The Relevance of Import Competition to
Merger Assessment in Australia

Julie Brebner*

Published version: ‘The Relevance of Import Competition to Merger Assessment in Australia’
(2002) 10(2) Competition and Consumer Law Journal 119-143

Download PDF

ABSTRACT

The Australian Competition and Consumer Commission has been criticised for failing to take due account of the impact import competition has on domestic firms when assessing whether or not a proposed merger will be likely to substantially lessen competition. This paper reviews the approach taken by the Commission to import competition in its merger assessments. Consideration is given to both the policy adopted by the Commission and the statistical relevance that has, in fact, been placed on import competition in merger assessment. A conclusion is then drawn as to the appropriateness of the Commission’s current policy and practice.

Introduction

Mergers and acquisitions between firms can achieve efficiencies and economies of scale which may ultimately benefit consumers and enhance the ability of Australian business to compete internationally.[1] On the other hand, mergers between competing businesses, by their nature, may reduce the level of competition in the market. Where the level of concentration in a market resulting from a merger is such that the merged entity’s conduct will not be effectively checked by competitive forces, a merger may deprive consumers of the key benefits of competition: high quality, low prices and continuing product innovation.[2]

Merger law in Australia is regulated by the Trade Practices Act 1974 (‘TPA’)[3] which seeks to balance these competing interests. In determining whether a merger contravenes the TPA, an important consideration will be the extent to which the merging firm will be constrained by import competition, both actual and potential. Imports can, and often will, provide a check on the ability of a merged entity to exercise any resulting market power. However, the value that should be placed on import competition in merger analysis is a subject of great contention.

This paper examines the extent to which the Australian Competition and Consumer Commission (‘the Commission’) has considered import competition in its merger assessments in the 10 years since the current merger test was introduced.[4] After reviewing the Commission’s policy guidelines and analysing public information on the Commission’s practical assessment of mergers a conclusion will be drawn as to the appropriateness of the Commission’s consideration of imports.

The Regulation of Mergers in Australia

Legislative regulation

The TPA prohibits mergers that would, or would be likely to, substantially lessen competition in a substantial market.[5] If a merger does this, it may nevertheless proceed if the ACCC accepts court enforceable undertakings by the parties that address the competitive concerns associated with the proposed merger[6] or, if authorisation is granted on the grounds that the merger, while lessening competition, nevertheless leads to public benefits that outweigh the likely anticompetitive detriments.[7] This is consistent with the express objective of the TPA, to ‘enhance the welfare of Australians through the promotion of competition ….’[8]

In determining whether a merger or proposed merger has, or will be likely to, substantially lessen competition in a market, the TPA requires that several factors be taken into account.[9] The first factor that must be considered is the actual and potential level of import competition in the market.[10] Other factors include height of barriers to entry, concentration in the market and ‘the dynamic characteristics of the market’.[11]

The Australian Competition and Consumer Commission (‘Commission’)

The Commission is charged with the duty of ensuring compliance with the TPA. In relation to mergers, the Commission’s role involves advising parties in relation to proposed mergers; accepting and administering legally binding undertakings to address anti-competitive concerns; seeking injunctions to prevent anti-competitive acquisitions; seeking remedies, such as divestiture of assets and penalties, where it considers an anti-competitive merger has taken place; and assessing authorisation applications.

Informal assessments

There is no statutory notification regime in Australia requiring the parties to notify and seek approval from the Commission before merging.[12] However, parties can, and frequently do, notify the Commission in advance of a proposed merger to obtain an opinion about its legality.[13] In this way the parties obtain a view about whether or not the merger is likely to be challenged by the Commission as contrary to section 50. Such advice from the Commission has no legal force[14] but, as it is only the Commission that may bring an action for an injunction restraining the merger,[15] advice that the Commission will not oppose the merger means that the parties can proceed with great confidence that their conduct will not be challenged.[16]

There are important incentives for parties to seek such a clearance and to follow any advice received by the Commission: if the parties proceed with a merger and the Commission is subsequently successful in an action alleging a breach of section 50, the parties will be liable for fines of up to $10 million[17] in addition to orders for divestiture.

