, Germany and the United Kingdom, the aggregate turnover of all the undertakings concerned exceeds EUR 25 million. The aggregate EU-wide turnover of each of the undertakings concerned is more than EUR 100 million. Neither undertaking achieves more than two-thirds of its aggregate EU-wide turnover within one and the same Member State. The proposed transaction therefore has an EU dimension within the meaning of Article 1(3) of the Merger Regulation.

4.   RELEVANT MARKETS

(6)     The Parties are active at different levels of the supply chain for automotive components for passenger cars and light commercial vehicles ("LCVs").

(7)     Montupet is active in manufacture and supply of automotive components, such as cylinder heads, steering knuckles, turbo casing, exhaust gas recirculation valves, intake manifolds and brake master cylinders. Montupet's core business is the  supply of aluminium cylinder heads, which represented […]% of Montupet's turnover in 2014.

(8)     Linamar offers several machining services for a variety of automotive components, including pre-machining of cylinder heads.

(9)     The relevant product markets for the assessment of this Transaction are: (i) the manufacture and supply of aluminium cylinder heads for use in passenger cars and light commercial vehicles,4 and (ii) the pre-machining of automotive components.

4.1.    Introduction to the relevant markets

(10)    Cylinder heads are one of the components of combustion engines for cars. Cylinder heads are produced through the casting production process, where alloys are re- melt and poured into a mould that will convey the shape to the component. The rough casted part needs to undergo the "pre-machining/cubing", which involves further refining the shape of the component by removing material in excess. Finally, the pre-machined component will go through the "final machining" process, which entails several additional phases of machining necessary to further polish the components before assembly.

(11)    Car manufacturers ("OEMs") usually outsource the casting and pre-machining of the automotive components to the same supplier, namely a casting manufacturer ("Tier-1 supplier"), which is selected through competitive tender procedures. The manufacturers of casting components usually also have in-house capabilities to perform the pre-machining on their own components. However, sometimes they might outsource the pre-machining to suppliers specialized in the provision of stand-alone machining services ("Tier-2 suppliers").

(12)    As regards cylinder heads, the Parties estimate that approximately 60% of cylinder heads in the EEA are produced in-house by OEMs.

(13)    The final machining, which is the most sensitive and critical phase, is usually performed in-house by the OEMs. If OEMs decide to outsource the final machining of a component, suppliers of stand-alone machining services will be awarded a contract and act as Tier-1 supplier.

(14)    As regards final machining of cylinder heads, the current practice in the EEA is for OEMs to perform this stage in-house.5

4.2.  Market for the production and sale of aluminium cylinder heads for passenger cars and light commercial vehicles

4.2.1.    Product market definition

(15)    In its precedents, the Commission has delineated the product market for the manufacture and supply of components for the automotive industry6  on a  product-by-product basis, thereby identifying a separate product market for each individual component,7 including aluminium cylinder heads.8 In line with the Commission's decisions, the Parties submit that the production and supply of aluminium cylinder heads for the use in passenger cars and light commercial vehicles constitutes a separate product market.

(16)    The majority of respondents to the market investigation highlighted that the know- how/equipment required for the casting of cylinder heads differs from that required for the casting of other automotive components.9

(17)    Qualified manufactures of cylinder heads noted that nowadays cylinder heads for passenger cars and LCVs are almost exclusively made of aluminium.10 The  findings of the market investigation confirmed that the know-how and equipment associated to the casting of aluminium cylinder heads components are different from those required for cylinder heads made of other metals.11

(18)    Overall, for the purpose of this decision, the Commission considers that the production and supply of aluminium cylinder heads constitutes a separate product market.

4.2.2.           Geographic market definition

(19)    In its precedents, the Commission has considered the geographic market for the manufacture and supply of automotive components to be EEA-wide. In previous cases, the Commission found that the market for the production and supply of aluminium cylinder heads for the use in passenger cars and LCVs was EEA-wide.12

(20)    The Parties agree with the Commission's practice in defining the geographic scope of this market.

(21)    The market investigation yielded mixed indications as to whether (i) competitors face different conditions of competition across different regions13 and (ii) suppliers are ready to serve customers regardless of their location14. However, the majority  of cylinder heads manufacturers that responded to the market investigation confirmed that the scope of their supply contracts is typically regional, such as EEA-wide in scope,15 and that they supply their EEA-based customers from their EEA-based production facilities.16

(22)    All the OEMs that responded to the market investigation confirmed that they usually rely on different suppliers of cylinder heads in different regions. One OEM explains that this is so because "in general, cylinder heads are too large and heavy to have them shipped across the ocean or over great distances on land. Only programs with very low volume in one region and high in other regions deviate from this general rule."17

(23)    In conclusion, the Commission considers that there are strong indications that the geographic scope of the market is EEA-wide but, for the purpose of this decision, the precise dimension of the geographic market can be left open, as the Transaction does not give rise to serious doubts about its compatibility with the internal market even if the market were to be defined on a broader basis (as worldwide in scope).

