Proposed acquisition by City Technology Limited of the gas sensors business of Marconi Applied Technologies Limited

No. 00212/N

A report under section 125(4) Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 11 December 2000 to the Secretary of State for Trade and Industry under section 76 of the Act

Assessment

Jurisdiction

The merger satisfies the share of supply test of the FTA in respect of the supply of catalytic combustible gas sensors, pellistors, in the UK. The ECMR does not apply.

The parties

City Technology Limited ('CTL') manufactures electrochemical gas sensors, pellistors and infra-red gas sensors for use in gas detection and measuring instruments. First Technology PLC ('FT') has owned CTL since 3 April 2000. FT's core business is the supply to the automotive industry of technical equipment for personal safety and comfort. Last year, CTL reported turnover of approximately £22m on sales of its range of gas sensors. Marconi Applied Technologies' gas sensors business manufactures pellistors and infrared gas sensors. The business operates under the name EEV (see Note 1). Marconi Applied Technologies' anticipated turnover attributable to EEV is approximately £3m for the year to 31 March 2001. [Excision at the parties' request]

Relevant markets

The parties overlap in the UK in the manufacture and supply of pellistors and the manufacture and supply of infrared combustible gas sensors for use in gas sensoring devices. These are relatively small markets domestically, for which it has been difficult to secure reliable information. However, in global terms the value of the market for sales of pellistors, and other gas sensors, is more significant and, unlike in the UK, CTL's pellistor business is of a roughly equal size to that of EEV.

I consider pellistors and infrared combustible gas sensors to be distinct products. Pellistors are the favoured sensor for use in industrial applications. They are designed to detect combustion in hazardous environments and respond to all combustible gases. Infrared sensors, on the other hand, are used to analyse concentrations of different gases and are generally only used to detect combustible gases where pellistors cannot be used due to extreme conditions, for example of temperature and humidity. There is limited overlap in terms of use, and infrared sensors currently cost six times more than pellistors. I have also considered supply-side switching but am not convinced that the potential is great. As a result, I consider it reasonable to look at pellistor supply separately from infra-red sensor supply. There is little overlap in infra-red sensors, so this market is not considered further.

Some gas detection equipment manufacturers (OEMs) produce their own pellistors. They do not all do so, however, and third party enquiries indicate that OEM self-producers are reluctant to supply their competitors, and that their competitors are reluctant to purchase from them. As a result, open market sales by OEM producers of pellistors appear to be small. OEM supply to the open market may not place competitive pressure on independent supply.

The geographic market for pellistors is at least national. The parties supply pellistors world-wide and have suggested that two companies in the Far East supplied in volume to UK equipment manufacturers. However, my officials have not been able to find evidence of this, and I understand from third parties that customers in the UK are not satisfied with the quality of products manufactured by Far Eastern suppliers.

Available estimates value the UK pellistor market, including OEM production, at £1.2m per annum. It is apparent from the parties' turnover stated above that sales of pellistors in the UK are relatively small compared to both parties' sales internationally, particularly for CTL.

Horizontal issues

It has not been possible to obtain definitive information on market shares. The parties estimated their combined share of the non-OEM supply of pellistors in the UK as 60% (increment 5%). However, this information is difficult to reconcile with independent evidence. Third parties consulted by my officials suggested a much higher figure, probably greater than 90% (which would imply an increment of about 8%). It should be noted that 'increment' here refers to the increment to the market share of the leading firm, which now is EEV. The increment to the share of CTL, the acquirer, would of course be large.

There has been no recent entry to the market, either in the UK (see Note 2 ) or the EU. This is probably partly due to regulatory approvals that are required for the gas detection equipment, in which pellistors are the key component. It would apparently take a minimum of two-and-a-half years for the necessary design approval for a new pellistor from an equipment manufacturer, at a not insubstantial cost to a new entrant (see Note 3). Other factors that may limit new entry are the small size of the market, the current dominance of one of the parties in that market, and the fact that customers are receptive to a one-stop supply of a range of sensors, including infrared and semi-conductor. Also, customers are likely to purchase replacement pellistors, which account for about 30% of sales, from their existing supplier.

In terms of buyer power, the customer base is fragmented. Most customers to whom my officials spoke, unless they self-produce, were concerned that they would have little if any buyer power because of the limited choice in independent supply of the required quality.

The parties' combined share of supply of pellistors in the UK and evidence of barriers to entry raise concerns about the merged entity's market power and the adverse effect that this could have on pellistor supply in the UK. Evidence on the parties' pricing behaviour in the last three years indicates that they have been in active competition. [Excision at the parties' request]

Significantly, despite CTL's small market share in the UK, in global terms it has an almost equal share of sales of pellistors to EEV and information from third parties indicates that there are few, if any, competitors offering comparable quality to the parties. The loss of this competition could lead to increased prices to customers, and reduced innovation.

Vertical issues

There are no vertical issues.

Other issues

CTL is the world's market leader in the manufacture and supply of electrochemical sensors. Electrochemical sensors are used to detect poisonous gases and are supplied by CTL to many of the same equipment manufacturers that purchase pellistors from the parties. Third parties have expressed concern that CTL might be in a position to exert 'portfolio power' if it acquires EEV by tying sales of electrochemical gas sensors and pellistors. If CTL wishes to expand the pellistor business within its portfolio of products, an alternative to acquiring EEV would be to expand in competition with it.

Undertakings in lieu

The parties have not offered any structural remedy and I doubt that one is available. It would, in my view, be difficult to devise behavioural remedies that would adequately address the competition concerns which I have identified and be practicable to monitor.

Third party views

I have received a significant number of representations from competitors and customers. Their concerns are reflected in the analysis set out above and in my advice.

Conclusion

In the light of the above assessment, I consider that the merger may have an adverse effect on competition in the supply of pellistors in the UK, and that this may lead to higher prices and a reduction in choice to customers.

In view of the small size of the market in the UK, I have considered carefully whether the cost of reference would be justified by the potential benefits. Bearing in mind the possible extent and duration of adverse effects, on balance I consider that the competition concerns in this case warrant further investigation.

I therefore conclude and recommend that you should refer this merger to the Competition Commission.

Notes

1. The parties have informed the Office that 'EEV' is the former company and trading name of Marconi Applied Technologies Limited. All references to EEV in this text are to the gas sensors business of Marconi Applied Technologies Limited.
2. The parties state that Sensoric entered the market recently. The Office is not aware of any sales by Sensoric to equipment manufacturers in the UK.
3. This information was obtained by the Office from an industry specialist and confirmed by third parties. The parties contest it.
   

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