UK OFT on the Lenzing takeover of Tencel - Part 2 (2004)

The Office of Fair Trading explains why the 2001 EU Commission decision prohibiting the Tencel/Lenzing Lyocell merger is no longer relevant:

• Tencel lost the luxury jeans market to other fibres.
• Tencel is increasingly used in Nonwovens and is more easily substitutable.
• There have been no requests for licences for lyocell technology.
• Hanil (Korea) have started production using their own technology.

The Commission in its correlation analysis in the market investigation in CVC/Lenzing found that other fibres such as VSF, cotton and polyester were not substitutable for lyocell. It found in particular that lyocell had specific product characteristics, such as its high tenacity in both wet and dry states and low shrinkage in water which were particularly favoured by certain customers. However, the parties have argued that, in the time since the Commission’s investigation, for the majority of lyocell applications, fibres such as cotton, viscose, polypropylene or micro polyester could be and have been used as alternatives, which is supported by some third party evidence received by the OFT. The parties pointed out that whereas lyocell was originally developed as a ‘premium-fibre’ in textiles, it has from 2000 onwards increasingly been used for non-woven applications such as duvet-fillings, wipes and tea bags. Lyocell used in non-wovens as opposed to textiles is sometimes of a different quality. There appears to be a wider choice of fibres in nonwovens which could explain the lower lyocell prices for non-wovens as compared to textiles.

There does not appear to be any supply-side substitutability between lyocell and other fibres given the different production process involved and the capital investment which would be required to acquire the necessary technology.

The parties argued that they are unaware of any use for which lyocell is essential and for which no reasonable substitute exists. For both textiles and non-wovens, manufacturers have, they contend, a wide choice of natural,synthetic and cellulosic fibres. As such, customers will only use lyocell
if the price is competitive and would switch to other fibres in response to short term relative price changes. To support their case the parties have also pointed out that since the Commission’s decision the makers of luxury jeans – which were found to be one of the most prominent applications for lyocell at the time (paragraph 56 of Commission’s decision) – have all switched to other substitute products and no longer use lyocell.

The majority of third party respondents supported this view. In any event, for the reasons explained below, since this merger is not considered to result in a lessening of competition that is substantial within any market or markets in the UK for goods or services, it is not necessary for the OFT to conclude on exact delineation of the relevant product market. Neither is it necessary for the OFT to determine whether there continues to be a distinct market for the supply of lyocell production and processing technology as indicated in the Commission’s decision. The parties have pointed out that while prepared to licence their technology they have never received a request to do so. Moreover, Hanil, a Korean fibre manufacturer, has begun lyocell production without any need for the parties’ technology. No third parties raised this as an issue and it will therefore not be considered any further.

Source: UK OFT Mergers