4.3.    Market for the pre-machining of automotive components

4.3.1.  Product market definition

(24)    The Commission has no precedents which concerned stand-alone machining of automotive components. However, the approach followed by the Commission in previous cases to analyse the market for machined parts could be used as a proxy for the analysis of the market for the machining of parts. In a case concerning commercial aircrafts, the Commission left open whether "each type of machined part should constitute a distinct product market".18 Consequently, this could suggest that the machining of each automotive component could be considered as a potential relevant market. In a case concerning the machining industry, the French competition authority left it open whether or not different segments of machined products market could be differentiated.19

(25)    The Parties submit that the machining of automotive components constitutes a distinct product market from the casting of components as they entail entirely different processes. The Parties submit that there is no separate market for the final machining of automotive components, or of cylinder heads in particular, as production methods are the same for both pre-machining and final machining.   They further submit that the product market for machining should not be delineated along different types of products for which machining is carried out as the same process and machineries are used to machine different components. They nonetheless consider that the issue whether the market for the machining of automotive components shall be further segmented by type of components can be left open.

(26)    The findings of the market investigation were not conclusive as to whether the know-how and equipment required for pre-machining of components in the automotive sector is in principle similar to that used for final machining. In the course of the market investigation, OEMs confirmed that whereas they usually source pre-machined components by generally relying on one single Tier-1 supplier, final machining of the components is usually done in-house20. Even when OEMs decide to outsource final machining, the procurement process for the selection of the final machining supplier is generally distinct from the one for the supply of the pre-machined component. As far as the present Transaction is concerned, only Linamar's pre-machining activities could give rise to a potential vertical relationship with Montupet's casting activities. Therefore, for the purpose  of this decision it is not necessary to further analyse the potential market for final machining. The precise scope of the market for pre-machining and the issue whether it should be considered to be part of the broader overall machining market can be left open since the transaction does not give rise to serious doubts about its compatibility with the internal market under any plausible market definition.

(27)    The findings of the market investigation were also not conclusive as to whether the pre-machining of automotive components should be delineated on a component-by- component basis. To this regard, there was disagreement among machining suppliers as to whether the know-how and equipment required for pre-machining of cylinder heads is similar to that used for other automotive components.21 Nonetheless, the majority of cylinder heads pre-machining suppliers that responded to the market investigation offer pre-machining services also for other automotive components.22 This suggests the existence of a certain degree of supply-side substitutability in the pre-machining of different automotive components.

(28)    Overall, the results of the market investigation indicated that there might be a market for pre-machining of automotive components. However, the Commission considers that, for the purpose of this decision, the exact scope of the product market can be left open since the transaction does not give rise to serious doubts about its compatibility with the internal market, even if the hypothetical narrower market for pre-machining of aluminium cylinder heads were to be defined.

4.3.2.           Geographic market definition

(29)    In a decision concerning the supply of machined parts for aircrafts, the  Commission drew an analogy between the geographic scope of the market for the supply of machined parts for aircraft and geographic scope of the market for the supply of parts for aircrafts.23 In that case, the Commission defined a worldwide market for the supply of goods to aircrafts. Therefore, it defined a global market for the supply of machined parts for aircrafts. In line with this precedent, the market  for machining for products for the car industry should be aligned to the geographic market for the supply such products. This would lead to the definition of a   market which is at EEA-wide. The Parties nonetheless submit that the precise geographic scope of the market can be left open.

(30)    The market investigation yielded mixed indications in relation to the possible geographic scope of the market. Some of the respondents pointed to the fact that they offer pre-machining services to EEA customers not only from their EEA facilities.24 At the same time, the majority of respondents indicated that their customers of pre-machining products are usually located nearby their facilities at national/regional level.25 Others indicated that the geographic scope of their contracts is mainly regional/EEA-wide in scope rather than global.26 Finally, the majority of respondents indicated that they face similar conditions of competition for the supply of pre-machining services across the various geographic areas where they operate,27 even though they would not be ready to offer pre-machining to any customer regardless of their geographic location.28

(31)    In conclusion, the Commission considers that there are indications that the geographic scope of the market may be EEA but, for the purpose of this decision, the precise dimension of the geographic market can be left open, as the Transaction does not give rise to serious doubts about its compatibility with the internal market even if the product market is defined on a broader (worldwide) basis.

