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Editorial Last Updated: Jun 14, 2016 - 11:48:08 AM


BREXIT: Big Business, Cartels and the Single Market
By Dr. Gary K. Busch 13/6/16
Jun 14, 2016 - 11:37:29 AM

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David Cameron has been trotting out his favourite leaders of British business to say how valuable the EU is to their economic health as a subset of Project Fear. The big business avowal of the value of the EU and the Single Market to their respective businesses is genuinely felt and their fear moving away from the cosy shelter of the EU is real.  Their problem is not that they will lose business as a result of the BREXIT; they are afraid that the cosy club of interlocking cartels and price-fixing mechanisms of the EU might be exposed to the European citizens if Britain leaves.

 

Capitalism is rooted in the belief that free and open competition will create the “hidden hand of the market” to promote efficiency and competitive pricing; a sort of economic Darwinism. The only problem is that these promoters of capitalism want this competition to take place in somebody else’s business. For their own businesses they would prefer a situation where free competition is controlled and a small band of producers join together to fix prices, restrain trade by preventing the new entry into the market of non-cartel manufacturers, and establishing a cozy relationship with the political regulators whose job it is to control them and promote free competition.

EU Fines Imposed on Cartels 1990-2016


That is twenty-three billion Euros so far from a Commission that is slow, unreliable and pressured to keep the barriers on competition in place. A recent study at Oxford reports “One of the most contentious and high-profile aspects of EU competition law and policy has been the regulation of those serious competition or antitrust violations now often referred to as 'hard core cartels'. Such cartel activity typically involves large and powerful corporate producers and traders operating across Europe and beyond, and comprise practices such as price fixing, bid rigging, market sharing, and limiting production in order to ensure 'market stability' and maintain and increase profits.”

What Is A Cartel or “Ring”

A cartel is an agreement between competing firms in a market to control prices or exclude entry of a new competitor in a market. It is a formal organization of manufacturers or providers of a service that agrees to fix selling prices, purchase prices, or reduce production, maintaining their control of their market sector; a restraint on competitive trade.

In some cases, companies producing similar goods meet together and agree a minimum price for the products among them; avoiding competition on price. In similar cases these producers agree to keep competitors out of their markets by insisting on delaying the acceptance of the new company’s designs or improvements in their restrictive markets. In other cases, the cartel forms a ‘ring’ of similar companies to agree a minimum price for each member to quote on a local or international tender. They then agree on which member should get to make the lowest bid at that price on the artificially raised and agreed price. They take turns winning inflated tenders. These are common practices in many economies but they are supposed to be regulated by antitrust law. There are several European Directives which promise to enforce the EU antitrust legislation. There is even a Commission to investigate complaints.

Antitrust violations are very common within the EU. Most EU citizens have no idea how widespread and pernicious these cartels can be. A key defining principle of doing business within the EU is that many, if not most, European industries operate outside the rules of free competition. Most operate as cartels; groups of businesses in the same industry which meet together and establish prices and working relationships. They don’t call this operating a cartel; the polite euphemism is “operating an orderly market”. They set high prices for the goods they produce, sure in the knowledge that their cartel will prevent any other company underbidding them on price. There are EU cartels for steel, sugar, milk, transport, cement, food production, pharmaceuticals, electrical goods, paper and paper products, computers, cars, construction, mobile phones, vacuum cleaners and many others. This both raises prices and inhibits innovation. The EU competition authorities are notoriously slow in prosecuting cartels but have been able to proceed against some

These are some of the ones who were caught and prosecuted. The damage they have done to the EU economy was estimated by the Commission


These are fines paid by some of the EU’s largest companies.

As an initial guide It will be clearer if some specific cases are looked at, using the EU Commission’s own descriptions.

