EU stops Merger of Tencel and Lenzing Lyocell - Part 4 (2001)

This extract continues on from the last post.  There are two distinct monopolies being created: one in the sale of lyocell products (fibres, filaments films etc) and another in the sale of lyocell production technology and plants.

121. The Commission, having considered these arguments, maintains its definition of a separate product market for the production and processing technology for lyocell (including both staple fibres and filament yarn). 

Firstly, it should be noted that, contrary to the parties [CVC/Lenzing] Reply, the definition of a separate market for technology is in line with consistent Commission practice and cannot therefore be regarded as highly unusual.

122. Secondly, the Commission considers the current activity in this area sufficient for it to form a separate market. Indeed, there appears to be a significant degree of demand by potential lyocell producers for lyocell production and processing technology; the parties themselves provide a series of examples in their Reply and also point out that Zimmer AG has been marketing its technology for the last two years.  Moreover, a certain number of licences have already been granted by the parties themselves; the circumstances under which these licenses have been granted (wholly exceptional) and the purpose for which they are being used (do not relate to lyocell fibre production) cannot be decisive for the definition of product markets. On the contrary, the very fact that licences were granted under exceptional circumstances which were not related to lyocell fibre production proves, in the Commission's view, that lyocell production and processing technology on the one hand and lyocell fibre production on the other hand are not inextricably linked with each other and deserve to be assessed separately.

123. Thirdly, not all of the companies and institutes which develop lyocell production and processing technology are at the same time active in lyocell production. As has been stated above (see paragraph 119) and confirmed by the parties in their Reply, the German undertaking Zimmer AG is active in the development and sale of lyocell technology but not in lyocell production; so is the research institute Thuringisches Institut for Textil- und Kunststoff-Forschung e.V. (TITK). The fact that different players are active in the lyocell production area and in the field of lyocell production and processing technology strongly militates in favour of the existence of a separate technology market.

124. The Commission therefore concludes that there is a technology market for lyocell production and processing which is distinct from the downstream market for the production and sale of lyocell.

(More to come)


Case No COMP/M.2187 CVC/Lenzing

EU stops Merger of Tencel and Lenzing Lyocell - Part 3 (2001)

Back to "Technology" for this extract from the EU Mergers report, signed incidentally by the then Commissioner Mario Monti who has just had a rather torrid time in the Italian elections.  

This is an amplification of the view that the Tencel/Lenzing merger would stifle the development of the technology not only for staple but for filament, film and membranes.

The production and processing technology for both lyocell staple fibres and lyocell filament yarn is entirely distinct from any other fibre production and processing technology. Whereas viscose technology (including environmental compatibility) is well established and readily available, the technology for lyocell production is rather young; it has been developed since the 1970s and has seen its first commercial application in the 1990s. It is characterised by the existence of a large number of patents. Whilst some of the initial patents have already expired, this is not the case for others, mostly those related to the production process and to the treatment of lyocell

119. Both Acordis and Lenzing are key players in this market in which some East Asian companies and the German engineering company Zimmer AG are also active, partly in co-operation with research institutions. Whilst some of these undertakings are at the same time involved in lyocell production, others, such as Zimmer AG, are not. Acordis and Lenzing cross licensed their lyocell technology in 1997.  From this cross licensing agreement it becomes clear that Lenzing and Acordis are already active as sub-licensors and sub-licensees on this market and that therefore there is trade in licenses. The same agreement also substantiates that this market not only includes technology for staple fibre production and processing but also for other lyocell products such as extruded films and membranes and filament. As the technology in these other areas is linked with the technology of lyocell staple fibre production and processing through certain patents common to all areas, these areas of lyocell production and processing technology belong to the same product market.

Moreover, lyocell filament technology has not yet entered the stage of commercial production and consequently competition in this area can only take place on the level of production and processing technology. The Commission's market investigation has furthermore revealed that there is demand for lyocell technology licences.