5.          COMPETITIVE ASSESSMENT

(32)   Montupet and Linamar are active at different levels of the value chain for automotive components, namely in the casting and machining respectively. Although Montupet has pre-machining/cubing internal capabilities dedicated to its captive production of cylinder heads, it is not active on the pre-machining market  as a supplier to third parties. Therefore, the Transaction does not give rise to horizontal overlaps.

(33)  The proposed Transaction gives rise to vertically affected markets in relation to cylinder heads since (i) Montupet is one of the main suppliers of cylinder heads in the EEA and (ii) Linamar is active in the pre-machining of cylinder heads.29

5.1.      The legal framework

(34)    Foreclosure concerns a situation where actual or potential rivals' access to supplies or markets is hampered or eliminated as a result of a merger and those   companies'ability and/or incentive to compete is reduced. Such foreclosure can take two forms: input and customer foreclosure.30

(35)    Input foreclosure is a situation where, post-merger, the new entity would be likely to restrict access to products or services that it would have otherwise supplied absent the merger, thereby raising its downstream rivals' costs by making it harder for them to obtain supplies of the input under similar process and conditions as absent the merger.31

(36)    Customer foreclosure is a situation where the merged entity may foreclose access  to sufficient customer base to its actual or potential rivals in the upstream market and reduce their ability or incentive to compete. In turn, that may raise downstream rivals' costs by making it harder for them to obtain supplies of the input under similar prices and conditions as absent the merger.32

(37)    For an input or customer foreclosure scenario to raise competition issues, three factors need to be taken into account: 1) the ability of the merged entity to engage in foreclosure, 2) the incentives of the merged entity to do so and 3) whether a foreclosure strategy would have a significant detrimental effect on competition on the downstream market.33

5.2.    Market Structure

(38)    Based on the Parties' estimates, as illustrated by the table below, in the EEA about 60% of the overall production of cylinder heads is captive and done by OEMs in- house. Montupet is the second largest manufacturer of cylinder heads in the EEA after Nemak. Other cylinder head suppliers active in the EEA are Nemak, St Jean Poitou, Mazzucconi, Arche and KSPG AG.34

(39)    Moreover, if the geographic market for aluminium cylinder heads were to be defined as worldwide, Montupet would have a much smaller market share ([5-10]%, excluding captive production).

(40)    According to the Parties' estimates, Linamar has a limited position in the EEA market for pre-machining of aluminium cylinder heads, namely [5-10]% market share in 2014.35 The market reconstruction performed by the Commission confirmed that Linamar's EEA market share for stand-alone pre-machining of cylinder heads is indeed rather limited (less than [10-20]%).36 At worldwide level, Linamar would achieve a [10-20]% market share due to its significant presence in North America.

(41)    When considering the overall machining of automotive components, Linamar's market share would be less than [5-10]% share at the EEA level (excluding captive production by OEMs) and less than [0-5]% at worldwide level.

(42)   Moreover, the overwhelming majority of the casting suppliers are vertically integrated37 and players such as Nemak, Martinrea, Magna, Georg Fischer, Ryobi have significant machining capabilities in-house.

5.2.1.           No input foreclosure effects

(43)    Linamar currently supplies pre-machining for cylinder heads […] in the EEA, […]. Due to Linamar's limited position in the upstream market for pre-machining, it is unlikely that the merged entity will be able to foreclose access to pre-machining services to Montupet's competitors. Post-transaction, several alternative suppliers of stand-alone machining will remain available on the EEA market, such as   Rege, Weber, ZMT, QP, ZBG, Barosz and Hackerodt.38

(44)    Moreover, the findings of the market investigation confirmed that the vast majority of machining customers, both casting houses, such as Nemak and Martinrea, and OEMs, such as BMW, Daimler and Ford, have in-house machining capabilities.39 Finally, in line with what the Parties submit, switching suppliers of machining services appears feasible within 12-18 month time.40 In more general terms, although some specific know-how and compliance to quality standards is  required, barriers to entry in this market appear to be relatively low and some recent entries have been observed in the industry, […].41

(45)    In light of the above and the evidence available to the Commission and in view of the outcome of the market investigation, it appears unlikely that the Parties would have the ability to engage into customer foreclosure strategy after the Transaction.

