Transcript impact of the merger - Amazon Web Services

Public hearings on the
Walmart/Massmart merger:
Government’s perspective
Presentation to the Portfolio Committee on Economic
Development
21 July 2011
Presentation parameters
• Avoiding referring to issues subject to judicial decision
• Not commenting on Competition Tribunal’s decision
and reasons (which are a matter of public record)
• Focusing on the impact of the merger and mergers in
general – on employment, industrial development,
local manufacturing and economic development
Competition Act (1)
• Purpose of the Act includes developmental aims –
– To promote the … adaptability and development of the
economy
–…
– To promote employment and advance the social and
economic welfare of South Africans
–…
– To ensure that small and medium-sized enterprises have
an equitable opportunity to participate in the economy
– To promote a great spread of ownership, in particular to
increases the ownership stakes of historically
disadvantaged persons
Competition Act (2)
• The Act specifically provides for “public interest” issues to
be considered, even where competition will not be
negatively affected
• The Commission or Tribunal must consider the effect the
merger will have on –
– A particular industrial sector or region
– Employment
– The ability of small businesses, or firms controlled or owned
by historically disadvantaged persons, to become competitive
– The ability of national industries to compete in international
markets
Competition Act (3)
• Section 18(1) of the Act empowers the
Minister of Economic Development to
intervene in any merger to protect the public
interest
Government policy (1)
• Relevance of government policy
– Departments believe that the merger is likely to have a negative
impact on employment
– Employment is a factor that the Tribunal is obliged to consider in
determining whether the merger can be justified on public interest
grounds
– Government policy informed by the unemployment situation in the
country
• SA ranked among the ten countries with the lowest level of employment in the
world
• Fewer than half of all working age South Africans in income-generating
employment
• Official unemployment rate of 25%
• 40% of those between 16 and 30 unemployed (Q1 2010)
Government policy (2)
• Ruling party manifesto emphasises employment
creation as one of five key priorities
• New Growth Path adopted by Cabinet in October
2010 is focused on employment creation
– Identifies sectors with high employment potential and
interventions to maximise this potential
– Identifies macro and micro-interventions to create an
enabling environment for employment creation
– Received widespread support from social partners
Government policy (3)
• Government’s Industrial Policy Action Plan (IPAP2) is also
focused on employment creation
– Seeks to strengthen the productive sectors of the economy and
promote local procurement
– Identifies key manufacturing sectors that government will
support
– Received widespread support from social partners
• Food security concerns
– If value chains disintegrate, agriculture, agro-processing and
food production become unviable
– SA economy will become more vulnerable to international price
and currency fluctuations and more affected by international
food shortages
Basic chronology
• 3 November 2010 – Merger notification
• 11 February – Commission recommends merger
without conditions
• 24-25 February 2011 – Departments intervene
• 22-25 March 2011 – Hearings on the merger and
discovery hearings
• 9-16 May 2011 – Hearings on the merger
Dialogue with Walmart/Massmart
• EDD facilitated dialogue between unions and merger parties
• EDD also engaged merger parties to try to concretise their vague
commitments on procurement
• Commission in making its recommendation without conditions
assumed these discussions would result in undertakings that would
be captured in the Tribunal order
• This did not materialise which necessitated the intervention of the
departments in the Competition Tribunal hearings
• As a result of government’s intervention the merger parties’
undertakings were captured in the Tribunal order
Rationale for intervention
• From government heads of argument, which are public record:
• Merger of the size of the Walmart/Massmart transaction could
undermine government’s policies focused on employment creation
• Strong likelihood of significant replacement of domestic purchases
with imports
– Apparent even from the limited discovery granted by the Tribunal
– Research commissioned by government
– Scope of Walmart’s global purchasing power and global sourcing
strategy
• Negative impact on local employment, output of particular sectors
and the eclipsing of SME and HDI firms
Walmart facts
• Centralised procurement is a pivotal feature of Walmart’s
business model
• Walmart’s revenue is estimated to be $408 billion – South
Africa’s GDP is $354 billion
• If treated as a country, Walmart would have a GDP larger
than 75% of countries worldwide
• Walmart’s procurement division employs 1400 employees
sourcing from 6000 factories in 65 countries
• In 1995 no more than 5% of Walmart products were