     

 

Some Recent Convictions (using the Commission’s own words

Steel Abrasives

Some of the cases involve companies one might not think to reference as a cartel. In May 2016 the Commission found that Italian abrasives producer Pometon S.p.A. breached EU antitrust rules by participating in a cartel to coordinate steel abrasives prices in Europe for almost four years. The Commission has imposed a fine of € 6 197 000.The Commission has found that for almost 4 years, Pometon participated in a cartel and had contacts on a bilateral and multilateral basis to coordinate prices of steel abrasives in the whole European Economic Area (EEA).
The cartel concerned steel abrasives, which are loose steel particles used for cleaning or enhancing metal surfaces in the steel, automotive, metallurgy and petrochemical industries. They are also used for cutting hard stones such as granite and marble.
Metal scrap, which is the main raw material for steel abrasives, is characterised by sharp price fluctuations as well as significant price differences between the EEA countries. To compensate for such fluctuations, the cartel participants set up together a specific surcharge (called the "scrap surcharge" or "scrap cost variance (SCV)") based on a common formula. In addition, the cartelists agreed not to compete against each other on price with respect to individual customers.

Canned Mushrooms:

In April 2016 The Commission fined Riberebro €5.2 million for participation in canned mushrooms cartel.  The European Commission found that Spanish canned and fresh vegetable company Riberebro participated in a cartel to coordinate prices and allocate customers of canned mushrooms in Europe for more than a year and has imposed a fine of €5 194 000 on the company. The Commission adopted a settlement decision in June 2014 concerning the participation in this same cartel of Bonduelle, Lutèce and Prochamp. Riberebro chose not to settle and consequently the investigation continued under the normal cartel procedure. The cartel concerned canned mushrooms sold in tins and jars (i.e. not fresh or frozen mushrooms) for private label sales in the European Economic Area (EEA). These sales are carried out via tender procedures to retailers and food wholesalers such as cash and carry companies, as well as to professional customers such as catering companies. The overall aim of the cartelists was to stabilise their market shares and stop a decline in prices. To achieve this, the cartel members exchanged confidential information on tenders, set minimum prices, agreed on volume targets and allocated customers among themselves. The cartel was a non-aggression pact with a compensation scheme in case of customer transfer and application of minimum prices which had been agreed beforehand. The Commission found that Riberebro participated in the cartel from 10 September 2010 until 28 February 2012.

Optical Disks

In October 2015 the Commission fined suppliers of optical disc drives € 116 million for cartel collusion. It fined eight optical disc drive suppliers a total of €116 million for having coordinated their behaviour in relation to procurement tenders organised by two computer manufacturers, in breach of EU antitrust rules.

Optical disc drives ("ODDs") read or record data stored on optical disks, such as CDs, DVDs or Blu-ray. They are used for instance in personal computers, CD and DVD players and video game consoles. The anticompetitive conduct subject to fines in this case concerns agreements to collude in procurement tenders for ODDs for laptops and desktops produced by Dell and Hewlett Packard (HP).

The eight suppliers engaged in the illegal practices covered by this decision, were Philips, Late-On, their joint venture Philips & Late-On Digital Solutions, Hitachi-LG Data Storage, Toshiba Samsung Storage Technology, Sony, Sony Optic and Quanta Storage.

The Commission's investigation revealed that between June 2004 and November 2008, the companies participating in the cartel communicated to each other their intentions regarding bidding strategies, shared the results of procurement tenders and exchanged other commercially sensitive information concerning ODDs used in laptops and desktops. They organised a network of parallel bilateral contacts that pursued a single plan to avoid aggressive competition in procurement tenders organised by Dell and HP.

Although the cartel contacts took place outside of the European Economic Area (EEA), they were implemented on a worldwide basis. Of the companies involved in the cartel, only Philips is headquartered in Europe. The remaining seven are headquartered in Asia. The duration of each company's involvement in the cartel varied and ranged from less than a year to over four years.

The companies were aware that their behaviour was illegal and tried to conceal their contacts and to evade detection of their arrangements. For example, they avoided naming the competitors concerned in their internal correspondence but used abbreviations or generic names.