5.2.2.           No customer foreclosure effects

(46)    At present, Montupet machines about [90-100]% of the cylinder heads it casts. Montupet outsources the machining of remaining [0-10]% of its cylinder heads' production to […]. Given that this supplier was appointed by […], any change of machining service provider would require […]’s consent. Furthermore, any early termination would be subject to significant break-up fees to be incurred by Montupet. Therefore, it is unlikely that Montupet will have the ability and  incentive to interrupt the existing external sourcing arrangements with this supplier.42

(47)    If, for future contracts, Montupet were to internalize the machining requirement of its entire production, the Transaction would not significantly impact the market structure since virtually all Montupet's machining requirements are already dealt with in-house.

(48)    In light of the above and the evidence available to the Commission and in view of the outcome of the market investigation, it appears unlikely that the Parties would have the ability to engage into customer foreclosure strategy after the Transaction.

5.2.3.           Conclusion

(49)    In the course of the market investigation, no substantiated concerns were raised as to the impact of the transaction on the market for stand-alone machining of automotive components and cylinder heads and/or the market for the production and sale of aluminium cylinder heads for passenger cars and light commercial vehicle.43

(50)    Some of Montupet's competitors indicated that after the transaction "the competition will be even higher"44 and in general there will be increased competition in the cylinder head market.45 The majority of Linamar's competitors indicate that the transaction will bring "more competition" or will have no impact on their business.46

(51)    The Parties' […] customers, specifically […] and […], expressed some concerns as regards the possibility that in the future their commercial relationship with each of the Parties might cease. Nonetheless, in view of the availability of alternative suppliers and the high concentration on the buyers' side due to the presence of few big OEMs active at global level, it is unlikely this will result in negative effects on the markets for cylinder heads and machining.

(52)    Finally, OEMs indicated that they do not expect the transaction to have any impact on their business limiting their choices in the future.47 On the contrary some anticipate increased competitiveness in particular in the supply of pre-machined cylinder heads in the long term as a result of the transaction.48 As explained by one OEM, "the proposed transaction will have positive effects. Linamar would have the foundry capacity which it lacks today and Montupet would gain a global footprint and easier access to capital".49 The majority of OEMs considered that the transaction will have no impact on the market for machining either, except for potentially prompting further consolidation in the industry.50

(53)    On the basis of the above, the Commission concludes that the Transaction does not raise serious doubts about its compatibility with the internal market.

6.          CONCLUSION

(54)    For the above reasons, the European Commission has decided not to oppose the notified operation and to declare it compatible with the internal market. This decision is adopted in application of Article 6(1)(b) of the Merger Regulation.

1                     OJ L 24, 29.1.2004, p. 1 ('the Merger Regulation'). With effect from 1 December 2009, the Treaty on the Functioning of the European Union ('TFEU') has introduced certain changes, such as the replacement of 'Community' by 'Union' and 'common market' by 'internal market'. The terminology of the TFEU will be used throughout this decision.

2                     Publication in the Official Journal of the European Union No C 376, 13.11.2015, p. 24.

3                 Turnover calculated in accordance with Article 5 of the Merger Regulation and the Commission Consolidated Jurisdictional Notice (OJ C 95, 16.4.2008, p. 1).

4                 Montupet's activities in the casting of other automotive components, such as steering knuckles, turbo casing, exhaust gas recirculation valves, intake manifolds and brake master cylinders do not give rise to vertically/horizontally affected markets. Therefore, these markets will not be discussed further.

5                 In the course of the market investigation, OEMs confirmed that in the EEA they don't outsource the final machining of aluminium cylinder heads. […] is the only OEM that has recently decided to outsource the machining of aluminium cylinder heads which will be produced  in-house for  a new EEA program starting in 2016.

6                 Within that industry, the Commission has differentiated between (i) light vehicles, including  passenger cars and light commercial vehicles, (ii) heavy commercial vehicles, see COMP/M.7401, Blackstone / Alliance BV / Alliance automotive group. As the Parties are only active in components for passengers' cars and LCVs, it is not necessary to differentiate any further.