Consequently, while it is the courts who are ultimately charged with the duty of determining whether or not a merger substantially lessens competition, in the vast majority of cases, whether a merger will or will not proceed will depend upon an informal indication by the Commission as to whether or not it is likely to oppose the proposed merger.[18] Thus, in form, if not legal effect, an ‘informal clearance’ by the Commission represents a green light for a merger in Australia.

Section 87B enforceable undertakings

In many cases any concerns held by the Commission may be addressed by enforceable undertakings,[19] rather than a complete abandonment of the proposal. The Commission may advise the parties that it will accept certain undertakings which, if provided, will address the anticompetitive concerns it has with the proposal. In this respect, the Commission ‘favours structural undertakings that replicate the competitive dynamics otherwise lost by the merger.’[20] Once given, an undertaking is binding on the parties:

The person may withdraw or vary the undertaking at any time, but only with the consent of the Commission.[21]

In many cases providing the undertakings will be a more attractive option to the parties than abandoning the proposal altogether, or risking divestiture and fines following a successful legal challenge. Parties have shown a general willingness to provide the undertakings requested by the Commission, with almost 50% of all mergers opposed between mid-1993 and mid-2001 being resolved in this way.[22]

Authorisation

If the Commission indicates it will oppose a proposed merger and undertakings are not appropriate,[23] parties who wish to proceed with a merger have little choice but to request that the Commission authorise their conduct, notwithstanding its anticompetitive effects.[24] Section 88(9) gives the Commission the power to grant such authorisations, provided they are ‘satisfied in all the circumstances that the proposed acquisition would result, or be likely to result, in such a benefit to the public that the acquisition should be allowed to take place.’[25]

In determining what amounts to such a benefit, section 90(9A) requires the Commission to have regard to, amongst other things, the following:

q a significant increase in exports;

q ‘a significant substitution of domestic products for imported goods;’ and

q ‘all other relevant matters that relate to the international competitiveness of any Australian industry.’

The relevance of imports to authorisation assessments will not be considered further, as the primary assessment of imports takes place as part of an initial assessment of the anti-competitive effects of a proposed merger. [26]

Guidelines for parties considering a merger

Parties considering a merger are assisted in determining whether or not their proposal is likely to infringe the section 50 prohibitions by the Commission’s Merger Guidelines 1999 (‘Merger Guidelines’). [27]

The Merger Guidelines, which do not have any legislative force, detail how the Commission will approach a competitive analysis of a proposed merger. In particular, they establish a five stage process in assessing mergers:

Step one involves a determination of the relevant market in which the merger is taking place. As the market definition will affect all other analysis it is undertaken with care.[28] In defining the market, the Commission will consider imports[29] that are substitutable with the product of the parties to the merger proposal.

Step two requires the Commission to determine the market share held by the parties to the proposed merger. In this respect, the Guidelines provide for a ‘safe harbour’ below which the Commission is unlikely to be concerned about a merger:[30]

‘If the merger will result in a post-merger combined market share of the four (or fewer) largest firms (CR4) of 75 per cent or more and the merged firm will supply at least 15 per cent of the relevant market, the Commission will want to give further consideration to a merger proposal before being satisfied that it will not result in a substantial lessening of competition.

In any event, if the merged firm will supply 40 per cent or more of the market the Commission will want to give the merger further consideration. The twofold thresholds reflect concerns with the potential exercise of both coordinated market power and unilateral market power.’ [footnotes omitted][31]

Step three, which is relevant only where the concentration threshold has been met, requires separate assessment of the level of import competition in the market. The Guidelines ask if imports are an effective check on the exercise of domestic market power.[32] If so, then the Commission is unlikely to intervene.

Step four involves a consideration of whether barriers to entry effectively constrain market power.

Finally, if all other considerations do not combat the anticompetitive concerns, the Commission considers the other factors listed in section 50(3), including countervailing power, substitutes, vertical integration and dynamic characteristics of the market.

The relevance of import competition in the Merger Guidelines

Import competition will be a relevant factor in markets involving tradable goods and services. While technological advances have increased the number of goods and, in particular, services which are internationally tradable, a large number of goods and the vast majority of services are not, in fact, tradable.[33] Consequently, there will be no threat of import competition in the non-tradable sector that can operate as an effective deterrent to domestic business.

