The ACCC has been unconvinced by arguments that Australia needs to allow mergers to create “national champions” that are able to compete in the global economy. The Competition Policy Review has broadly accepted the ACCC’s view by recommending that competition laws remain focussed on protecting Australian consumers in Australian markets and that the competition regulator (currently the Australian Competition Tribunal) has adequate powers to authorise mergers to create a “national champion” if it considers that to be in the public interest. Partner, George Raitt discusses the issues.
The Review’s draft report notes the recent debate regarding “national champions”. It is said by business groups that competition law is too focussed on competition in the domestic market and does not pay sufficient attention to the benefits of mergers between Australian companies that operate in the global traded goods sector. The Review notes several responses to this criticism. First, many mergers in Australia which generate scale efficiencies may not adversely affect competition because the markets in Australia are subject to import competition. However, this focus on markets and competition in Australia again does not address the desirability of Australian business being able to compete in global markets.
Second, the Review quotes Michael Porter’s 1990 classic, Competitive Advantage of Nations, to the effect that the best preparation for overseas competition is exposure to intense domestic competition. This would be valid if the domestic market is large enough to sustain viable businesses. Clearly there is no question of this for the US economy (although the same criticisms of US anti-trust law arose during the 1970s when US businesses felt they were hampered by anti-trust laws in their response to international competitors entering the US market). However, the Australian economy is about half the size of the State of California. Whatever might have been the position in the US up to 1990, it is unlikely to assist the Australian policy debate in 2014-2015.
Experience of that last 25 years in fact indicates that Australian start-up businesses in innovative technologies will not justify the required return on capital by carrying on business in the Australian market, i.e. in order to raise the necessary capital, they must focus on global markets to be viable and to generate the return required to raise capital. Increasingly, in addition, these Australian businesses have recognised that:
- Australian capital markets (including venture capital markets) do not have the depth required to raise necessary capital
- to develop a successful business often requires locating where the customers are, typically in European, US or Asian markets
- to raise capital often requires locating in the markets where investors carry on business, i.e. Europe, US or Asia. Increasing globalisation and increasing focus on high technology products changes the focus from traditional manufactured and traded goods, which may be developed in the domestic market, and from that base may launch into overseas markets, where scale economies are critical.
The traditional traded goods sector is the focus of the Review’s analysis of the subject of “national champions” (arising largely from a recent case in point concerning the acquisition of an Australian dairy company by an overseas acquirer after the ACCC opposed a takeover by an Australian would-be acquirer). However, this analysis is not quite so relevant in the “new” global economy of high technology products, where success requires not an understanding of Australian consumers but of overseas consumers and their needs informed by their particular cultural and market issues.
Third, the Review notes that the legislation is concerned with the “economic welfare of Australians, not with citizens of other countries”. This statement skates over the central paradox of competition laws: there is a trade- off between the interests of Australians as producers, who must respond to the needs of consumers in their global marketplace to succeed and generate income; and the interests of Australians as consumers, whose needs are satisfied by both Australian and overseas produced goods and services. The Review quotes the Productivity Commission to suggest that “there is no a priori reason why growth in exports or the substitution of domestic production for imported products or services increases (or decreases) public welfare”, and that to encourage same may in fact lead to a misallocation of Australia’s resources and “ultimately reduce community incomes”. This reasoning may well miss the point that in an increasingly global economy the nexus between the welfare of Australian consumers and the allocation of Australia’s productive resources becomes more and more tenuous. While the Review’s discussion of the “national champions” issue seems to dispose of the concerns of industry, the discussion may well lack the depth necessary to do so convincingly.
One consequence of the continued focus on “markets in Australia” appears to be an odd tilting of the playing field that disadvantages Australian companies in merger cases compared to their global competitors. Taking the recent dairy industry experience, for example, an Australian would-be acquirer having a substantial competitive overlap with the takeover target in Australia may be precluded by our merger law from the acquisition, whereas its overseas competitors in global markets may not be so precluded. The Review states that “allowing mergers to create a national champion may benefit the shareholders of the merged businesses but could diminish the welfare of Australian consumers”. This statement seems to reflect the rather narrow views of the ACCC regarding “public benefits” (which have been rejected by the Tribunal – see separate article in this issue regarding the Review’s proposed reforms of the merger clearance process).
As the Tribunal pointed out in the Qantas case (2004), increased profits of the merged entity contribute to GDP, and so serve the interests of Australian consumers, i.e. the paramount interest of Australian consumers is to have an income with which to consume. Certainly the differing views playing out in the Review’s draft report have the potential to affect the national interest one way or the other.