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Sandown Motor Holdings (Pty) Ltd and McCarthy Limited Others (33/LM/May02) [2002] ZACT 66 (19 November 2002)

.RTF of original document

COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA


                                             Case Nos: 33/LM/May02 – 38/LM/May02


In the large mergers between:

Sandown Motors Holdings (Pty) Limited and McCarthy Limited

and

Sandown Motors Holdings (Pty) Limited and Barloworld Motor (Pty) Limited

and

Barloworld Motor (Pty) Limited and Durban South Motors (Pty) Ltd

and

Newco, (being a joint venture company between Barloworld Motor (Pty) Limited and Durban South Motors (Pty) Ltd) and McCarthy Limited

and

Sandown Motors Holdings (Pty) Limited and Imperial Holdings (Pty) Limited

and

Imperial Holdings (Pty) Limited and Sirius Motor Corporation (Pty) Limited

________________________________________________________________

Reasons for Tribunal’s Decision
________________________________________________________________

Introduction

1.       We have been asked to approve six transactions involving the sale of firms who are authorised dealers for the products of Daimler Chrysler South Africa (‘DCSA’).

2.       Ordinarily, each of these mergers would be considered separately since legally, at least, they constitute discrete transactions. However, with good reason, the merging parties and the Competition Commission have treated them as one for the purposes of their evaluation. We have been commended to follow that approach which we have done.

3.       The reason for this approach is that the six transactions all involve the same four firms, variously cloaked in the garb of buyer and seller, and are driven by the same rationale; the desire by DCSA to implement its ambitious dealer network strategy (‘the DNS’).

4.       In a nutshell, what is happening is that DCSA has re-organised its sales network in certain urban areas, into five geographical territories, which it refers to as “metro centres”. Only one firm will be awarded a franchise for a particular metro centre. Each of the four firms of dealers will be allocated at least one territory, whilst one firm will be located two. Since presently some of the firms are located in more than one territory it was necessary to engage in the several transactions before us to effect the re-organisation.

5.       Post the series of mergers, the DCSA dealer network in the five metro areas will in the words of the DNS be characterised by “bigger territories with less owners”We have to decide whether the transactions in question will substantially lessen or prevent intra-brand competition, and if they do, then the question is whether there remains sufficient inter-brand competition to ameliorate any concern about the possible loss of intra-brand competition.

6.       Although the mergers in question are horizontal in nature, they form part of the manufacturer’s strategy to re-align its own distribution network - this means that the competition concerns, if any, should be examined from a vertical rather than horizontal perspective.

History of the Matter

7.       The mergers were notified to the Commission in May 2002. On the 31 July 2002 the Commission recommended in terms of section 14 A of the Act that they be approved without conditions. The Retail Motor Industry Organisation (RMI), an industry body that represents dealers, applied to intervene in the proceedings. There was no objection from the merging firms and we allowed them to do so on the basis of their interest in the matter. The RMI argued that the merger should be approved, but subject to conditions relating to the franchise agreement between DCSA and its dealers.

8.       On the 14 August 2002 we held a pre-hearing conference and requested further documentation from the parties.

9.       The matter was heard on the 11 September 2002. Apart from hearing submissions from the parities, the Commission and the RMI, the parties also led oral testimony from two employees of DCSA South Africa, Mr Christoph Kopke, the Chief Executive Officer, Fritz van Olst, the Sales and Marketing Director, as well as Mr. Phillip Michaux, the Managing Director of Cargo Motors, who also serves as the chairman of the Mercedes Benz Dealer Council.

10.      On the 12 September 2002 we ordered that the merger be approved without conditions.

Background to the DNS

11.      Daimler Benz recently merged with the Chrysler Corporation in one of the largest corporate mergers ever, to form Daimler Chrysler the parent of DCSA. The merger greatly increased the portfolio of products to be distributed by the merged firm, but also meant that the company was now distributing very different product offerings. This issue has vexed DCSA considerably as it meant that in the same outlet a number of unconnected or competing brands appeared under the same roof. In the minds of their marketing people, this was detracting from the brand equity of their premium marque, Mercedes Benz. Put in the words of their CEO one would find a Colt bakkie next to a Mercedes SLK on the same showroom floor. The proximity of the plebeian cart to the patrician coach would serve to diminish the latter’s value in the eye of the beholder. Thus an important component of the DNS is to end multi-brand DCSA show rooms and replace them with those dedicated to their specific brands, namely Mercedes Benz, Chrysler, Colt and Mitsubishi.

