Blog Martijn Snoep: Competition authorities have a role in creating new European suppliers

The call for reducing dependence on non-European companies is growing louder and louder. Strategic autonomy is getting more weight in policy and investment decisions in sectors such as energy, IT (cloud services), defense, and pharmaceuticals. At the same time, supply and demand are not always perfectly balanced within Europe. Buyers are waiting for supply of sufficient quality, functionality, and scale, while suppliers say there is too little demand for them to scale up and improve functionality and quality. And it is not clear which is the cause and which is the effect: a classic example of the chicken-or-egg dilemma.

What can competition authorities do to solve this?

Policymakers in Brussels and in the European capitals are thinking about various possible solutions: a targeted innovation policy, the elimination of intra-European trade barriers, Buy NL/EU initiatives, subsidies for European companies, imposing additional requirements on non-European companies et cetera. In this blog, I will discuss how competition authorities such as the Netherlands Authority for Consumers and Markets (ACM) can help solve the chicken-or-egg dilemma. I will focus on demand bundling and supply bundling through joint agreements between companies.

Arrangements between businesses

The dilemma of the chicken or the egg is a coordination problem: someone is waiting for the other to make a move, and vice versa. Depending on the context, such a dilemma can be solved in different ways, for example, through rules, social norms, or agreements. For example, think of the simple rule of driving on the right-hand side of the road. Without such a rule, traffic would be a mess. In our social interactions, we predominantly use social norms. Since these are less clear-cut, awkward situations can arise. Is it one kiss, two kisses, three kisses, or just a handshake when saying hello or goodbye? Businesses solve chicken-or-egg dilemmas mostly via agreements, which may or may not be written down in a contract. ‘If you invest in this new production line, I will buy such and such amount of sheet steel from you over the next few years’.

In order to match European demand and European supply, more is needed than a single agreement between one buyer and one supplier regarding investments and purchases. Scaling is needed in order to create a European supply that is capable of competing with major non-EU competitors. Demand bundling can help in that context. For example, think of coordination between financial institutions to procure cloud services from a new European supplier whose scale and functionality is still insufficient at the moment. Such demand bundling enables this supplier to scale up quickly, thereby reducing its costs as well as investing in functionality. Supply bundling can also help reach the necessary scale. For example, think of European defense firms that collectively develop a new air defense system. Or think of Airbus, which was once founded in order to create a hitherto non-existent European supply of wide-body passenger aircraft, and which subsequently went on to become a European champion.

Guidance

Arrangements between competitors regarding the bundling of demand or supply often have a hint of cartels, and thus being at odds with the competition rules. However, with chicken-or-egg dilemmas, arrangements actually lead to the creation of European suppliers that are able to compete with non-EU competitors, and therefore ultimately to more competition instead of less competition. Since businesses are afraid of violating the competition rules, competition authorities have a role to play in eliminating the chicken-or-egg dilemma. They can draw up general guidelines, and, upon request, make clear what is and is not allowed in individual situations. ACM has, along those lines, already taken the lead in providing general and individual guidance regarding sustainability agreements between competitors. ACM has gained valuable experience in that by now. Over the past few years, ACM has given guidance to dozens of companies. In most cases, the competition rules appear to offer more latitude than what most companies think. ACM is fully prepared to take similar steps, aimed at creating new European suppliers, both in the Netherlands and, with the help of fellow competition authorities, in Europe.

European champions?

The discussion about the coordination problem is often taken to the other extreme if there is a political desire to create “European champions” through mergers, even if existing competition between major European competitors needs to be thrown overboard. This occurs in the telecom sector, for example. Yet, that is an entirely different discussion altogether. The discussion at hand is about the development of new European suppliers. Without any coordination through supply and/or demand bundling, competition from these new suppliers will not even get off the ground. Therefore, let us predominantly focus on the creation of European alternatives, which we obviously would not begrudge if they evolved into new European champions through their own hard work.

Martijn Snoep
Chairman of the Board of ACM