7                 COMP/M.7401, Blackstone / Alliance BV / Alliance automotive group.

8                 COMP/M.452, Nemak / Hydro Castings; COMP/M.4500, Nemak / TK Aluminium "A";  COMP/4840, Fiat / Teksid.

9                 See replies to Question 8 of Q2 – Questionnaire to competitors in cylinder heads.

10              See for instance minutes of the conference call with a market player of 4 November 2015.

11              See replies to Question 9 of Q2 – Questionnaire to competitors in cylinder heads.

12              COMP/M.452, Nemak / Hydro Castings; COMP/M.4500, Nemak / TK Aluminium "A";  COMP/4840, Fiat / Teksid.

13              See replies to Question 13 of Q2 – Questionnaire to competitors in cylinder heads.

14              See replies to Question 11 of Q2 – Questionnaire to competitors in cylinder heads.

15              See replies to Question 12 of Q2 – Questionnaire to competitors in cylinder heads.

16              See replies to Question 10 of Q2 – Questionnaire to competitors in cylinder heads.

17              See replies to Questions 2 of Q3 – Questionnaire to automotive customers.

18              COMP/M.4561, GE / Smiths aerospace § 22.

19              French Competition Authority, decision of 2 November 2010, 10-DCC-155, RBDH / Fonds de la Consolidation et de Développement des Entreprises, § 13.

20              See replies to Questions 4 and 5 of Q3 – Questionnaire to automotive customers.

21              See replies to Questions 8 and 9 of Q1 – Questionnaire to competitors in machining.

22              See replies to Question 3 of Q1 – Questionnaire to competitors in machining.

23              COMP/M.4561, GE / Smiths aerospace.

24              See replies to Questions 13 of Q1 – Questionnaire to competitors in machining.

25              See replies to Question 18 of Q1 – Questionnaire to competitors in machining.

26              See replies to Question 16 of Q1 – Questionnaire to competitors in machining.

27              See replies to Question 17 of Q1 – Questionnaire to competitors in machining.

28              See replies to Question 15 of Q1 – Questionnaire to competitors in machining.

29              Linamar also has activities in the final-machining of certain automotive components, but not in relation to cylinder heads. In fact, there were no sales of final-machining for cylinder heads in the  EEA over the last few years, as this stage of production is usually internalized by OEMs.

30              See, for instance Guidelines on the assessment of non-horizontal mergers under the Council  regulation on the control of concentrations between undertakings, OJ C 265, 18.10.2008, p. 7. ('Non- Horizontal Guidelines'), paragraphs 29 and 30.

31              See, for instance Non-Horizontal Guidelines, paragraph 31.

32              See, for instance Non-Horizontal Guidelines, paragraph 58.

33              See, for instance Non-Horizontal Guidelines, paragraphs 32 and 59.

34              See replies to Question 5 of Q2 – Questionnaire to competitors in cylinder heads.

35              There is no difference between the EEA market shares for pre-machining of cylinder heads and those for the overall machining (including pre-machining and final machining) since there was no outsourcing of final machining for cylinder heads in the last few years.

36              See replies to Question 7 of Q1 – Questionnaire to competitors in machining, replies to Questions 6, 19 and 20 of Q2 – Questionnaire to competitors in cylinder heads and information contained in paragraph 126 of the Form CO.

37              See replies to Questions 3 and 4 of Q2 – Questionnaire to competitors in cylinder heads.

38              See replies to Question 20 and 21 of Q1 – Questionnaire to competitors in machining.

39              See replies to Question 8 of Q3 – Questionnaire to automotive customers, Question 5 of Q1 – Questionnaire to competitors in machining and Questions 3 and 4 of Q2 – Questionnaire to competitors in cylinder heads.

40              See replies to Question 23.2 of Q2 – Questionnaire to competitors in cylinder heads.

41              See replies to Question 33 of Q2 – Questionnaire to competitors in cylinder heads.

42              The machining of cylinder heads for Montupet represented only about 20% of […] annual capacity.

See minutes of the conference call with a market player of 4 November 2015 at 15:00.

43              See replies to Question 30 of Q1 – Questionnaire to competitors in machining; Question 34 of Q2 – Questionnaire to competitors in cylinder heads; and Question 9 of Q3 – Questionnaire to automotive customers.

44              See reply of a competitor to Question 34.1 of Q2 – Questionnaire to competitors in cylinder heads.

45              See replies to Question 34.1 of Q2 – Questionnaire to competitors in cylinder heads.

46              See replies to Question 30.1 of Q1 – Questionnaire to competitors in machining.

47              See replies to Question 9.1 of Q3 – Questionnaire to automotive customers and minutes of the conference call with a market player of 3 November 2015 at 17:15.

48              See replies to Question 9 of Q3 – Questionnaire to automotive customers.

49              See for instance minutes of the conference call with a market player of 4 November 2015.

50              See replies to Question 9 of Q3 – Questionnaire to automotive customers.