Highlights: 

• The Chinese Ministry of Commerce (MOFCOM) conditionally approved Seagate’s acquisition of Samsung’s hard disk drive business, making it the 4^th conditional approval of this year and the 10th conditional approval by MOFCOM since China’s Anti-Monopoly Law went into effect.
• While MOFCOM still relies heavily on market share and market structure, it also takes in account a comprehensive set of factors as well as pragmatic evidence in its analysis.
• This deal was also notified in the U.S. and the EU, but MOFCOM is the only authority that has imposed remedies, showing that MOFCOM is getting increasingly independent in reaching its own decision.

MAIN ARTICLE

On December 12th, 2011, the Ministry of Commerce (“MOFCOM”) conditionally approved the acquisition of the hard disk drive (“HDD”) business of the Korean Samsung Electronics (“Samsung”) by the US Seagate Technology (“Seagate”)[1].  This is the 4th conditional approval of this year and the 10th conditional approval by MOFCOM since China’s Anti-Monopoly Law (“AML”) entered into effect in 2008.

According to MOFCOM’s announcement, this review process lasted for almost 7 months starting from May 19th when the notification was first submitted to MOFCOM.  The review process entered into the Extended Phase II and was cleared on the next business day of the expiry date of this phase.[2]

Relevant Market

According to the Announcement, the relevant market is the worldwide HDD market.  Although MOFCOM found that the HDD market could be further divided into narrower market segments based on the end use application (such as desktop computers, mobile computers), it considered the HDD market as a whole and carried out competition analysis only in the HDD market.

Competitive Assessment

MOFCOM mainly considered the following factors in its analysis:

Market Structure.  MOFCOM noted that the worldwide HDD market is highly concentrated with only five players, i.e. Seagate (33%), Western Digital (29%), Hitachi (18%), Toshiba (10%) and Samsung (10%), whose market shares are similar in China.  It found that the HDD market is very transparent.  Since the HDD products are homogenous and large computer manufacturers as the main downstream customers are relatively few in number, it is easy for HDD manufacturers to gain competitor’s information.

Purchasing Pattern.  MOFCOM emphasized the importance of the current purchasing pattern on the maintenance of competition in HDD market.  In order to ensure stable supply, large computer manufacturers procure through a confidential bidding process and split the order among two to four HDD manufacturers based on the competitiveness of their prices.  This model incentivizes HDD manufacturers to compete for larger orders.

Buyers’ Bargaining Power.  MOFCOM found that large computer manufacturers generally will not oppose price increases and will instead shift such price burden to end consumers that have little countervailing buyer power.  As pragmatic evidence, MOFCOM cited an example indicating how the recent price increases by Western Digital due to its impaired production by the floods in Thailand were passed on to end consumers.

MOFCOM also found that the capacity utilization rate of the HDD manufacturers are very high (90% in the fourth quarter of 2010), entry barriers are significant (no new entry into the worldwide HDD market in the past 10 years) and that innovation is quite important for HDD manufacturers to obtain competitive advantages.

Taking into account the above, MOFCOM was of the view that this merger will cause negative impact on Chinese consumers.  It is likely to restrict competition by removing an important competitor from the market, undermining the effect the purchasing pattern has on bringing competitive pressures on HDD manufacturers and increasing the possibility of coordination among the remaining players considering the relative transparency of the HDD market.

Remedies

According to MOFCOM’s decision, Seagate shall have the following obligations:

(1) Seagate shall adopt measures to keep Samsung’s brand as a separate competitor, such as establishing an independent subsidiary for independent pricing and sales of Samsung products, creating firewalls to avoid information exchange etc.;

(2) Seagate shall keep its promise to expand the Samsung production capacity within six months of the decision, and reasonably determine and report the production capacity and volumes of Samsung’s products thereafter;

(3) Seagate shall not materially change its current business model, forcing customers to buy HDDs exclusively from Seagate or its controlled entities;

(4) Seagate shall not force TDK (China) Investment Co. to supply magnetic pickup head for HDDs to Seagate or its controlled entities exclusively or restrict the quantity TDK sells to other HDD manufacturers; and

(5) Seagate shall invest at least USD800 million per year for three years in R&D.

It is interesting to note that Seagate is entitled to apply to MOFCOM for release of the first two of the above obligations after the elapse of 12 months from the date of the decision.  MOFCOM will then decide whether to approve based on the market conditions.

Comments

The decision is the most comprehensive decision MOFCOM has published to date.  Whereas MOFCOM still relies heavily on market share and market structure, it also takes in account a comprehensive set of factors as well as pragmatic evidence in its analysis.

Moreover, this deal was also notified in the U.S. and the EU.  But MOFCOM is the only authority that has imposed remedies, showing that MOFCOM is getting increasingly independent in reaching its own decision.  This raises another interesting issue: how and to what extent would antitrust authorities in different jurisdictions cooperate with each other in the face of a cross-jurisdictional merger filing if significant divergence is likely to happen?

In relation to the remedies, it is also interesting to note that for the first time, MOFCOM included a periodic review clause in its clearance.  Western Digital/Hitachi, the other major transaction in HDD market, obtained conditional approval from the European Commission in November.  MOFCOM may have considered that the Western Digital/Hitachi transaction and the divesture commitments made by Western Digital may eventually change the competitive landscape of the HDD market and therefore Seagate’s obligations may merit review at a later stage.