On February 6, 2019, the Commission[1] prohibited the then-proposed combination of Siemens AG’s (“Siemens”) mobility business and Alstom S.A. (“Alstom”) which put an end to the parties’ ambition of creating a European Champion in the rail industry.[2] The Financial Times called this Phase 2 investigation “one of the most important test cases for the commission since it assumed powers to vet EU mergers in 1989.”[3]

The Commission conducted an eight-month pre-notification investigation, issued almost 200 requests for information, reviewed around 800,000 internal documents, and engaged in extensive remedy discussions with the parties throughout. In addition, the €15 billion deal was reportable in almost 30 jurisdictions worldwide.

The Commission’s Concerns

The Commission’s decision found that the transaction would have produced anticompetitive effects in the markets for: (i) high-speed/very high-speed trains; and (ii) a number of mainline signaling systems.[4] The Commission had originally raised concerns in multiple additional markets, including for mainline and urban rolling stock, signaling systems for conventional metros and light rail, and rail electrification. These were ultimately dropped based on the parties’ arguments in their response to the Statement of Objections. Concerns in urban signaling systems were dropped following remedies submitted by the parties.

High-Speed and Very High-Speed Trains. The relevant market included trains capable of maximum speeds equal to or higher than 250 km/h. These were viewed as distinct from lower-speed intercity and regional trains due to regulatory and technical specifications that allow them to run at high service speeds. The Commission regarded the market as EEA-wide, including Switzerland, while acknowledging that it could also be wider. China, Japan, and South Korea were excluded from the relevant market due to “insurmountable barriers” impeding the entry of foreign competitors.

The parties considered competition in high-speed/ very high-speed to be particularly intense, with at least eight suppliers globally, including CAF, Bombardier, Hitachi/Ansaldo, Stadler, and Talgo. According to the parties, all of these players have confirmed track records, and comparable technical know-how and innovation capabilities. China’s CRRC has recently developed high- speed trains compliant with EU standards, and European customers expected them to enter the market within 3 to 5 years. The HS2 project in the U.K., the largest recent tender for very high-speed trains in the EEA, attracted seven bidders, including China’s CRRC. The vast majority of European customers supported or were unconcerned by the transaction, including Europe’s largest railway operators such as the U.K.’s HS2, Eurostar, Renfe (Spain), SBB (Switzerland), SJ (Sweden), and SNCF (France).

The Commission rejected these arguments and concluded that the transaction would have given rise to unilateral effects due to high combined market shares (60–80%, depending on the segmentation and time frame) and would have removed one of the two largest suppliers outside of China. In the Commission’s view, the parties were leading innovators and close competitors, with incumbent positions in France and Germany, providing them with large recurring orders. Competitors, such as Bombardier, Hitachi/ Ansaldo, Stadler, Talgo, and CAF, were considered weak in comparison, with comparatively low tender participation and winning rates. The Commission also found that CRRC was unlikely to successfully enter the EEA market despite its recent participation in the HS2 tender in the U.K.

Signaling Systems. The Commission distinguished between signaling systems for mainline trains (e.g., high-speed, intercity, and regional trains) and urban trains (e.g., metros and trams).

  • For mainline signaling projects, the Commission identified further sub-segments of certain signaling systems (g., interlockings and Automatic Train Protection (ATP)), differentiated between legacy and European Train Control System (ETCS) projects, and on-board and wayside/trackside solutions. The geographic market of these sub-segments was found to be national or EEA-wide.[5]

The Commission concluded that the combined entity would have been the main innovator and market leader in many of these sub-segments, with combined shares ranging between 40–100%. The parties were considered close competitors based on their bidding activity, feedback from the market investigation, and internal documents. The competitive pressure from the remaining signaling suppliers, including Thales, Bombardier, and Ansaldo, was considered insufficient.

  • For urban signaling projects, in view of the remedies offered, the Commission did not maintain its

Proposed Remedies

To address the Commission’s concerns in high and very high-speed trains, Siemens and Alstom offered to either: (i) divest one of Alstom’s high-speed train businesses (the Pendolino); or (ii) grant a license to Siemens’ Velaro very high-speed technology and technology bricks of the Velaro Novo (Siemens’ future very high-speed platform).

For mainline signaling systems, the parties offered Siemens’ entire on-board ATP business in the EEA while Alstom offered its entire global wayside ATP ETCS business and most of its interlocking business in the EEA. In addition, the parties proposed to divest one of Siemens’ urban signaling businesses. These assets combined would have created a new signaling player which would have been approximately the same size as Alstom’s European signaling business today, including R&D resources, a significant patent portfolio, backlog and personnel. The proposed remedies attracted significant interest from potential purchasers.