imported, by 2005 this figure stood at 60%
Impact of this merger
• Government believes that given global purchasing power of Walmart, the
merged entity will significantly increase imports and reduce purchases
from local suppliers
• This will affect entire value chains from the suppliers of raw materials and
components to the suppliers of the finished product
• Commissioned research estimates that a 1% increase in imports will result
in 4000 job losses in South Africa
• Government believes a ripple effect in the sector is inevitable –
competitors of the merged entity will also import more and procure less
from local suppliers
Dispelling some myths (1)
• Myth: South Africa is adopting a protectionist stance
– South Africa has an open trade regime, with lower aggregate tariffs
than many other developing countries
– SA trade policy is aligned with its industrial policy
– Judicious and selective use of a variety of policy instruments supports
local employment
• Myth: This merger is about foreign direct investment
– Massmart, the local company, is 72% foreign-owned
– There is unlikely to be a change in the level of foreign ownership
– SA seeks FDI that will help rebuild the productive sectors of the
economy
– If the impact was on the same scale as the Walmart/Massmart merger,
government’s stance towards a merger between local companies
would have been the same
Dispelling some myths (2)
• Myth: Other countries are much more open to FDI
– Investment Canada Act makes provision for a "net benefit" assessment for FDI
assessing • the effect on the level of economic activity in Canada, on employment; on resource
processing; on the utilization of parts and services produced in Canada and on exports
from Canada;
• the degree and significance of participation by Canadians in the Canadian business or
new Canadian business and in any industry or industries in Canada;
• the effect of the investment on productivity, industrial efficiency, technological
development, product innovation and product variety in Canada;
• the effect of the investment on competition within any industry in Canada;
• the compatibility of the investment with national industrial, economic and cultural
policies; and
• the contribution of the investment to Canada's ability to compete in world markets
– A recent example of where this provision was used to block an investment into
Canada was the BHP Billiton bid for Potash in which the Minister of Industry
found that the company had not satisfied the requirement that the
investment would create a net benefit for Canada
Dispelling some myths (3)
• Myth: Government seeks to protect monopolies or
inefficiency
– SA general retail market is already highly competitive
• Myth: It is unfair to impose conditions on Walmart
– Conditions proposed are merger-specific – specifically intended to
remedy effects of the merger
– Conditions appropriate to Walmart, given its size and specific business
model which, if applied in SA, would have serious negative
consequences
• Myth: Government seeks to disadvantage poorer consumers
– Access to money for the poor attained through access to employment
– Our consumption sectors are growing at twice the rate of our
productive sectors - unsustainable
Dispelling some myths (4)
• Myth: Government’s approach is out of line with the rest of
the world
– Governments act on a public mandate given by citizens during election
campaigns
– In other jurisdictions transactions are prohibited or conditions
imposed upon them by the executive authority
– In the US, some public authorities have prohibited Walmart from
operating in their areas (example of New York) or imposed conditions
on their entry into the market
– The German Supreme Court found that Walmart Germany was guilty
of illegal predatory pricing of certain products
Concluding remarks (1)
• Government is seeking to protect the public interest by
ensuring that the merger does not undermine
employment, industrial development, small business and
firms controlled by historically disadvantaged individuals
• Because of Government's participation in the Tribunal
proceedings highly relevant but insufficient information
about the effect of the transaction on local procurement
and employment in South Africa was made available by the
merging parties
• Through this process Government has demonstrated that
there is a substantial public interest concern in this merger
Concluding remarks (2)
• In this case, Government believes that evidence in the possession
of Walmart/Massmart would confirm the extent of the negative
impact of the merger
• Government has now applied to review the Tribunal's decision on
the merger and the process it adopted in the merger hearing - it is
essential that public interest concerns are properly ventilated in
Tribunal proceedings after merging parties have made adequate
discovery of information and relevant witnesses have had sufficient
time to make oral submissions
• Government supports a transparent, independent and expeditious
merger review process, in which all key stakeholders, including
Government, can engage meaningfully in order to ensure outcomes
which are pro-competitive and in the public interest