On 27 April 2020 the Federal Cartel Office in Germany (“FCO”) cleared the acquisition of Vossloh Locomotives GmbH (“Vossloh Locomotives”) by Chinese manufacturer CRRC Zhuzhou Locomotives Co. Ltd. (“CRRC”). FCO President Andreas Mundt stated that the in-depth investigation found that initial concerns were not serious enough to justify prohibiting the transaction.

The FCO released a press report and a case summary (exclusively available in German) one week before expiry of the review period. The detailed clearance decision will be published at a later stage.

By acquiring Vossloh, CRRC takes over a key manufacturer of shunters in Europe. The FCO determined that Vossloh Locomotives is the leader for the manufacture of diesel-powered locomotive shunters with a share between 40-50% in the European Economic Area and Switzerland. The FCO found that this area constituted a relevant geographic market. CRRC is the world’s largest manufacturer of rolling stock, albeit with only limited activities in Europe.

The decision should be read in the context of the interplay between merger control and Foreign Direct Investment (“FDI”) screening. It contains significant and novel decisional guidance on the competitive assessment under German merger control law of acquisitions by State-owned companies originating from centrally planned economies. It also clarifies that a merger control analysis only covers some of the concerns raised by acquisitions by state-owned companies.

Distinguishing Merger Control Purpose From Other Concerns

The FCO stated that it “very thoroughly examined all the particularities associated with the acquisition of a European company by a Chinese state-owned company”, and acknowledged the intensive public debate surrounding such transactions. However, the case report recalls that an assessment under competition law focuses on how the transaction affects the functioning of competition. The FCO believes that only some aspects of the public debate fall within the scope of a merger control assessment, whereas others cannot be addressed through competition tools. The present decision should therefore be seen against the broader context of trade and FDI policy and State aid.

Particularities of the Assessment of Participations by State-Owned Companies

The FCO identifies several particularities of acquisitions by State-owned companies originating from a centrally planned economy, which raise novel competition law questions. This decision will therefore serve as future guidance for the assessment of such transactions, at least within Germany:

• First, the FCO acknowledges that State-owned companies originating from a centrally-planned economy may be subject to very different competitive restraints and limitations.

• More specifically, the FCO refers to the size of CRRC’s corporate group, concluding that it should be seen as part of the whole group of companies in which the Chinese State is a majority shareholder. As a result, CRRC is found to benefit from significant economies of scale and access to the varied production capability within the group.

• In addition, the FCO sees State-owned companies as more likely to be able and willing to engage in low-price strategies. While the FCO recognises that low prices are “inherent” to competition, it states that systematic undercutting of competitors’ prices may lead to substantial changes of market conditions. According to the FCO, this cannot be addressed by means of an abusive behaviour assessment, given that political considerations (e.g. goals formulated in five-year-plans or in national industry strategies) may outweigh purely economic incentives.

• In this context, the FCO refers to CRRC’s access to financial resources through subsidies from the Chinese State and loans from State banks. It asserts that CRRC plays an important role in China’s industrial strategies and that it benefits from State programs;

• The FCO further adds that the numerous decisions adopted by the European Commission (the “Commission”) against Chinese State-owned companies for price-dumping practices indicate a readiness of such companies to engage in such practices.

Competitive Assessment – No Grounds for Prohibition

Despite significant concerns, the FCO ultimately concluded that the requirements for a prohibition of the proposed merger are not met:

• The FCO found that market shares in the shunter industry are volatile, as the products concerned are durable commercial goods of which only a small and varying number is sold per year, and that there is a significant time gap between product order and product delivery. It therefore based its decision on the sales volume of the past five years instead of a single year period and looked at a five-to-ten year period for its market prognosis instead of the 3-5 years typically applied.

• The FCO developed a number of different counterfactual scenarios for its substantive assessment, investigating whether, in the absence of the transaction, Vossloh would (i) exit the market, (ii) find another buyer that would inject capital to finance required R&D projects, or (iii) remain independent, phasing out its activities without access to resources to finance R&D and other necessary investments. In all scenarios, the FCO took into account the presence of three recent entrants in the market.

• Ultimately the FCO found that there is not sufficient evidence that the proposed merger will significantly impair competition on the European shunter market within the next five to ten years to warrant blocking the transaction.

Observations

The FCO’s decision deals with a number of novel questions for the merger control analysis of acquisitions by State-owned companies acting in the broader political context of a centrally-planned economy and provides guidance for future assessments.

In addition, the decision is a relevant precedent insofar as the FCO based its decision purely on competition grounds, illustrating that – even during heightened FDI and trade policy awareness – a competition agency can perform its activities without getting distracted by the political debate outside of the remit of competition law.