A report under section 125(4) of the Fair Trading Act 1973 on the advice of the Chairman of the Office of Fair Trading given on 21 May 2003 to the Secretary of State for Trade and Industry under section 76 of the Act
The merger satisfies the share of supply test in respect of the supply of slip-on iron tube fittings in the UK. The ECMR does not apply.
KIG Ltd (KIG) is the holding company of Kee Klamp Ltd (Kee Klamp) and Tubeclamps Ltd (Tubeclamps), which are brands of slip-on iron tube fittings. KIG is itself a subsidiary of KIG Holdings Ltd, which is established in five countries and has distributors in another 28. For the year ended December 2001, KIG Holdings Ltd reported pre-tax profits of £796k, on turnover of £12.9m and, at 31 December 2001, had gross assets of £13m.
FastMat Ltd (FastMat) began trading in 1999 and its shares are owned by the shareholders and directors of Access Technologies Ltd (Access). FastMat supplies iron tube fittings under its own brand FastClamp, as well as free-standing edge protection systems. Access supplies metalwork products including temporary edge protections systems, industrial flooring, and steel fabricated balustrades. For the year ended 30 June 2002, Access reported pre-tax profits of £235k, on turnover of £2m and, at 30 June 2002, had gross assets of £940k. FastMat reported pre-tax profits of £155k, on turnover of £841k and, at 30 June 2002, had gross assets of £487k.
The parties overlap in the supply of malleable iron slip-on tube fittings (or clamps). These are non-permanent fittings used in situ to join metal tubes in applications such as guard-rails, hand-rails and fencing. Thus the demand for clamps is derived from the demand for finished structures. KIG sells two brands of clamp: Kee Klamp, which is the original brand and has a greater range of peripheral services, and Tubeclamp, a lower cost brand. FastClamp is a 'no-frills' brand of clamp sold primarily direct to the end customer.
The principal demand-side alternative to clamps appears to be welding of tubing either on-site or in pre-fabricated sections welded off-site that are bolted together on-site. The parties submit that welding is a direct substitute for the use of clamps in all applications. They highlight the fact that in some European countries where the labour cost of welding is lower, clamps are not used. The parties also submitted a range of photographs demonstrating the use of clamps and welding in constructed hand rails and other systems which have been used on the same site.
Third parties have not, in the main, confirmed the view that welding and clamps are directly interchangeable. Some have indicated that the tube fitting design (clamps) is simple and effective, and there is no readily available alternative. Others have maintained that welding is their preferred option. Third parties have also indicated that the price differential between clamps and welding depends upon the application. Welding involves higher labour costs due to the specialist labour requirements, whereas clamps have a higher material cost. Overall, welding appears likely to be cheaper where the product is simple.
It is possible that third parties are not considering all of the options open to them in concluding that there is no substitute for clamps. If a structure has been designed to be constructed using either clamps or a welded design there might be little possibility of switching, but a choice of construction method appears to remain at the earlier, design stage. Moreover, KIG asserted that some designs did not specify the type of railing required and so in these cases clamps will directly compete with welded products to meet these design needs.
Since 1998 there has been an increase in the volume of sales of clamps and, despite an overall price fall of [20-30] per cent [see note 1], the total value of clamp sales has remained constant. This increase in demand has come during a period when there has been general growth in the market for metalwork structures due to both an upturn in the construction industry and an increase in health and safety requirements with respect to construction sites. Hence growth in demand for clamps appears to be a result of two factors: an exogenous increase in demand, and a demand response to falling prices potentially due to switching from alternatives. However, evidence of this switching provided by the parties through contracts won and lost has not proved conclusive and given that the cost of welding remaining largely unchanged, it is perhaps surprising that there has not been more substitution from welding to clamps.
The parties argue that the reason substitution has not been more prevalent is that the fall in the price of clamps only represents a [5-10] per cent [see note 1] fall in the price of a structure using clamps and, as this is a cumulative price fall over 4-5 years, the annual price fall has been smaller. They also submit that this reduction may not be sufficiently large enough to persuade customers to switch, thus there may be some inertia. Some customers (fabricators) have confirmed that they have an inherent preference for using either welded or clamped products.
On the supply-side most suppliers of clamps in the UK, excluding KIG, import these in finished form from low-cost production facilities, primarily in the Far East. [See note 2]. Indications are that there are a variety of foundries capable of producing these products, in different regions of the world, and that capacity is not constrained.
The above evidence suggests that while welding and clamps do appear to be substitutes for each other in certain circumstances, it is not clear how strong a substitute welding is. But it would not be appropriate to exclude welding entirely from consideration of the range of demand-side constraints that operate in this sector. (We consider supply-side constraints, including some that might arguably be considered as supply substitutability, in the analysis of entry conditions below.)
