Exports and the Trade Practices Act/Australia

Exports and the Trade Practices Act

Guidelines to the Commission's approach to mergers,
acquisitions and other collaborative arrangements that aim to
enhance exports and the international competitiveness
of Australian industry

Australia

September 1997

Section 4. The international framework of collaborative arrangements

This section canvasses some additional issues that the Commission takes into account when considering the international framework of the various collaborative arrangements discussed in these guidelines.

How are issues of size relevant?

Obstacles to export growth may face firms of all sizes. It is not apparent that, simply by entering a collaborative arrangement like a merger, a company's ability to compete internationally is enhanced. ²¹ Size is often not necessary to enhance the ability to compete on world markets. ²² Low scale manufacturers can successfully market products overseas, particularly higher value products or in niche markets. It has been convincingly argued that, in many cases, domestic rivalry rather than national dominance is more likely to breed companies that are internationally competitive. ²³ A recent report to the Government which reviewed business programs in the context of an increasingly competitive global market noted that a lack of domestic competition was one of a number of impediments to building globally sustainable firms in Australia. ²⁴

Small and medium-sized enterprises may be disadvantaged (relative to larger enterprises) when it comes to having access to adequate information on international business opportunities. Ongoing improvements in information technology and electronic commerce can bring particular benefits for these businesses, for instance, through lowering information and transaction costs. While size may not be necessary to enhance export opportunities, correct and complete market information is crucial.

The Commission strongly supports the development of more efficient markets (for all firms, not just exporters) which can be achieved by harnessing the benefits of information technology. To the extent that a competition law enforcement agency can, the Commission endeavours to minimise the obstacles to export growth that may face firms of all sizes. For instance, the Commission takes particular account of international competitiveness issues in its administration of the merger and authorisation provisions of the Trade Practices Act, and it prioritises merger regulation in the non-traded sector.

Obstacles to export growth

The Commission recognises that the lack of an effective competition framework in an export market may indeed act as a barrier to Australian exports (although it is difficult to gauge the extent of any adverse effects). Inadequate competition laws or ineffective enforcement can be a barrier to Australian exports, as can be jurisdictional conflicts in dealing with alleged anti-competitive conduct that has international implications. The Commission actively promotes a cooperative approach internationally to competition law enforcement that will have benefits for Australian exporters. ²⁵

There are, of course, many aspects relating to a firm's ability to enhance exports that do not touch on merger and competition policy. Some industries may be naturally more outward-looking given the level of technology employed in the relevant industry or the state of maturity of that industry. Other issues that may affect a firm's ability to enhance its international competitiveness include taxation, the exchange rate, access to finance, research and development and intellectual property. Costly labelling requirements in different foreign markets can also be an obstacle.

Furthermore, until micro-economic reforms are fully implemented in many public utility and infrastructure industries, so that they are subject to the discipline of effective competition and/or efficient regulation, the over-riding objective of micro-economic reform to increase efficiency and international competitiveness of Australian industry will not be realised.

In so far as its role allows, the Commission endeavours to minimise obstacles to export growth faced by Australian firms. In its administration of the Trade Practices Act (particularly its merger and authorisation provisions), the Commission takes account of international competitiveness issues, and gives priority to merger regulation in the non-traded sector to ensure competitive input markets for exporters.

The international context of arrangements

The Commission will consider the international context of an arrangement that is claimed to have the effect of enhancing international competitiveness. It will do so on a case-by-case basis. In some cases issues will arise that lend support to arguments that a merger or joint venture will enhance international competitiveness. In other cases the international context of such an arrangement may weigh against claims that it will enhance international competitiveness.

What sort of issues are relevant when the Commission considers the international context of a collaborative arrangement?

The following issues may be relevant.

Trade and competition factors

Competition laws of other jurisdictions will need to be taken into account when firms consider strategies to improve their export competitiveness. For instance, some countries attempt to exercise their jurisdiction over anti-competitive arrangements such as export cartels formed outside their borders. In addition, non-tariff barriers in some countries make it difficult for Australian firms to export to those markets. The Commission will take account of arguments that Australian firms are competitively disadvantaged in external markets.