In relation to the tradable industries, however, import competition will be considered as part of market definition and market share analysis, but also as a separate factor in determining the competitive effects of a merger. In the separate analysis of import competition the Commission will consider

arguments that the market share of imports is not indicative of their competitive role. … in some markets, market share may understate the competitive constraint provided by imports, because of the potential to expand the supply of imports rapidly in response to higher prices.[34]

Specifically, the Guidelines provide that the Commission will consider the following types of information in assessing the relevance of import competition:

q information that domestic suppliers are consistently inhibited in their pricing by the pricing of actual or potential import supplies;

q the extent to which imports are independent of domestic suppliers or the extent to which they are brought in under the licence of the merging firms and/or other domestic suppliers;

q whether existing import supply routes could accommodate a significant expansion of supply, without the need to invest in sunk costs of distribution, advertising and promotion;

q the extent to which imports are closely substitutable for the products of the merging firms from the perspective of their customers, without the need for supply substitution by the overseas producers;

q tariff levels and non-tariff barriers to trade, including industry standards;

q changes to tariff levels and other forms of protection which are likely to occur over the next two or three years;

q information that overseas corporations have concrete plans to enter the Australian market;

q data on the impact of exchange rate changes on the viability and market share of imports;

q information about the availability and potential availability and influence of imports in different parts of Australia; and

q practical difficulties in importing versus local supply in relation to the nature of the product and its demand, e.g. perishability (both physical and fashion related), the importance of rapid supply response and the costs of holding inventories.[35]

No specific ‘safe harbour’ threshold is set down for import assessment, but the Guidelines indicate that the Commission

… has not objected to any merger where comparable and competitive imports have held a sustained market share of 10 per cent or more for at least three years, and – as an indicative guideline – is unlikely to do so.[36]

This position was recently reiterated by the Chairman of the Commission, Professor Allan Fels, who stated:

The potential, or real, import competition is considered an important factor because of the globalisation of markets. If import competition is an effective check on the exercise of market power, it is unlikely the Commission will intervene in a merger. It has not rejected any merger where imports, independent of the merged parties, have been sustained at more than 10 per cent of the market.[37]

Consequently, despite a lack of a set ‘safe harbour’ where imports have reached a certain level, parties can be confident that in most cases sustained imports of above 10% will allay Commission concerns about the anticompetitive effects of a merger. Nevertheless, there will be exceptions to the general position and, therefore, imports must be considered on a case by case basis taking account of any factors unique to the particular market involved.

Statistical analysis of the relevance of imports

General merger assessment statistics

The Commission has opposed relatively few mergers in the past ten years. Of the 1328 merger considered by the Commission between 1993 and 2001[38] only 100 (or 7.5%) have been opposed by the Commission. Of these, 42 were resolved through undertakings, leaving only 4.4% opposed and not resolved. This number appears to be dropping, as indicated by the graph below. Between 1997 and 2001 on average only 2.35% of mergers were opposed and not resolved and, in the last financial year (2000-2001), the figure was as low as 1.1%.[39]

These figures are consistent with the Commission’s statement that

‘most mergers do not raise competition concerns and therefore do not raise problems under the Act.’[40]

The following table highlights the Commission’s consideration of mergers from 1993-2001. It demonstrates that while the number of mergers assessed each year is rising, approximately the same percentage of mergers have been opposed, resolved and not opposed each year:[41]

Year	Examined	Not opposed	Resolved	Opposed
1993-94	77	71 (92.2%)	1 (1.3%)	5 (6.5%)
1994-95	113	101 (89.4%)	5 (4.4%)	7 (6.2%)
1995-96	117	105 (89.7%)	3 (2.6%)	9 (7.7%)
1996-97	147	140 (95.2%)	2 (1.4%)	5 (3.4%)
1997-98	176	165 (93.8%)	6 (3.4%)	5 (2.8%)
1998-99	185	168 (90.1%)	10 (5.4%)	7 (3.8%)
1999-00	235	226 (96.2%)	5 (2.1%)	4 (1.7%)
2000-01	265	252 (95.1%)	10 (3.8%)	3 (1.1%)

The assessment of import competition

There is no judicial interpretation of section 50(3)(a) relating to the relevance of import competition. Parties usually address Commission concerns prior to merging or withdraw their proposal rather than risk an adverse finding in the courts. Consequently, the only real guidance on the relevance that is, in practice, attached to import competition comes from a combined assessment of the Merger Guidelines and published results of informal assessments conducted by the Commission.

