Acquisition by E.I. Dupont De Nemours and Company of assets of Kappler Safety Group Inc, namely its protective clothing business

No. ME/1044/02

A report under section 125(4) Fair Trading Act 1973 on the advice of the Director General of Fair Trading, given on 29 April 2002, to the Secretary of State for Trade and Industry under section 76 of the Act

JURISDICTION

The merger satisfies the FTA's share of supply test in respect of the supply of disposable garments used for protection against chemicals. The ECMR does not apply. The merger has previously received clearance in Germany and Italy.

THE PARTIES

E.I. DuPont de Nemours and Company ('DuPont') is a US science-based company operating in food and nutrition, health care, apparel, home and construction, electronics and transport. Kappler Safety Group Inc ('Kappler') is a US manufacturer of protective clothing.

ASSESSMENT

Relevant markets

DuPont and Kappler both manufacture and sell protective garments, which can be made from woven or non-woven materials. Woven materials include cotton, polyester, nylon and blends such as polycotton. Non-woven materials include SMS (two layers of spunbonded fabric with a micro-porous film in between), MPF (spunbonded fabric coated with micro-porous film) and HDPE (flash spun high-density polyethylene). Woven and non-woven garments do not appear to compete directly since they are typically used for protection in different circumstances, and there does not appear to be scope for supply side substitution.

The parties make protective garments from non-woven fabrics. In the non-woven sector, DuPont's garment, made from Tyvek®, is the leading product and commands a substantial price premium. Garments made from other non-woven materials such as SMS (e.g. Kappler's Nexgem garment) and MPF, generally perform the same functions as those made from Tyvek®. There is a perception among customers that Tyvek®-based garments may be of higher quality but, overall, customers are of the view that protective garments made from the various types of non-woven material are demand side substitutes.

Because transport costs are relatively low, suppliers seek manufacturing efficiencies wherever they can geographically. Kappler, for example, has its protective garments manufactured in China, Mexico and the USA. Some 75 percent of protective clothing sold in the UK is imported. Similar prices are charged for non-woven protective garments throughout Europe. Although protective garments have to be granted a CE mark to show that they meet relevant EC safety standards before they can be sold in the EU, this mark can be obtained in two to four weeks and, once obtained, the garments can be sold freely throughout Europe. This suggests that the relevant geographic market is at least European, and possibly global.

Horizontal issues

There are no readily available or official sales statistics in this area, and it was difficult to obtain estimates. The parties have, however, estimated that their highest combined share would be in the supply of disposable protective garments used for protection against chemicals, where they would account for around 40-50 percent of sales (increment around 10 percent) (see note 1). Third parties have estimated the parties' combined European share of disposable non-woven garments to be higher: estimates varied from 50-80 percent with an increment of 5-10 percent. This may be because Tyvek® is the most recognised brand in the industry and has become a generic term for similar protective products. Kappler's brand, Nexgem, does not by contrast appear to be so well known. In any event, DuPont's historically strong position has been eroded as other suppliers have entered.

DuPont and Kappler do not appear to be each other's closest competitor. They compete with a range of alternative suppliers. Indeed, Kimberley Clark is the second largest supplier of non-woven protective garments in the UK. Other suppliers to whom customers could readily turn in the event of a price increase include Arco, Orvec International Ltd, Plysu, Shiloh Healthcare, and Dailys. Some of these suppliers have begun selling garments only recently.

Recent entry has been facilitated by a reduction in barriers to entry. In particular, technological barriers have fallen due to the 1996 expiry of Kimberley-Clark's patent on SMS technology, following which many companies world-wide began making SMS material and SMS-based garments. New entry has been encouraged by rapid growth in demand for protective garments (10-20 percent per year) (see note 2).

The parties' customers tend to be distributors who supply a wide range of protective garments and other equipment for various purposes, such as protection against dirt and dust, fire, and medical contamination. If distributors are not satisfied with a particular garment supplier they can readily identify other suitable suppliers from the many available. Garment suppliers need distributors to sell their products, and the distributors therefore appear to have relatively high degree of buyer power. Certain large distributors discipline prices by selling 'private label' protective garments alongside those of DuPont, Kappler, Kimberley Clark and others. These distributors purchase non-woven protective garments direct from overseas manufacturers, to which they affix their own garment brand.

Third party views

DuPont's Tyvek® was generally seen as a very significant brand, and some third parties were concerned by any addition to DuPont's share of supply. Other third parties did not think that Kappler's brand was significant enough within the UK for the acquisition to enhance DuPont's position to the detriment of competition.

CONCLUSION

The acquisition qualifies on the share of supply test in respect of the supply of disposable garments for protection against chemicals, where the merger creates a combined UK share of 40-50 percent (increment around 10 percent) (see note 3) based on the parties' estimates. However, the merged entity will face competition from a range of alternative suppliers, and competition takes place internationally. DuPont's historically high share has been falling in recent years due to increased competition from new entrants taking advantage of low barriers to entry and rapidly increasing demand. In addition, distributors can exercise significant countervailing buying power by switching suppliers or selling competing 'private label' garments. In these circumstances, it seems unlikely that the merger will lead to a significant lessening of competition.

I therefore conclude and recommend that you do not refer this merger to the CC.

NOTES

1. More precise value excised at the request of parties.

2. More precise value excised at the request of parties.

3. More precise value excised at the request of parties.

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