120. In their Reply, the parties [CVC and Lenzing] argue that there is no market for lyocell technology in the sense that there is currently no significant licensing of lyocell technology and patent rights, and that it is highly unusual to identify a separate market for technology. Secondly, they contend that the parties themselves are currently not active in sub-licensing and that Zimmer AG is currently the only significant supplier.

(The Commission's response follows in the next post)

EU stops Merger of Tencel and Lenzing Lyocell - Part 2 (2001)

The last post referred to the lyocell technology.  This one refers to the market for lyocell fibres. 

The following paragraph from the EU Final Report of the Hearing Officer for the CVC/Lenzing merger case records the conclusions from consulting lyocell fibre customers about the proposed merger:

63. The market investigation carried out by the Commission has confirmed that there is not sufficient demand-side substitutability between lyocell and other fibres for them to be included in the same relevant market. Indeed, the vast majority of the customers interviewed stated that they were not in a position to replace lyocell in their products at all. According to their replies, certain customers would have to cease manufacturing the product concerned and the vast majority of customers would simply not change anything in the event of an increase of 5-10% in the price of lyocell. The most common reasons for not switching were the specific product characteristics of lyocell and the requirements set by downstream customers. 

The report adds in a footnote that these findings were confirmed by a statement in an internal document submitted by CVC.  Later in the same section:

70. Likewise, there is no supply-side substitutability between lyocell and VSF.Although both viscose and lyocell staple fibres are man-made cellulosic fibres, lyocell is produced in separate plants by an entirely different production process, a solvent spinning process in which the fibre is formed by directly dissolving wood pulp in organic solvents (whereas viscose has to undergo a different chemical process of slurrying and xanthation, which in contrast to the lyocell process involves the formation of a derivative, then dissolving the xanthate in dilute caustic soda before it can be extruded through spinnerettes). Special equipment and machinery are required to produce lyocell. The production technology is highly capital intensive, resulting in lyocell currently being the man-made cellulosic staple fibre with the highest cost of production by far.

Both competitors and customers assume, however, that these production costs might fall significantly once the considerable investment in research and development for this comparatively new technology will have paid off, given that the lyocell production process is in fact a process involving fewer production steps than the viscose process.

Case No COMP/M.2187 CVC/Lenzing

EU stops Merger of Tencel and Lenzing Lyocell - Part 1 (2001)

A review of the EU documents blocking the proposed Acordis/Lenzing merger (to create "the new entity") reveals the following conclusions on the technology involved in the Tencel/Lyocell part of the merger.

• The new entity would remain the only player worldwide who is able to license this technology as far as ready-to-produce technology is concerned.
• No other producer could therefore start lyocell production without entering into a licensing agreement with the new entity or running the risk of patent litigation.
• Competition in the market for lyocell production and processing technology would therefore be eliminated as far as ready-to-produce technology is concerned. 
• The effect of such a situation would not only be the slowing down of technological development but also the likely alignment of any new entrants behaviour in lyocell staple fibre production with the new entity's behaviour, making it likewise impossible for any new entrant to effectively challenge the new entity's dominant position in lyocell staple fibres.
• This slowing down of technological development would be due to two factors: firstly, the immediate incentive of the new entity to invest in technological developments, and thus lower barriers to entry, would be reduced by the "free rider" problem it could face with regard to the licensee. 
• Whilst this freerider problem also exists in regard to the current competitive situation between Acordis and Lenzing, it is effectively counterbalanced by the technological rivalry between both companies, which provides an incentive to innovate. 
• Post-merger, the incentive to innovate would therefore be reduced.

Case No COMP/M.2187 CVC/Lenzing

(More to come)

How the EU justified the same merger 3 years later will be the subject of later posts.

Geoffrey Owen's Tencel lyocell history extracts (Part 6 - Lenzing)

Geoffrey Owen of the Department of Management, London School of Economics presented a paper at SPRU in October this year entitled "Innovation in the man-made fibres industry: corporate strategy and national institutions." It is based on unpublished material made available to the author by Akzo Nobel, Lenzing and Courtaulds (amongst others) and is available in full here on the web as a PDF file. It contains excellent sections on Tencel lyocell development history, the sixth extract of which is reproduced below.  This final part deals with the early history of Lenzing leading to their lyocell development.