The Merger Guidelines provide that where the Commission’s concentration threshold has been met, the Commission will be particularly interested in information that shows there is, or is potential for, ‘a significant, sustained, and competitive level of independent imports.’[42] In assessing the historical value that has, in fact, been placed on import competition the following statistics are significant:

q import analysis in cases where mergers were approved despite the concentration thresholds being exceeded; and

q import analysis in all cases where mergers were opposed.

These statistics are not readily available.[43] The limited published information states that between January 1993 and mid-1997 the Commission did not oppose ‘a total of 78 proposals where import competition was relevant, or 16 per cent of matters it did not oppose’.[44] However, no specific statistics as to the level of imports in those cases, or the existence (or otherwise) of other factors mitigating the Commission’s concerns over these particular proposals is provided. Nevertheless, it does, on its face, suggest that the Commission considers import competition of considerable importance.

The only other sources of information relating to import statistics are the Commission’s Mergers Public Register[45] (‘Merger Register’) and the details published by the Commission about a few key cases.[46] However, the Merger Register is deficient in many respects in assisting any import analysis. In particular, it does not include confidential matters[47] and, for the matters it does include, only very limited information about the competition analysis undertaken is provided and, in many cases, pertinent information is missing completely. For example, the word ‘unknown’ regularly appears in relation to whether concentration thresholds and/or imports above 10% have been achieved.[48] This apparently indicates that this information has simply been omitted from the Register.[49]

Nevertheless, some conclusions may be drawn from the limited information that is available. The Register details 146 merger investigations in 2001 that were not confidential.[50] As a result of the investigations only 8 mergers were opposed and 5 of these were resolved by the parties giving undertakings. This leaves 3, or 2% of mergers opposed and withdrawn by the parties. This is consistent with full statistics published for previous years.

In relation to imports, the Merger Register indicates that in 22 cases imports were assessed as above 10%.[51] In 33 cases imports were assessed as below 10% and in 90 cases the register represents the level of imports as ‘Unknown’ or ‘N/A’.[52]

Imports above 10%

In 3 cases where imports were represented as being above 10% the merger was, nevertheless, opposed by the Commission, but ultimately resolved through undertakings.[53] In no cases were mergers involving imports above this level opposed and not resolved.

In the other 19 cases in which the Register indicates imports were above 10% the merger was allowed to proceed unopposed. In 5 of these cases the threshold was not met, rendering a separate import analysis essentially irrelevant; in 9 cases the threshold was clearly met, so import analysis was of significance; and in 5 cases the Register failed to indicate whether or not the concentration threshold had been met. However, in at least 9 cases mergers were not opposed where imports were above 10% despite the fact that market concentration thresholds were met.[54] In all of these cases imports were a relevant factor in the Commission’s decision not to oppose the merger.

Imports stated as below 10%

Where imports were stated as below 10%, there was 1 merger opposed and subsequently withdrawn, 1 opposed but resolved through undertakings and 32 not opposed.

In 15 of the cases in which mergers were not opposed the concentration threshold was not met, so that separate analysis of imports was irrelevant. In 6 cases the Register does not indicate whether the concentration threshold was met. In the remaining 10 cases the concentration threshold was met. In 9 of these cases imports were not of any relevance, indicating factors other than import competition were relevant in determining that the merger would not substantially lessen competition. However, in one case, while existing imports were below 10%, the Commission considered the potential for imports of considerable significance in their decision not to oppose the merger.[55]

Case studies

Because of the limited number of useful statistics relating to the relevance of import competition, it is necessary to look in more detail at a few specific cases in which imports have been considered relevant. In this respect two classes of case will be considered:

1. Cases in which the level of imports into the market have allayed Commission concerns about a merger, despite a high post-merger market concentration;
2. Cases in which imports have not been considered sufficient to allay concentration concerns.