However, both the proposed high-speed and signaling remedies, which in aggregate were estimated to amount to around four percent of the combined entity’s total, global, sales, were considered insufficient by the Commission and the transaction prohibited on that basis.

Calls For Reform of EU Merger Control Rules

While Siemens/Alstom was only the 9th prohibition decision since the 2004 EU Merger Regulation, it has caused sizeable controversy. During the final stages of the Commission investigation, 19 EU Member States had called for an update of the merger control rules to facilitate the creation of European industrial champions.[6] France’s economy minister subsequently called the decision a “political mistake”,[7] and the German minister of economy stated that it “demonstrates the urgent need for a European industrial strategy. It involves orders of many $100 billion worldwide. That is why we need strong European champions. France & Germany agree.”[8] These two Member States then published a Franco-German Manifesto setting out their goals for European industrial policy.[9] The document acknowledges that merger control rules are essential but suggests three fundamental changes: (1) taking into account government control and subsidies of competing suppliers; (2) assessing competition at a global level and extending the time frame of assessing potential future competition; and (3) introducing a right of appeal to the EU Council, which would have the power to ultimately override Commission decisions in certain, yet to be defined cases.

Most competition law experts appear highly skeptical of these proposals that would politicize the rules-based, and generally considered world-leading, merger review system that the Commission has established over the course of the past 30 years. In Commissioner Vestager’s view, the prohibition decision should not prompt an overhaul of EU merger rules.[10] The Commission’s position is supported by multiple national antitrust authorities including in Germany, France, and the U.K., and by almost 50 European industrial economists emphasizing that “competition policy should be independent from political interference based on perceived European industrial goals, and respond to efficiency considerations and the protection of the competitive process.”[11] Economist Patrick Rey and Nobel laureate Jean Tirole, who advised the Commission on the economics of unilateral effects at the time of the adoption of the current EU Merger Regulation in 2004, commented that “Europe would be wise not to leave competition policy enforcement in the hands of its politicians” and rather called for “World Trade Organization dispute-settlement procedure or for stronger EU trade and procurement policy, not the weakening of its competition policy.”[12] Commission President Juncker argued similarly and promoted alternative solutions to protect the single market stating that “this is why we have shown our teeth by raising tariffs on cheap steel coming from China or taken a no tolerance approach on the forced transfer of technology. It is why we have modernised our trade defence instruments and have just recently agreed new rules on screening foreign investment in areas that may affect security or public order.”[13]

[1]      Siemens/Alstom (Case COMP/M.8677), decision not yet published.

[2]      Cleary Gottlieb acted as Alstom’s antitrust counsel globally, including in the EU.

[3]      See Rochelle Toplensky, “EU blocks planned Siemens-Alstom rail deal in landmark decision”, February 6, 2019, Financial Times.

[4]      Signaling systems are designed to prevent train collisions and increase traffic efficiency.

[5]      The Commission identified markets for (i) ETCS on-board projects in the EEA, (ii) legacy on-board projects at national level, (iii) standalone interlockings at national level, (iv) ETCS ATP for overlay projects in the EEA, and (v) ETCS ATP for re-signaling projects in the EEA (bundling ETCS ATP and interlockings).

[6]      See Jorge Valero, “19 EU countries call for new antitrust rules to create ‘European champions’”, December 19, 2018, EurActiv.

[7]      See Harriet Agnew, “EU blocks Siemens-Alstom rail merger, Le Maire says”, February 6, 2019, Financial Times.

[8]      See Florence Schulz, “German 20130 industrial strategy: Altmaier backs ‘European Champions’”, February 7, 2019, EurActiv.

[9]      See full manifesto dated February 19, 2019, available here https://w w w.gouvernement.fr/en/a-franco-german-manifesto-for-a-european-industrial- policy-fit-for-the-21st-century.

[10]    See Eszeter Zalan, “Vestager says ‘no’ to Siemens-Alstom mega-merger”, February 6, 2019, EUObserver.

[11]    See full open letter from February 2019, available at: https://www.barcelonagse.eu/microupdates/open-letter-massimo-motta-european-industrial-economists.

[12]    See Patrick Rey and Jean Tirole, “Keep Politics Out of Europe’s Competition Decisions”, March 4, 2019, Project Syndicate.

[13]    See European Commission Speech SPEECH/19/870, “Keynote speech by President Juncker at the EU Industry Days 2019”, February 5, 2019.