With regard to the geographic market no firm conclusions to this have been drawn as they are not crucial to the economic assessment.
The parties have a [70-80] per cent [see note 1] share of supply of clamp fittings in the UK post-merger, an increment of [10-15] per cent [see note 1], with the nearest competitor, GWS accounting for [10-15] per cent [see note 1]. On an EU basis the parties will have a [70-80] per cent [see note 1] share with an increment of [5-15] per cent [see note 1].
The parties have mentioned that competition within the clamps sector has driven prices downwards and that welding provides a constraint to prices as this defines the 'ball-park' within which clamp prices must be for the product to be competitive.
The Kee Klamp brand is said to be the 'premium' brand within the market, due to the incremental services supplied by KIG which warrant the higher price. If Kee Klamp products command a premium for some users, then KIG may be able to exploit this premium by increasing the price of Kee Klamp post-merger, in the knowledge that it will be able to capture any switching away from the brand by additional sales in its other brands, thus exploiting a multi-brand strategy.
KIG disputes that such a strategy would be viable [see note 2].
In regard to barriers to entry and expansion, [some] [see note 2] clamps sold in the UK are manufactured by contract manufacturers primarily located in the Far East. The cost of entry to UK suppliers includes cost of tooling the foundry and acquiring suitable stocks to enter the market. It was estimated by third parties that stock orders worth £200,000 would be required to be placed initially with manufacturers, due to the need to stock a range of different components. The cost of marketing and setting up a sales operation was estimated to be in the region of £50,000. KIG stated that the initial cost of tooling was £[5,000-10,000] [see note 1] for FastMat when it entered the UK market in 1999. These costs must be seen in the context of a fittings market worth £[5-8]m [see note 1] in the UK, and therefore do not appear to be substantial. Moreover, as a general proposition, only some costs of entry are barriers to entry.
Since entry, FastMat has been successful in gaining a [10-15] per cent [see note 1] share of supply in under four years. Its parent company, Access, was originally buying clamps for use in its end products from a UK supplier. It saw a profitable opportunity to become an importer, bringing in clamps both for its own needs and for sales to third parties. Thus perhaps the most significant competitive constraint that KIG may face is the possibility of customers becoming importers or other metalwork companies exploiting their existing relationships with the foundries to buy direct from them. Firms may follow FastMat's example and sell to third parties if their own internal needs are too small.
However FastMat's rapid success needs to be balanced against the number of smaller firms who have not expanded since the last merger, and appear to represent a competitive fringe.
The role of distributors may make it more difficult for new entrants, as they tend to stock only one manufacturer's product range, though they may order in other brands to fulfil customer orders. However, the parties argue that [see note 2] any new entrant would use the direct sales approach. Moreover, FastMat does not use distributors hence the merger does not decrease potential access to this supply chain [see note 3].
Although the distributors/stockists may have some buyer power through consolidation in recent years, the fall in the number of alternative suppliers may reduce this. The end-users (fabricators) generally only purchase small quantities of clamps when required for a project and so are unlikely to have any buyer power.
Although both FastMat and KIG make internal sales to their divisions which create finished structures, these sales are a small proportion of their total sales of clamps.
Third party views
The views of third parties consulted by the OFT were mixed and are reflected in the above advice. Some distributors and stockists argued that they would be able to purchase directly from foundries in the event of a price increase, and others argued that they could switch to an alternative supplier based in the UK.
End customers were generally of the view that they would not switch between clamps and welding. However there were some third parties who felt there was competition between the two.
FastMat's turnover before the takeover was less than £1 million. Nevertheless, there has been a significant increment in KIG's high share of supply of clamps as a result of the merger. On the demand side, while it is evident that welding is a substitute for clamps at some level, it is not clear how strong a competitive constraint this alone might be. There are a number of suppliers in the UK but their shares of supply are currently modest. However, clamps may be an unduly narrow product market definition, and the potential for entry and expansion needs to be considered carefully.
The financial cost of entry seems relatively modest. Entry has been seen in practice with FastMat, who achieved a sizeable share of supply in a relatively short space of time. Moreover, available production capacity suggests that existing competitors would be able to expand should the opportunities be available. Therefore, on balance, overall the potential threat of entry, the presence of a competitive fringe and some degree of demand side substitution are such that no substantial lessening of competition is expected.
I therefore conclude and recommend that you do not refer this merger to the CC.
1. Actual figures replaced by a range at the request of KIG.
2. Details excised at the request of KIG.
3. The parties wish to state that FastMat does use distributors to a limited extent.