12.      But the re-design in strategy that is sought in the DNS does not end there. Another major aspect is to change the focus of its dealers. It is this aspect of the strategy which is perhaps the most contentious and for this reason we need to examine the status quo first before we deal with the new proposals.

13.      Various models for motor vehicle distribution exist and our market has examples of all of them. In the first place we have dealerships that are owned by the manufacturers. This apparently is the norm for the sale of commercial vehicles and has been known, although is not the norm, in the distribution of passenger vehicles.

14.      This is because the distribution of passenger vehicles requires a ubiquitous network, to make a manufacturer attractive to consumers, and hence a high level of investment downstream, which is not something manufacturers would readily assume.

15.      This has led to dealerships being undertaken by firms owned independently of the manufacturer who are either dedicated dealers of that manufacturers’ products, or distribute the products of several manufacturers, the so–called “multi– brand” franchises.

16.      Nevertheless even multi–brand franchisees have not distributed more than one manufacturer’s products in any one outlet. Thus, by way of example, although the McCarthy Group holds franchises from most of the major manufacturers, it has dedicated outlets for each manufacturer.

17.      In the second hand market things are different and it is not unusual to see the products of rival manufacturers side by side on the same show room floor. Why has this distinction come about? It is because one cannot become a retailer of new cars without a supply agreement with a manufacturer, which will invariably, as one of its conditions of supply, require the dealer to provide a dedicated show room for its products.

18.      In the second hand market a dealer does not need any contract with a supplier and hence the condition is not practically enforceable.

19.      The final species of dealer is the exclusive dealer who retails only the products of a specific manufacturer but is owned by a firm independent of the manufacturer but as with the multi-brand dealers, has a franchise agreement with the manufacturer.

20.      In 1999 DCSA, as part of the evolution of the dealer network strategy, took a strategic decision to enter the dealer network directly and hence took up a share in one of its exclusive dealers, by acquiring a 75 % stake in Sandown Motors.

21.      The merger was notified to us as a large merger and we approved it without conditions. Already at that stage there were murmurings of unhappiness amongst the dealers and the RMI initially indicated that it wanted to intervene in our proceedings to oppose the merger, but later did not do so, formally withdrawing their objection to the merger at the hearing, after a memorandum of understanding was reached in terms of which DCSA undertook to maintain transparency and to consult with the RMI with regard to all aspects of its new strategy in an appropriate forum. The RMI were nevertheless invited to make submissions with regard to various aspects of the transaction, as well as to the nature of the industry in general. 

22.      DCSA as it was entitled to, has proceeded to implement the merger with Sandown Motors. The present six transactions represent the next phase of the implementation strategy.

The Transactions

23.      Sandown Motors Holdings (Pty) Limited and McCarthy Limited
SMH will acquire from McCarthy its retail motor outlets in Randburg, Milnerton, Claremont and Culemborg. McCarthy will acquire from SMH its Pretoria outlets, being Ellenby Motors and its Mitsubishi dealership.

24.      Sandown Motors Holdings (Pty) Limited and Barloworld Motor (Pty) Limited SMH will acquire from Barloworld its passenger car and commercial vehicle outlets in Roodepoort, being Garden City Roodepoort PC and Garden City Roodepoort CV.

25.      Barloworld Motor (Pty) Limited and Durban South Motors (Pty) Ltd (the joint venture)
The parties are to enter into an agreement in terms of which they will set up a joint venture with the view of combining their motor retail outlets for DCSA products in the Durban area. Barloworld Motor (Pty) Ltd is to contribute its dealerships in the area to the joint venture, whilst Durban South Motors (Pty) Ltd will contribute its dealership in the area to the joint venture.

26.      Newco, (being a joint venture company between Barloworld Motor (Pty) Limited and Durban South Motors (Pty) Ltd) and McCarthy Limited
All parties to this transaction are retailers of motor vehicles. The parties are to enter into an agreement in terms of which the joint venture between Durban South Motors and Barloworld Ltd is to acquire from McCarthy its passenger cars and commercial vehicle outlets in Pinetown

27.      Sandown Motors Holdings (Pty) Limited and Imperial Holdings (Pty) Limited An agreement is to be entered into between the parties in terms of which SMH will acquire from Imperial Holdings Ltd certain retail motor outlets, being Mitsubishi Motors Cape Town, Cargo Northcliff and Cargo Rosebank.