Case study 5 provides an example of the Commission's consideration of barriers to overseas markets in assessing a domestic merger.

Case study 5. George Weston/Bunge (December 1996)
An illustration of a merger where external trade policies were taken into account in the Commission's decision not to challenge.
Facts
George Weston proposed to acquire the starch and gluten business of Bunge, which consisted of a starch plant in Victoria and a flour mill in NSW. The relevant markets were concentrated, and the proposed acquisition would reduce the number of domestic starch manufacturers from four to three. Barriers to entry to starch and gluten manufacture were considered to be very high.
Total imports were about 11 per cent, although arms-length imports (imports not imported by the merger parties or their main domestic competitors) were about 5 per cent only.
Analysis
The likelihood of the merged firm engaging in oligopoly behaviour would depend on a number of factors. High concentration, high barriers to entry and low imports were relevant factors. Nonetheless, the Commission considered that the possibility of importing starch remained open to customers, should prices rise on the domestic market. The buyers' market was quite concentrated, and customers had the capacity to benchmark prices internationally.
The Commission took account of George Weston's claims that the new operating division would open up new opportunities in the international starch market through greater efficiency and technology exchange agreements with starch manufacturers in the US, Europe and South Africa.
The Commission also considered the trade policies of the European Union which appeared to have the effect of protecting European starch producers with a competitive advantage in the export of gluten. These policies appeared to place Australian manufacturers at a significant competitive disadvantage, particularly in relation to the export of gluten to Asian markets, as well as potentially impacting on domestic starch prices.
In deciding not to oppose the acquisition, the Commission in its consideration of overseas trade policies, determined that it was vitally important that a level playing field be established in markets subject to global competition, so that Australia does not suffer a competitive disadvantage because of its free trade policies.

The Commission can assist businesses that may confront non-tariff barriers to export markets, both directly and indirectly:
- by taking a pro-active role in developing cooperative arrangements with foreign competition agencies in Australia's export markets it can assist in creating a less restrictive international environment in which Australian firms can compete; and
- as a source of information for domestic firms on competition law issues they may face in foreign markets.
In this respect it should be noted that the Commission strongly supports the establishing of a competition database for all APEC countries which will encompass, from the various APEC jurisdictions, information relating to competition laws and policies, information on organisational structures and divisions of responsibilities between departments, administrative procedures and relevant guidelines, lists of publications and subscription details, lists of cooperative agreements, lists of academics and specialists, and statistical data. Already, Australia, Taipei, New Zealand and Japan have contributed to this database. ²⁶
The Commission recognises that the contestability of overseas markets may change over time, for instance as tariff and other trade barriers are removed. Where it is claimed that a merger or some other collaborative arrangement is necessary to establish an export capability, the Commission will take account of future changes in the contestability of such markets. The acceptable time horizon for judging the effectiveness of achieving export targets will depend upon the particular circumstances of each case. The uncertainty and/or likely timing of exports will be balanced against the extent of any detriment (e.g. reduced domestic competition). The less the detriment, the longer the time horizon the Commission will be prepared to accept in which to judge the effectiveness of achieving export targets.
In situations where barriers to overseas markets are insurmountable it will be apparent that export opportunities are not available in particular foreign markets. In these cases there is an increased likelihood that the actions of a collaborative arrangement will focus on the coordination of behaviour on the domestic market.
There may be trade and competition policy reasons that argue for and against mergers as a solution to enhancing international competitiveness. There is a growing recognition that trade and competition policy are mutually reinforcing, with similar objectives of enhancing welfare through the provision of more efficient resource allocation. As trade and competition policies converge, firms may find it difficult to gain comparative regulatory advantages by merging or otherwise forming export consortia. Alternatively, they may find that a more level playing field has developed, and that a merger or acquisition would enhance a firm's ability to compete in this new environment.

Case study 6 illustrates the Commission's approach to a merger where declining tariff protection influenced the Commission's decision not to challenge.

