On 12 December 2011, the Anti-Monopoly Bureau of the Ministry of Commerce ("MOFCOM") published its conditional approval decision of the proposed acquisition of the hard disk drive ("HDD") business of Samsung Electronics of Korea ("Samsung") by Seagate Technology of the United States ("Seagate"). This is the 10th conditional approval by MOFCOM since China's Anti-Monopoly Law (the "AML") entered into effect in 2008 and the fourth such approval in 2011. This transaction was also notified in other jurisdictions including the United States, the EU and Japan. In a striking contrast to the unconditional approvals granted by the antitrust regulators in the EU, the United States and Japan, MOFCOM imposed significant remedies.
In April 2011, the European Commission received two notifications of proposed concentrations in the HDD sector, both of which were subject to a Phase II investigation. The first (notified on 19 April) concerned the proposed acquisition of the HDD business of Samsung by Seagate; the second (notified on 20 April) concerned the proposed acquisition of Viviti Technologies Ltd (formerly known as Hitachi Global Storage Technologies Holdings Ltd) ("Hitachi") by Western Digital Corporation of the United States ("Western Digital"). By notifying first, Seagate obtained a regulatory advantage, as the Commission applied a priority rule based on the date of notification (i.e. on a "first come, first served" basis, following its previous approach in relation to TUI/First Choice and Thomas Cook/MyTravel). The Commission therefore evaluated the Seagate/Samsung transaction without regard to the Western Digital/Hitachi transaction, whereas it took into account the Seagate/Samsung transaction in evaluating the Western Digital/Hitachi transaction. Ultimately, the Commission granted an unconditional clearance in Seagate/Samsung, but cleared the Western Digital/Hitachi transaction subject to the condition that Western Digital divests essential production assets for the manufacture of 3.5-inch HDDs. The two transactions were also notified to the Federal Trade Commission ("FTC") of the United States and the FTC sought additional information from the parties in relation to both transactions. On 8 December 2011, the FTC closed its investigation in Seagate/Samsung, stating that no further action was warranted by the FTC. The Japan Fair Trade Commission reviewed both Seagate/Samsung and Western Digital/Hitachi in parallel, but cleared both on 28 December 2011 on the basis of the remedies that had been offered by Western Digital, and concluded its review.
MOFCOM review - procedural issues
The Seagate/Samsung transaction was notified to MOFCOM on 19 May 2011, and the notification was formally accepted by MOFCOM on 13 June 2011. MOFCOM exhausted all the statutory review periods, including 30 days in Phase I, 90 days in Phase II and 62 days in Extended Phase II; the case was cleared on the last day of Extended Phase II. Normally, Extended Phase II should be 60 days but, because the last day of the review period was a Saturday, MOFCOM extended the period for a further two days. This reveals that in practice MOFCOM can further extend the review period if the final day coincides with a holiday. Thus it took altogether 207 days for the parties to obtain the conditional approval.
MOFCOM review - substantive assessment
In the most comprehensive decision MOFCOM has published to date, MOFCOM considered in detail eight aspects of the transaction, as summarised below.
- Market definition
MOFCOM defined the relevant market as the worldwide HDD market. This differs from the Commission's approach in defining separate worldwide markets for HDDs based on their form factor (3.5-inch or 2.5-inch) and end use. MOFCOM noted that the HDD market could be further divided into relevant product markets according to end use, but it focused its analysis on the HDD market alone, without looking at the market structure or carrying out a competitive assessment in respect of any of the narrower markets.
- Market structure
MOFCOM found that there are five players in the worldwide HDD market, including Seagate (33%), Western Digital (29%), Hitachi (18%), Toshiba (10%) and Samsung (10%), with similar market shares in China (thus treating Western Digital and Hitachi as separate players, despite the proposed transaction). It found that the HDD market is very transparent and therefore it is relatively easy for HDD manufacturers to gain competitor information. MOFCOM also found that HDD products are homogenous and downstream customers could quickly switch to other suppliers with little cost, and that the main downstream customers are large computer manufacturers.
- Purchase model
MOFCOM found that large computer manufacturers generally adopt a confidential bidding process to conduct seasonal bilateral negotiations with HDD manufacturers. MOFCOM found that, to ensure security of supply, computer manufacturers will purchase from two to four HDD manufacturers based on factors such as price (the most competitive bidder receiving the largest order, the second a smaller order, and the others may not receive any order). MOFCOM stated that such a purchase model facilitates price competition among HDD manufacturers.
