Volvo-Scania Merger

Introduction September 1999 : Volvo notified the Commission of the plans to acquire with Scania Reasons for the merger: – Economies of scale in the industry of heavy trucks and buses – To compete in emerging markets March 2000: after an investigation the Commission blocked the proposed merger After: Volvo formed a group with RVI and Scania found a partner in Volkswagen (which previously was not active in the production of heavy trucks and buses)

Firms Volvo Swedish March 1999: Volvo sold his automobile business to Ford Motor By consequence now fully active in the manufactory and sales of trucks, buses, marine and industrial engines, construction equipment, and aerospace equipments Truck business accounted for 57% of turnover, while buses 13% of turnover Scania Swedish Active in the manufacture and sales of trucks, buses, marine and industrial engines Truck business accounted for 60% of turnover, while buses 8% of turnover

Economic analysis for Trucks and Bus Market Situation before the proposed transaction

Definition of relevant market for Trucks Product Market : identification of 3 Market segments according to vehicles weight. Because of technical differences, the categories are not considered as interchangeables by consumers. The proposed merger concerns the market segment of heavy trucks. Geographic market : because purchasing is done on a national basis and the distribution and service network constitute a barrier to import penetration, there are several distinct national markets. The commission focuses its attention on Northen Europe because it is where both Volvo and Scania have more market power

Definition of relevant market for Buses Product market: – 3 categories of buses: City buses,Inter-city buses,Touring coaches (with each category provides a different service) → heterogeneous products: differences in technical characteristics distinct buyer groups Geographic Market: the national markets constitute the relevant geographic market, because price levels differ between Member States, local consumer preferences, purchasing is done on a national basis and technical configurations vary between Member States.

Demand and supply The demand is fragmented and inelastic The consumer’s preference is based on: geographic location, price, after sale networks, second hand value, power of the engine and comfort level. The consumer’s preference for buses is more concentrated on local service network, reliabilitty and life-time costs Change in customer’s profile For trucks we see seven big producers on European market within which DaimlerChrysler is the leader. As for buses the main other suppliers are Neoplan and Bova, MAN, DAF Bus, Van Hool and Dennis. Volvo and Scania appear to be each other's closest competitors and closest substitutes pursuing similar market strategy: both high quality, loyalty and well-spread network services.

Price and competition While the result of the investigation made by the commission reveals a policy of bilateral prices between countries of 10-20%, Volvo states that there is no substantial price differentiation between member states and that indicated price differences are due to variations in the equipment supplied with the heavy truck and/or the customer structure. As for competition: Absence of entry barriers High entry costs Crash test in Sweden

Economic analysis of the heavy truck market and bus market Changes in market structure as a consequence of the proposed merger

Effects on competition Some obstacles depend on intrinsic characteristics of both the structure of the market and the national technical standards, others are the result of the price policy that Volvo can put in place: – Capacity building as a barrier to enter ( service network; cost of training) – Difficult to amortize costs because of a small population density – Based on its loyalty Volvo could increase price by a little amount acting as a price- taker

Effects on society Anticompetitive unilateral effects: Negative effect on technological development lack of product differentiation which reduces the choice of the consumers demand is inelastic the firm has a tendency on fixing higher prices and on decreasing the quantity produced. The result is a loss of consumer's surplus. Coordinated positive effects: Technical efficiency ( specialization, economies of scale, capital optimization) Increase of the potential of price discrimination Farrell and Saphiro analysis of mergers between oligopolies on prices and total welfare

Shrinkage effect Volvo, supported by a JP Morgan study, argues that a shrinkage effect will result from the merger through the loss of a 10-20% of market share because of customers switching suppliers. Commission after studies made on consumers behaviour and similar situations occurred in the past concludes that there is little evidence suggesting that market shares should drop drastically in the short to medium term

Conclusions The commission has come to the conclusion that the proposed concentration is not compatible with the common market as it would create a dominant position which would significantly impede concurrency and consequently generate a total welfare loss for society Many critics have been made: Analysis focuses only on anti-competitive effects No transparency Narrow definition of relevant markets Impeded to compete internationally because based in a small market