The cartelists also avoided leaving traces of anticompetitive arrangements by preferring face-to-face meetings and ensured that the competitors' discussions were not revealed to customers. Some of them met in places where they could not be easily spotted, including in parking lots or cinemas.

Cargo Trains

In July 2015 the European Commission imposed fines of € 49 154 000 on Express Interfracht, part of the Austrian railway incumbent Österreichische Bundesbahnen ("ÖBB"), and Schenker, part of the German railway incumbent Deutsche Bahn ("DB"), for operating a cartel in breach of EU antitrust rules in the market for so-called cargo 'blocktrain' services. The three companies fixed prices and allocated customers for their "Balkantrain" and "Soptrain" services in Europe for nearly eight years.

Kühne+Nagel of Switzerland, which is one of the largest transport and logistics companies in Europe, also took part in the cartel but was not fined as it was granted immunity for revealing the existence of the cartel.

'Blocktrains' refers to a rail shipping system to transport cargo from one hub to another without wagons being split up or stored on the way. This saves time and money for customers from a wide range of industries, in particular those with large volumes to transport. In principle, blocktrains are economically more efficient than traditional rail cargo transport, notably for single commodity shipping. The 'blocktrains' covered by the cartel, named "Balkantrain" and "Soptrain", were jointly operated by Kühne+Nagel, Express Interfracht and Schenker. "Balkantrain" ensures the connection between Western and Central Europe with Southeast Europe. "Soptrain" connects Central Europe with Romania.

In order to limit competition between them, the companies agreed on several restrictive practices:
•    they agreed and allocated existing and new customers as well as setting up a customer allocation scheme including a 'notification system' for new customers;
•    they exchanged confidential information on specific customer requests;
•    they shared transport volumes contracted by downstream customers;
•    they coordinated prices directly by providing each other with cover bids in respect of customers protected under their customer allocation scheme and coordinated sales prices offered to downstream customers.

The infringement lasted from July 2004 to June 2012 for all companies.

Cartels Off The Hook

These are just a few of the cases brought to a successful conclusion by the Competition Commission. However, the fact that these cases were brought and fines levied does not mean that these fines were actually imposed or collected. The EU clearly recognises that cartels are the leitmotiv of European business and have prosecuted some cases, but that does not mean that the cartels are deterred or fined.

When these cases were heard and a fine imposed the EU allows for a mitigation of the penalty. It reaches a “settlement” with the cartels reducing the fines and limiting the liabilities of the companies found to be operating cartels. Recent settlements include cartels in the following cases: DRAMs, animal feed phosphates, washing powder, glass for cathode ray tubes, compressors for fridges, water management products, wire harnesses, Euro and Yen interest rate derivatives, polyurethane foam, power exchanges, bearings, steel abrasives, mushrooms, Swiss Franc interest rate derivatives and bid-ask spreads, envelopes and parking heaters.

The Commission has established variations to its antitrust legislation which permits a policy of leniency. Some companies are let off entirely because they co-operate with the Commission; others have their liabilities reduced by 75% plus an additional 10% for later co-operation. Some are let off because the fine would “destroy” the company. Others are let off because it would be better for consumers if their products remained in the market. All in all, EU competition and anti-trust policy is largely for show and for giving the lobbyists a reason for collecting their large fees; a useful sham. They can also deduct these fines from their income as a business expense.

I have had first-hand experience with how these cartels work. My company was engaged in the international trade in cement. We traded in Africa, the U.S. and in Britain. When we established our UK operation we were approached by several producers seeking to discuss our place in the orderly marketing arrangements. We were informed that on the last Thursday of every month the European cement producers would have their monthly meeting at the Hyde Park Hotel where access to the European market and projects coming up would be discussed and contracts allocated in the “ring” of the producers. We decided that this was not the way we wanted to do business so thought we could do business without the cartel. It was not a wholly successful position to take as we faced retaliation. It was not that they companies took any action against us per se but they informed all of our cement buyers that if they bought from us they would not be able to buy sand or stone or other materials except at a very high price.