- Capacity utilization
MOFCOM concluded from its investigation that the unused production capacity of the five HDD manufacturers is very limited due to the recent increase in market demand, noting that in the fourth quarter of 2010 capacity utilization rates were approximately 90%.
MOFCOM emphasized the importance of innovation on the competitiveness of HDD manufacturers. However, it failed to discuss the significant competition HDD manufacturers face from solid-state drives, which are data storage devices that use flash memory technology.
- Buyer power
MOFCOM found that distributors of HDDs do not have countervailing buyer power, and that large computer manufacturers generally will not oppose price increases and will instead pass on such price increases to end consumers. Because the end consumers are highly dispersed, they have little countervailing buyer power. MOFCOM cited an example of the recent price increase by Western Digital after its production was adversely affected by the Thai floods, which led to price increases for end consumers.
- Market entry
MOFCOM found that there are significant barriers to entry (due to intellectual property and other technology requirements), and noted that there has been no new entry into the relevant market in the past 10 years.
- Impact on the relevant product market and consumers
MOFCOM held that the transaction would:
- remove an important player from the market;
- alleviate the competitive pressures on HDD manufacturers in relation to the purchase model discussed above; and
- increase the probability of HDD manufacturers coordinating their behaviour, in light of the relative transparency of the HDD market which allows HDD manufacturers to predict the behaviour of their rivals.
Importantly, MOFCOM noted that China is one of the biggest computer consumers, and that this transaction would adversely affect the interests of Chinese consumers.
MOFCOM review - remedies
Similar to the approach adopted by the Commission when assessing Seagate/Samsung, MOFCOM's competitive assessment treated Western Digital and Hitachi as separate players. However, unlike the Commission, MOFCOM imposed significant remedies on this transaction, including:
- Seagate must adopt a series of measures in order to keep Samsung's HDD business as an independent competitor, including: establishing an independent subsidiary responsible for setting the price for and conducting sales of Samsung's products independently; creating firewalls to avoid the exchange of competitive information between Seagate's and Samsung's sales teams; and prohibiting Seagate from restricting Samsung's production. All of these measures are subject to the close supervision of the monitoring trustee;
- Seagate must keep its promise to expand the Samsung production capacity within six months of the decision, and reasonably determine the production capacity and volumes of Samsung's products thereafter. Both Seagate and Samsung are required to report their production capacity and volumes to the monitoring trustee;
- Seagate cannot make substantive changes to its current business model by coercing customers to purchase HDD products from Seagate or other entities controlled by Seagate;
- Seagate cannot coerce TDK China to supply HDD heads to Seagate or other entities controlled by Seagate or restrict the amount of HDD heads that TDK China supplies to other HDD manufacturers; and
- Seagate will invest at least USD 800 million each year in the next three years in innovation to ensure that it will bring more innovative products and solutions to consumers.
Strikingly, the decision includes a review clause entitling Seagate to apply to MOFCOM to waive the first two of the above conditions a year after the decision, on which MOFCOM will make a decision in light of prevailing market conditions.
In the EU, commitments will usually include a review clause, which allows parties to apply to the Commission to modify or waive their commitments. However, actual waivers of commitments are rare and have only been granted in exceptional circumstances. It is possible that MOFCOM's approach may have been influenced by the pending Western Digital/Hitachi transaction. As noted above, as a condition to obtain approval from the Commission, Western Digital has agreed to divest its 3.5-inch HDD business to a third party. The identity of the third party buyer is not clear, but MOFCOM may have anticipated that the Western Digital/Hitachi transaction and the agreed divestiture will change the competitive landscape of the HDD market.
This case represents another example of the apparent divergence of MOFCOM's approach in merger assessment from that of antitrust regulators in the EU, the United States and Japan. MOFCOM's prohibition of Coca-Cola's proposed acquisition of Huiyuan in 2009 generated significant controversy and prompted a fear that the AML could be used to protect domestic companies to the disadvantage of foreign multinationals. While MOFCOM's recent approvals of several proposed foreign takeovers of well-known Chinese brands have allayed the fear to some extent (e.g., Yum!/Little Sheep, Nestlé/Hsu Fu Chi), MOFCOM's imposition of significant remedies in this transaction may again cast doubt on its impartiality, particularly in light of its emphasis on the protection of the interests of Chinese consumers. This case is another reminder that monitoring and understanding MOFCOM's approach in its merger control decisional practice remains a high priority for companies doing business in China.