Case study 6. Alcoa/Comalco (December 1995)
An illustration of a merger the Commission did not challenge in a trade-exposed sector with declining tariff protection.
Facts
A joint venture between Alcoa and Kobe proposed to acquire Comalco’s aluminium rolling mills at Yennora in NSW. The mills produced, amongst other things, aluminium bodystock for the manufacture of beverage cans. The acquisition would deliver the entire domestic market for aluminium bodystock production to Alcoa.
Analysis
At the time imports were subject to a tariff of 7 per cent, reducing to 5 per cent in July 1996. The Commission explored the possibility of the removal of a tariff on bodystock, with the agreement of Alcoa.
The joint venture partners applied for a Tariff Concession Order to remove the tariff and the tariff on bodystock was reduced to 3 per cent from 1 July 1996.
The Commission did not oppose the acquisition. It considered that, although the entire bodystock market would be delivered to Alcoa, imports would act as an effective constraint. The reduction of the tariff would limit the ability of the sole domestic supplier to raise prices charged to can makers, and the Commission considered that these prices would flow through to consumers of products like soft drinks and beer.

Offshore investment factors

Australian firms may choose to enhance their international competitiveness by establishing manufacturing operations in overseas markets, or by merging or establishing joint ventures with foreign companies. A firm may find that an overseas joint venture party may be of more benefit to its international competitiveness than a domestic partner. For instance, the overseas partner may provide greater access to distribution channels and have greater market knowledge. This will particularly benefit exporters who face barriers to entry in target countries such as tariffs and import cartels, or where transaction costs associated with direct exports are high. Other market factors that drive offshore investment include enhanced access to capital, superior technology, resources or customers.
Offshore investment encourages firms to increase their efficiency in order to meet greater offshore competition, which in turn has some flow through to domestic operations. In many cases the benefits and returns have been strong. However, those Australian firms that establish production operations in export markets may face limitations on the export opportunities available to them to those markets.

Endnotes

Section 4

²¹ Mergers may not necessarily result in the efficiencies originally claimed by the parties. In a report by Price Waterhouse in the United States, it was claimed that one study has estimated that nearly 85 per cent of all mergers and acquisitions fail to achieve their combined goals, while another study reported that only 23 per cent recover the intrinsic costs incurred in doing the deal: Farmer, R., Russell, R., and Pamplin, R., Organisational Change in Mergers and Acquisitions: Aligning Financial Institutions to Achieve the Vision, Price Waterhouse LLP, USA, 1995, at 1. back

²² The fastest growing category of Australia's exports are small to medium-sized, high-value added manufacturers exporting between $2 million and $50 million annually: Australian Manufacturing Council, Emerging Exporters, June 1993, p ii. It is estimated that around 4500 small to medium sized enterprises in Australia are internationally active, generating about $6.5 billion in international turnover: Department of Foreign Affairs and Trade, Winning Enterprises -- How Australia's small and medium enterprises compete in global markets, AGPS, Canberra, 1995, at viii. back

²³ Domestic rivalry can provide the environment in which firms can innovate and improve productivity, which may be more to the long term advantage of a firm than realising economies of scale. Further, domestic rivalry is more visible and may be more likely to encourage firms to sell offshore than foreign rivalry. See: Porter M.E., The Competitive Advantage of Nations, London, 1990. Theoretical and empirical results of research into 32 U.S. food manufacturing industries were found to be consistent with Porter's hypothesis, and led to the conclusion that domestic market competition is positively related to global success in global markets: Kim D. and Marion B., 'Domestic Market Structure and Performance in Global Markets: Theory and Empirical Evidence from U.S. Food Manufacturing Industries' 12 (1997) Review of Industrial Organization, at 335-354. back

²⁴ The Mortimer Report, op cit, at 131. back

²⁵ For instance, the Commission has been involved in numerous technical assistance programs under which it makes available its resources and expertise in competition law to countries (particularly in the Asia Pacific region) with less developed competition law regimes. The Commission also participates in fora, such as APEC, at which cooperative approaches to competition policy and law enforcement are discussed. back

²⁶ This database can be located via the internet on http://apecdb.apeccp.org.tw/ back

[Section 1. Background to the guidelines]
[Section 2. The process of merger review and authorisation]
[Section 3. Forming other collaborative arrangements]
[Section 4. The international framework of collaborative arrangements]
[Section 5. Suggested checklist]
[ACCC export contact officers]