Industry leaders warn rail giants over merger

Industry leaders and academics have warned against Siemens and Alstom using potential competition from Chinese rival CRRC as an excuse to merge their rail businesses, saying such a deal would create a monopoly in Europe's rail industry to the detriment of travelers.

They say if European Union competition regulators approve the deal next month, it will damage the credibility of EU competition law and set a precedent for mega mergers by other transport and utility companies.

"We have so much at stake," said Christopher Bovis, a professor of international business law at the University of Hull. "The creation of such a mega merger will significantly reduce competition, create barriers for new market entrants, and increase costs for rail travelers. Risking all that on the premise of potential competition from CRRC is not a credible argument."

Christian Wolmar, a leading railway commentator and author of more than a dozen transport books, added: "As Siemens and Alstom already dominate Europe's rail market, such a merger could provoke other smaller rail players to merge in order to compete, and that will significantly reduce choices in this market."

Siemens' mobility unit and Alstom first announced their intention to merge in September 2017, arguing that such a merger is necessary to create a 'European champion' to fight potential competition from China's CRRC.

The proposed merger triggered an extensive investigation process by the EU's competition watchdog, which can block the deal if it believes the merged Siemens-Alstom entity will become a monopoly that can unfairly increase prices, reduce quality or restrict innovation.

The EU's competition watchdog is set to announce a final decision on Feb 18, but so far the deal has garnered little support.

Margrethe Vestager, the EU's competition commissioner, said earlier this month that building European champions by undermining competition is not acceptable. "We can't build them with mergers that harm competition, or by looking the other way when Europe's businesses break our rules," she said at a business forum in Berlin.

Vestager's views are backed by competition regulators from at least five countries. In December last year, competition regulators from the United Kingdom, Spain, the Netherlands and Belgium jointly wrote to Vestager, expressing their concern that the proposed Siemens-Alstom merger would create a loss of competition "both widespread and very significant".

Germany's competition authority expressed similar concerns in a confidential letter to its EU counterpart, according to a story in the German newspaper Frankfurter Allgemeine Zeitung in January.

CRRC is currently the world's biggest train maker by revenue, but the majority of its business is in China's domestic market. According to the latest analysis by S&P Capital IQ, a market intelligence provider, CRRC's international sales have hovered around 9 percent of total revenues, between 2015 and today.

CRRC's market share in Europe is very small. Meanwhile, an EU investigation last year found that the merged Siemens-Alstom entity would have a combined market share three times that of its nearest competitor in high-speed trains and signaling systems.

Other railway players with businesses in Europe, such as Canada's Bombardier and Japan's Hitachi, have lobbied vehemently against the merger, arguing that CRRC's small presence in Europe means it should not be used as an excuse to give the Siemens-Alstom deal exemption from EU competition law.

Alistair Dormer, chief executive of Hitachi's global rail business, said: "I think using the Chinese as the excuse to merge Siemens and Alstom is a bit premature."

Bombardier's General Counsel Daniel Desjardins added: "This deal will distort fair competition and enable one player to leverage dominance in the signaling space to lock-out competition in rolling stock and hold the industry captive, at the expense of all stakeholders."

Christian Cornett, a partner at the law firm King & Wood Mallesons, agrees. "One principal objective of competition law is to maintain competition to promote economic efficiency. As long as European competition law is seen as a mean to achieve this aim, mergers that reduce competition should in my view not be allowed," he said.

However, some are backing the deal, including German Economy Minister Peter Altmaier and French Finance Minister Bruno Le Maire.

In an Europe1 radio station interview on Sunday Le Maire said that blocking the deal is a "political mistake" because it "would waken the European industry against China".

But Pablo Ibanez Colomo, a professor of law at the London School of Economics and Political Studies, argues that EU competition law has credibility precisely because its rulings are always made on technical considerations, and this credibility could suffer if political considerations are added to the analysis.

"That could be dangerous, especially because EU competition law is widely respected around the world and used as reference for other countries' competition law," Colomo said.

He explained that in arriving at a decision, the EU regulators would analyze if CRRC's likely future expansion into Europe would constrain the merged Siemens-Alstom entity from using monopoly powers to increase price, reduce quality or reduce innovation. But so far that seems to be unlikely.

"From the information available it would appear that there are doubts as to whether the new entity would be subject to sufficiently strong constraints," Colomo said.