The planned takeover of Alstom by GE has raised anti-trust concerns in Brussels. The European Commission is expected to soon come with an official “Statement of Objections”. The companies – and the French government – are putting heavy pressure on the Commission to let the deal go through.  “Blocking the deal would help Chinese rivals and cost jobs in Europe.”
The US$13.5 billion deal announced last year between two of the world’s biggest energy technology companies is confronting policymakers in Brussels with a major headache. EU officials fear that it could harm competition in the market for heavy gas turbines. GE is already their biggest manufacturer and the transaction would effectively eliminate one of its three main competitors, the Commission said in February, when it decided to launch an in-depth investigation.
“Europe is not living up to its potential”
We are concerned that the proposed acquisition might not only lead to higher prices but also result in less choice for customers and less innovation in the sector,” explained EU Competition Commissioner Margrethe Vestager at the time.
The opening of an investigation does not pre-judge its final result. The deal may yet be approved unconditionally. But the talks between GE, Alstom and the Commission so far have not reassured the latter that all is well or resulted in a compromise that would enable the merger to go ahead. It is likely that GE can expect a formal Statement of Objections soon. This will clarify the Commission’s concerns. GE and Alstom then have the right to respond in writing or to request an oral hearing to make their case. The Commission’s new deadline for a decision on the deal is 21 August (it was 8 July but the deadline was extended and indeed, could be again).
Competition concerns
What worries the Commission is that the deal will concentrate too much power in the hands of one company in both the sale and servicing of heavy duty gas turbines. These are primarily used in gas-fired power plants. There are only four global players – GE, Alstom, Siemens and Mitsubishi Hitachi Power Systems (MHPS). The latter is “less active” in Europe, says the Commission, which means that the GE-Alstom deal would unite two of the three biggest players and create an entity with 50% market share both within Europe and worldwide, albeit excluding China, in the sale of one type of turbine, 50 Hz turbines.
“In energy, bad policy and a lack of investment has created a cost structure that is twice as high as the US”
The Commission’s worries about less customer choice and innovation stem from a fear that GE would discontinue the production of certain Alstom-developed turbine models and the technologies that underpin them. Ultimately less competition would push up prices, the Commission says.
GE disagrees with these arguments. It tells a different story altogether. “Europe is not living up to its potential,” GE Chairman and CEO Jeff Immelt told the American Chamber of Commerce to the EU in Brussels in May. [The deal] will give us the chance to bring innovation back to the energy business in Europe.” GE generates €41 billion of economic activity in the region every year. It employs 11,000 “technologists” in 20 industry research centres and is currently doubling the size of its Global Research Centre in Munich. “We are everything about Europe.”
But Europe remains fragmented, uncoordinated and complicated (read: bureaucratic), Immelt added. Moreover “in energy, bad policy and a lack of investment has created a cost structure that is twice as high as the US”. Europe is looking for an industrial renaissance of the kind that he is trying to deliver for GE, its CEO continued. “You literally can make almost anything in Europe and sell it almost anywhere around the world, and be competitive if you are doing it the right way.” The EU’s goal of 20% of GDP in manufacturing by 2020 is “exactly right”. With a weak Euro, Europe is more competitive than ever.
And then there is the ongoing negotiation over the Transatlantic Trade and Investment Partnership (TTIP). What GE would like the European Commission to do is look at the big picture. Not just in terms of investment, innovation, industrial recovery and trade. But even in terms of the energy market itself.
Evolving market
“Out of 215 heavy duty gas turbines sold around the world last year, only three went to Western Europe,” Immelt said in May. With exports of €13 billion, GE sells from Europe to the world, not just in Europe. That world includes China, which operates on the same 50 Hz frequency as Europe (the world is split into two frequencies, 50 Hz and 60 Hz). By not taking China into account in its competition analysis, the Commission is not taking account of the potential global market, argues GE. And GE-Alstom looks more dominant? Europe is just 5% of the total global market for heavy-duty gas turbines, notes the company.