The rayon factory in the town of Lenzing, situated in Upper Austria between Salzburg and Linz, was built in 1938 as part of the Nazi authorities’ self-sufficiency programme; a number of plants were built in Southern Germany and Austria in order to replace cotton imports. The rayon factory was adjacent to an existing pulp mill, which became the main source of woodpulp; the mill was bought by Lenzing in 1969. The integration of pulp and rayon production gave Lenzing a cost advantage over rayon producers such as Courtaulds which obtained their wood pulp from distant suppliers.

After the war the company was controlled by two partially state-owned banks, Landerbank and Creditanstalt. Subsequent mergers in the Austrian banking industry led to the creation of Bank Austria, which became the principal shareholder. Lenzing was listed on the Vienna Stock Exchange in 1985 but only about 10 per cent of the shares were offered to outside investors. Lenzing was expected to make profits and to pay dividends but it was not a shareholder-driven company. As the principal employer in its region, it had a social responsibility which influenced its strategic decisions, not least its determination to make the best possible use of the site. A drawback of the site was the lack of water and Lenzing had to invest in costly techniques to
reduce its water consumption while also meeting the environmental rules laid down by the regional government. The result was a cleaner manufacturing process, giving the company the confidence to continue improving the viscose process at a time when other producers were cutting back. 

Lenzing also developed speciality cellulosic fibres, of which the most important was modal; launched in 1964, this was a “high wet modulus” fibre, stronger than rayon and suitable for hightenacity applications.  Lenzing took a cautious approach to synthetic fibres. It made a brief foray into acrylics and later into polyester in partnership with Hoechst, but was never a major producer. Because of its limited involvement in synthetics, Lenzing was less affected than most other European fibre producers by the over-capacity crisis of the mid-1970s. At the end of that decade it made what turned out to be an important decision to participate in an Indonesian viscose plant with the Indian Ashok Birla group. The Indians had asked for technical assistance and in exchange Lenzing secured a minority interest in the new company. This plant, which started production in 1982, gave the Austrian company a foothold in a region where demand for man-made fibres was growing fast, and paved the way for subsequent investments in Asia; Lenzing later acquired majority control of the Indonesian company.

Like Courtaulds, Lenzing was aware of possible alternatives to the viscose process and it initiated research into solvent spinning during the 1980s. A pilot plant was built in 1990 and five years later Lenzing decided to manufacture its own lyocell fibre, a direct competitor to Tencel; production began in 1997. In 2004 Lenzing bought the ex-Courtaulds Tencel business from CVC.This added the two Tencel plants which Courtaulds  had built, in the UK and the US, to Lenzing’s existing plant in Austria. All three factories were subsequently expanded, and in 2010 Lenzing announced plans to build a new Tencel plant in Austria. The Tencel takeover was one of a series of moves which gave the Austrian company a more international dimension. The Indonesian plant was enlarged and in 2005 the decision was taken to build a viscose plant at Nanjing, China; another Asian viscose plant, in India, is expected to come on stream in 2013. Lenzing is now one of the two leading producers of cellulosic fibres, the other being the Aditya Birla group in India. Nearly 60 per cent of its sales come from Asia, but the heart of the company remains the original site in Lenzing; some 3,000 out of the company’s total labour force of 6,600 are employed there. 

Although Lenzing has diversified on a small scale outside fibres, principally in plastics, its strategy since the war has been based on the belief that, with continuous investment in new technology and new product development, cellulosic fibres will remain a good business to be in. This consistency has been reinforced by the company’s ownership structure. In 2000 Bank Austria sold its shares to an Austrian foundation, the B & C Private Foundation, whose mission was to act as a long-term core investor in Lenzing, with a commitment to maintain the company’s role in the Austrian economy. In 2011, as part of a capital reconstruction which involved the issue of new shares, B & C reduced its share of the voting shares to 68 per cent and the free float was increased to about 33 per cent.  Part of the motivation was to make Lenzing shares more accessible to international investors.