We went to Brussels to meet with Leon Brittan, the European Competition chief and told him about the cartel and what it was doing. He investigated and proceeded to examine the evidence. In an ironic turn of events the Cement Cartel had put a Swiss man from Holderbank as the secretary of the cartel. He took notes and circulated them to the attendees at the Hyde Park meetings. Being Swiss he was very efficient and thorough in his notes. When Leon Brittan’s investigators raided the offices of the largest Belgian cement producer they found the circulars sent out by the Swiss secretary of the cartel, labelled “European Cement Cartel”. The Belgians had a hard time trying to explain that no such cartel existed.

The EU announced a fine of € 93 million against the various producers identified as being members of the cartel. The lobbyists were able to reduce this by more than 85%. In the spring of 2002, the German Federal Cartel Office (FCO) uncovered a hard-core cartel in the cement sector. Numerous cement producers had divided the German cement market among them, agreed on sales quotas, and fixed prices, since the beginning of the 1990s at the latest. Readymix AG disclosed the cartel agreements to the FCO and applied for leniency under the German leniency programme. In April 2003, the FCO imposed a fine totalling €702 million on 12 companies and their representatives, €660 million thereof on the six largest German producers. The lobbyists were able to get this reduced substantially and there are current proceedings seeking to reduce it further.

While I was in the UK cement business I was frequently approached by my competitors to attend ‘ring’ meeting on upcoming construction projects in Canary Warf, Limehouse Link, the Ashford Bypass, Stanstead Airport and many roads to discuss the price of cement to be supplied to these projects. Aggregate manufacturers, ready-mix manufacturers, road builders and engineers, architect and others were there. They operated a ring of established and famous corporate tenderers for these construction products and they wanted to us to fix the prices of the components; cement was only one.  Once the price was agreed by the big companies their lawyers would get together to prepare the bids for the tender to the government agency.  They told me that there was too much money involved to leave it to chance or a new company coming in with a lower bid. I chose not to attend.

This is exactly what is happening in the EU. International tenders are constructed by a series of rings within and among countries. The government only gets the tenders based on the agreed minimum price. Competitors are kept out. In recent days the British entrepreneur, James Dyson, has complained about the EU and has backed Brexit. He has a good reason for this. He sued the EU for creating a standard for vacuum cleaners which was biased in favour of German manufacturers.  Although his technology was far in advance of his German cartel competitors he lost. He has recommended that Britain leave the EU for its bias and lack of receptivity to new technology. In November 2014 he stated on BBC Radio 4 "I think it's a European Union dominated by Germany, and in our particular field we have these very large German companies who dominate standards setting and energy reduction committees, and so we get the old guard and old technology supported and not new technology. I want to keep EFTA – European free trade – and free movement of peoples, but I don't see that we need to be dominated and bullied by the Germans."

It’s not only the Germans; it is the EU itself and many of its constituent countries which restrict trade, make the EU consumer pay high prices for what they buy, and restrain technologies which would allow innovative corporations to enter their markets. It is small wonder the elite of British business feels comfortable and secure in staying with such a cosy bunch. The EU business community was rocked when the U.S. fined the banks for price-fixing on LIBOR and other cases. They were shocked that they couldn’t reduce the fine to negligible proportions as is common practice in Europe.


It is pathetic that the British public is cajoled by these captains of industry to vote to keep these cartels in place. Getting rid of cartels and allowing real price and technological competition will allow Britain to prosper. I am reminded of my old friend, Jim Carey, present of the International Union of Electrical Workers. He told me a story I never forgot. When the six General Electric Corporation executives were found guilty of price-fixing and sent to jail, the union sent them all a present at Christmas during the first year. They sent them each a Monopoly set.


Source:Ocnus.net 2016

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