January 17, 2019 / 4:20 PM / a month ago

Explainer: Why Siemens-Alstom rail merger is creating European tensions

PARIS (Reuters) - Germany’s Siemens (SIEGn.DE) and France’s Alstom (ALSO.PA) agreed in 2017 to merge their rail assets, hoping to create a European industrial champion. But the EU’s competition authority has doubts about the deal and could turn it down, despite the companies offering to take steps to clinch it.

FILE PHOTO: Henri Poupart-Lafarge, Chairman and Chief Executive Officer of Alstom, and Siemens President and CEO Joe Kaeser attend a news conference to announce their deal to merge their rail operations, creating a European champion, in Paris, France, September 27, 2017. REUTERS/Stephane Mahe/File Photo

Siemens said on Thursday it was not prepared to make further concessions, meaning the merger’s fate now likely rests in the hands of the European Commission, whose 28 commissioners are themselves split on the issue.

The Commission has not commented publicly on its deliberations, beyond saying it will take a decision by Feb. 18.

French Finance Minister Bruno Le Maire has warned the EU’s executive of a grave political error if it rejects the deal.

His outspoken intervention reflects a frustration in Paris and some other European capitals that the EU’s competition laws no longer reflect modern-day geopolitical realities, and in particular the threat from China.

WHAT’S THE LATEST?

Sources said Siemens planned no further concessions after it already offered to license parts of its high-speed train business and sell parts of its signaling operations to allay the EU antitrust concerns.

For its part, Alstom said it considered the proposed concessions already on the table “appropriate and adequate” to get the deal approved.

The merger would create the world’s second largest rail company, with combined revenues of around 15 billion euros ($17 billion). That is roughly half the size of China’s state-owned CRRC Corp Ltd (601766.SS) but twice the size of Canada’s Bombardier (BBDb.TO).

EU Competition Commissioner Margrethe Vestager worries the merger would stifle Europe’s rail industry and has voiced doubts that China is likely to be a competitor on European railways in the near future.

WHY IS IT SO POLITICALLY CHARGED?

French President Emmanuel Macron champions a “Europe that protects”. That includes protecting citizens from the threat to European jobs from Chinese firms. Europe, he says, needs to create industrial giants, like planemaker Airbus (AIR.PA), to ensure its firms are not squeezed out of their own market.

The Commission bases its judgment on EU competition law - ensuring that consumers have a choice that maintains downward pressure on prices in the European market.

A weakness of the EU is its faith in an international rules-based system, especially when others violate it, French officials say.

By applying its antitrust rules to the letter, the EU may end up benefiting China more than its own economic area, the French argue.

At the same time, officials in Brussels question whether bending competition rules to forge European champions is the best way to rein China in or teach it a lesson.

In a sign of the Commission’s splits, the French and German commissioners are speaking up internally about the need to take the Chinese threat into account in deciding whether the Siemens-Alstom merger would hurt competition, European officials say.

Several national regulators have opposed the deal or raised doubts about it, as have unions at the companies, making it hard for the Commission to overlook concerns.

ARE THE EU LAW’S OUTDATED?

France’s Le Maire says Europe needs to wake up, branding its competition laws “obsolete”.

One German official said the Commission struggled to see beyond the EU market: “They haven’t understood the way China works ... (it) is not a market economy. There’s this EU bubble thing, they haven’t seen the global tectonic shifts.”

Vestager says European champions cannot be built by undermining competition, and questions whether using competition policy is the best way to alter China’s behavior.

French officials acknowledge the debate is one that will not be resolved before a decision on Siemens-Alstom is due, meaning the deal may end up becoming collateral damage.

AREN’T MACRON AND VESTAGER POLITICAL ALLIES?

With a high profile in Brussels for attacking tax avoidance and monopoly powers among U.S. multinationals, Vestager is widely talked about as a liberal who could win support beyond her party as the next Commission president.

The former Danish economy minister hasn’t announced any public bid for the job, but if she does she would likely need the backing of Macron, another liberal, whose party will compete in May’s European elections for the first time.

If she ultimately rejects the Siemens-Alstom deal, it might taint her relations with Macron. Even so, French officials acknowledge that she has every reason to want to protect her reputation for applying the EU’s rules firmly and fairly, earned via investigations into Google (GOOGL.O) and Apple APPL.O over taxes, no matter what the political cost.

WHAT DOES THIS LEAVE THE MERGER?

Tom Pick, a competition expert at law firm Fieldfisher in Brussels, said he had heard no noises from Vestager that suggested she had changed her mind as a result of the concessions offered by the companies.

“From what I see, what they are probably going to say is a prohibition, unless they have decided to market test again and have come to a different view,” Pick said.

The Commission will take a decision in a “collegial” manner involving all 28 commissioners, one nominated from each member state. As the commissioner responsible for competition, Vestager has a very strong say but the process of arriving at a collective decision can be opaque.

Reporting by Richard Lough; additional reporting by Luke Baker in Paris and Alastair Macdonald in Brussels

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