“I think it would be justified to give approval conditional on an assurance that R&D centres in Europe would be maintained for some time”
Former President of the Alstom Group in India, Krishna Pillai, writes in his blog: “The EU market currently… is so small it cannot be considered a market distinct from the global market.” He adds: “Mitsubishi is absent from Europe as a matter of their own choice – not because they cannot. If the [European] market grows, there will certainly be three, probably four and eventually five players. And if the market does not grow then the objection is moot.”
The market for heavy duty gas turbines is hardly booming in Europe, quite the opposite in fact. It is a buyers’ market. Heavy duty gas turbines are being mothballed, not sold. Moreover in the long term, Europe is moving towards a renewables-based decentralised power system that will require smaller, more flexible gas turbines to balance the grid.
The American giant also points to complementarities between itself and Alstom that will benefit customers. For example, GE’s expertise in gas turbines plus Alstom’s expertise in steam turbines. Together, they could offer a fuller package. GE puts itself forward as a big technology development investor with a solid balance sheet. Globally, GE spends 5-6% of its industrial revenues on R&D and one-third of that in Europe.
Some however, such as Pillai, argue that R&D is one area where the Commission could impose some conditions. “I think it would be perfectly justified for the EC to give approval conditional on some kind of assurance from GE that R&D centres (and possibly R&D jobs and budgets) in Europe would be maintained for some period of time.” That could indeed turn the deal into a way to “keep R&D alive” instead of it coming to a stop in the “cul-de-sac” in which it is “stuck” with Alstom, he writes.
In February, Vestager said that outside of the heavy duty gas turbine market, she foresaw no other problems: “At this stage, the Commission considers that the transaction is not likely to raise concerns in relation to power generation equipment for nuclear, coal-fired, wind and hydro power plants, as well as in relation to electricity transmission equipment.”
Finding remedies
“We believe in the merits of this deal,” said Steve Bolze, chief executive of the GE Power & Water Unit, in an interview with the New York Times. “But we are willing to explore remedies to get it done.” Obviously “any remedies will have to preserve the deal economics and our strategic value”.
“We ask the Commission to look at the right market: that market is global, and the competitors are Chinese”
To mollify the Commission, GE is talking about selling IP licenses around some of its heavy duty gas turbine products. But it has reportedly drawn a red line around its gas turbine servicing business. That lucrative segment underpins the economic rationale of the deal. It offers a steady stream of revenue when the market for gas turbine sales in Europe is flat.
Pillai argues that the Commission’s concerns over lack of competition in the servicing sector as a result of the deal are unfounded, since a client would always turn to the original equipment manufacturer (OEM) to service a relatively new machine. Only for machines installed at least ten years ago would they take the risk of going to a second party. So “for these older machines, the competition for service business is far more with other “pirates” than with the OEM.”
European Champion
Whilst all this is playing out, Alstom is suffering. Last summer, GE won the backing of the French government for the deal after a highly public negotiation played out in the media. If for GE the deal is desirable, for Alstom it is critical. Without it, there is no Alstom – not as it exists today nor as a standalone rail transport business (it’s famous for its high-speed TGV trains). The point of the deal for Alstom – and for France – is to keep the French company alive.
At the end of May, French Economy Minister Emmanuel Macron stepped into the fray to warn that blocking the deal would help Chinese rivals and cost jobs in France. He used a visit to GE and Alstom’s joint factory in Belfort to tell local newspaper L’Est Republicain: “We think that competition policy is important and we support the Commission’s role in this domain. But we ask it to really look at the right market: that market is global, and the competitors are Chinese.”
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GE-Alstom are currently working their way through the regulatory processes of 20 countries around the world. A majority of jurisdictions have cleared the deal so far, including India and Brazil. The Commission is cooperating closely with the Department of Justice in the US. The Commission’s green light is one of the final clearances GE needs. Back in 2001, then EU Competition Commissioner Mario Monti blocked GE’s US$42 billion attempt to buy Honeywell International. But that was about two American companies. What about a potentially problematic merger that could save a European company?
Immelt says: “What our investment in Alstom is about [is] creating a strong, long-term competitor in the global energy market that wins projects everywhere in the world.” In other words, let us be your European champion. Vestager has recently taken on Google and Gazprom. She has insisted that competition law is not political. But what about when Europe is at stake? The Commission declined a request for comment, saying only: “The investigation is ongoing.”