28.      Imperial Holdings (Pty) Limited and Sirius Motor Corporation (Pty) Limited
The parties are to enter into an agreement in terms of which Sirius is selling the Mercedes Benz franchise rights for Springs to Imperial, as well as selling the Mitsubishi franchise rights for Gauteng East to Imperial. In addition it is selling to Imperial the freehold property in Springs from where the Union Motors dealership operates.

Extent of the mergers effect on the DCSA distibution network

29.      The mergers affect only the five so-called metro centres and DCSA’s distribution network outside of this remains unchanged. The reason for this is that dealers outside these areas have a much lower turnover in DCSA vehicles and it would not make sense for them to establish separate brand show rooms for each of the DCSA‘s brands. Their distribution network is thus considered an exception to the DNS strategy.

30.      The tables below reflect the outlets which distribute DCSA‘s products in the five metro centres and how the ownership of each will change post-merger. A distinction is made between commercial vehicles and passenger vehicles.

COMMERCIAL VEHICLES

31.      Commercial vehicles are typically classified according to light commercial vehicles (“LCVs”), medium commercial vehicles (“MCVs”), heavy commercial vehicles (“HCVs”) and buses & coaches.




Table 1: Gauteng North

Dealership
Owner –Pre Merger
Owner-Post Merger
McCarthy Freightliner, Pretoria      
McCarthy
SMH
McCarthy Truck Centre, Centurion
McCarthy
SMH

Table 2: Gauteng East

Dealership
Owner Pre-merger
Owner Post-merger
Sandown Truck Centre, Kelvin
SMH
To be relocated to another brand centre
Cargo Wadeville, Wadeville
Imperial
Imperial

Table 3: Gauteng West

Dealership
Owner –Pre merger
Owner –Post merger
Garden City Roodepoort (CV)
Barloworld
SMH

Table 4: Durban

Dealership
Owner –Pre merger
Owner –Post merger
McCarthy Truck Centre Pinetown (CV)
McCarthy
BML & Durban South J.V
NMI Prospection
Barloworld

Table 5: Cape Town

Dealership
Owner
Owner –Post merger
McCarthy Truck Centre, Montague Gardens
McCarthy
SMH
Sandown CV Bellville
SMH
SMH

32.      What we observe from the above is that in at least two metro centres the number of different dealer outlets goes from two to one. In at least two centres the number of dealers remains the same, although the identity of the dealer may have changed. The parties argue that in respect of commercial vehicles, the market is national and the alteration of ownership in the metro centres, even if it leads to fewer players in certain centres, is irrelevant, as the number of players nationally remains unaltered. The reason they argue that the market is national, is because the customer profile is different from that in the passenger vehicle market. The typical commercial vehicles customer would be a firm buying several vehicles for its fleet and which is not inconvenienced by sourcing from anywhere in the country. Given that most commercial vehicles are considerably more expensive on average than passenger vehicles, customers are not reluctant to spend the extra time in travelling to source the best deal.

33.      We accept this argument and we have no reason to believe that the restructuring insofar it affects commercial vehicle outlets of DCSA will lead to any meaningful diminution of competition.

34.      There remains as well significant inter-brand competition in the markets for MCV’s and coaches and busses. We set these tables out below.

Table 6: Market Shares of MCV’s 2001-2002

Firm
Market Share
Mercedes Benz
24.6%
Nissan
25.2%
Toyota
22.2%
Isuzu
15.6%
M.A.N
8.8%
Iveco
2.3%
Freightliner
0.9%
Volvo
0.45
ERF
0.1%
            
Source: MB Commercial Vehicles Business Plan 2001/2

Table 7: Market Shares of HCV’s– 2001-2002

Firm Market Share HCV’s
Mercedes Benz
21.6%
M.A.N
18.6%
Navistar
14.1%
Scania
9.8%
Freightliner
9.1%
Volvo
6.3%
Nissan
5.6%
Peterbilt
4.8%
Toyota
3.3%
Iveco
2.4%
Isuzu
1.7%
ERF
1.5%
Mack
1%
               
Source: MB Commercial Vehicles Business Plan 2001/2

Table 8: Market Shares of Buses– 2001-2002

Firm Market Share HCV’s
Mercedes Benz
35.5%
M.A.N
28.4%
Iveco
15.8%
Volvo
9.4%
ERF