Cases where imports have allayed Commission concerns

There are several examples of cases in which sustained imports have allayed initial concerns that a substantial lessening of competition would result from a merger.[56] Generally, the Commission has indicated that, for the 2000-2001 financial year:

Most mergers in the resource sector raised little concern given its global nature. High levels of imports or internationally set prices mitigated many of the concerns about increased concentration.[57]

The following are specific examples of recent cases in which import competition has been a significant factor in the Commission’s decision to oppose a merger. Unfortunately only limited detail about the precise level of import competition in the market is available in each case. In most cases the Register also fails to indicate the significance the Commission attached to imports specifically, as opposed to other factors, such as barriers to entry, that may also address competition concerns.[58]

q Email Limited and Southcorp Limited

The proposed merger of these companies, involving various whitegoods product markets, clearly crossed the Commission’s concentration thresholds. The Commission also found that there was a high level of brand recognition for the merging parties’ products, that they were strong competitors and that there were high barriers to entry. Nevertheless, the Commission allowed the merger to proceed on the basis that a ‘significant competitor’ in the domestic market, combined with existing and potential import competition was likely to ensure the merger would not substantially lessen competition.[59] It is extremely unlikely that this merger would have been allowed to proceed unchallenged if not for the considerable weight placed on the constraining effects of imports in the relevant product markets.

q American Greetings Inc and The Ink Group Pty Limited

The proposed merger crossed the Commission’s concentration thresholds and barriers to entry were considered high. However, the Commission determined that ‘… the level of imports are high at around 23% for greeting cards manufactured entirely outside of Australia and around 35% for calendars offered for sale in Australia’[60] and did not object to the merger.[61]

q Illinois Holdings Proprietary and Siddons Ramset Ltd

In this case merger concentration thresholds were clearly met and the fact that imports were above 10% was a key in the Commission’s decision not to oppose the merger.

‘Whilst it appears that the merged entity would gain a high level of market concentration in both the relevant markets and that the merger guideline thresholds would be crossed …, it appeared that both of the relevant markets were characterized by a high level of imports.’[62]

q Howard Smith Ltd and OPSM Protector Limited (2001)

In Howard Smith Commission the Commission considered that, although merger would result in market share of about 42% ‘the market is characterised by substantial levels of imports and the barriers to entry are not high.’[63]

q BioMerieux Australia Pty Ltd and Oranganon Teknika Pty Ltd

The merger would have resulted in the merged entity holding a share of approximately 42% in the relevant market for ‘microbiology diagnostic equipment’. However, the fact that the majority of microbiological diagnostics were imported into Australia’ together with some other market considerations led the Commission to conclude the merger would not substantially lessen competition.[64]

q Avery Dennison Australia Group Holdings Pty Ltd and Jackstaedt Holdings Pty Ltd JAC Australia Pty Ltd

In this case, the merger concentration thresholds were significantly exceeded but the merger was not opposed because:

‘while the merger combines the two largest domestic manufacturers of labelstock, customers have indicated that their ability to import, or vertically integrate their operations by manufacturing labelstock, will constrain price levels in the market post merger. … the Commission notes that imports have constituted at least 10% of the Australian market for labelstock for at least the last 3 years.’[65]

q Cesco Australia Ltd & Forbes Engineering Holdings (Aust) Pty Ltd

The proposed joint venture between these parties would have resulted in ‘the two largest manufacturers and services of concrete mixers combining their operations’. However, the Commission considered that despite the fact that existing imports did not exceed 10%, there was a ‘potential for imports … particularly from NZ’ and that this was a key factor in not opposing the merger.[66]

These cases, while not providing sufficient detail for thorough analysis, are consistent with the Commission’s stated approach to the consideration of imports in a competition analysis. In particular, in Cesco, where imports did not meet the 10% the Commission normally considers will constrain domestic prices, the limited existing imports combined with the ‘potential’ for imports was sufficient to temper Commission concerns with the merger.