Between the years 2000 and 2017, Turkey has been amongst the top 5 countries of which the automotive market was expanding with the rapid rate of 20%. After three consecutive years of successful sales rates, the automotive sector in Turkey ended the year 2018 with contraction. Domestic models strengthened their position in the passenger car market while expanding to 50% of the shares in the light commercial vehicle market. When perceivable growth held in mind, the crucial forces syncopating the production may be identified as dematerialization, decrease in the cost of operation, localized decision making and access to information. Turkish Competition Authority (TCA)'s policy and competition law regulations, being the direct reflection of the government's approach to the automotive market should, therefore, be taken into consideration, with an emphasis on their consequences on the cost of operation and access to information.


Mergers and Acquisitions


Turkey has accepted the effectiveness of the case-law constituted by the Institutions of the European Commission (EC) pursuant to Art. 38(2)(a) of the Decision of the Association Council no. 1/95. Thus the cases of EC Court of Justice have been adopted to the national legislation. The Act on the Protection of Competition (hereinafter will be referred to as the APC) numbered 4054 and dated July 12, 1994, is based on two fundamental prohibitions: Prohibition via Art. 4, which aims to prevent the distortion of the competition by the associations between enterprises or agreements, or concerted practices between enterprises and Prohibition via Art.6, which aims to prevent the abuse of dominant position by enterprises in such a position. For the purposes of this article, the regulations and exemptions regarding the mergers and acquisitions and prohibition via Art. 4 will be further studied in the light of TCA decisions. 


According to Art.7(2) of the APC, for the mergers and/or acquisitions (M&A) to be effective, it is compulsory to file and receive authorisation from the TCA. Pursuant to the Communique on Mergers and Acquisitions Subject to Permission by the Turkish Competition Authority (hereinafter will be referred to as Communique) numbered 2010/4, the M&As where total market shares of the undertakings exceed 25% of the market in the relevant product market within the whole territory of the country or a part of it are subject to evaluation of the TCA. 


The obligation does not cease to exist for enterprises with total turnovers exceeding 100 million Turkish Liras or with a global turnover of above 30 million Turkish Liras. In making its appraisal in a merger transaction, the Board takes into account inter alia, (i) The market position of the undertakings concerned, (ii) Their economic and financial powers, (iii) Their opportunities for access to resources of supply or entry into markets, (iv) Any legal or other barriers to entry into the market, (v) Supply and demand trends for the relevant goods and services, the interest of the intermediate and ultimate consumers and (vi) The developments in the technical and economic progress provided that they are to the advantage of consumers and do not hinder competition gravely.  

In a recent decision TCA, allowed the acquirement of all of the shares of SAS Autosystemtechnik GmbH & Co. KG (SAS) by Faurecia SE (FAURECIA) from Continental Automotive GmbH (CONTINENTAL). FAURECIA, owned by Peugeot S.A. (PSA Group), operates in the production and development of various components both for commercial and passenger vehicles. TCA stated that, "‚ĶThe main area of operation of FAURECIA in Turkey consists of the assembly of differing accessories for Ford Turkey. Whereas SAS operates in the assembly of cockpits in both passenger and commercial vehicles. Fundamentally, SAS is the subcontractor of FAURECIA to assemble cockpit models in various Ford models." 

The acquirement at hand can be considered as a vertical agreement concerning competition. According to the TCA, "SAS also is the only enterprise in the assembly of cockpit models of Ford." The vertical integration of the parties may be the leading justification for allowance from the legal perspective of the TCA given the fact that Art.4 violations tend to stem from horizontal integrations within the same operational field, however, the main cause from a micro-economic perspective would demonstrate the severe decrease in the production cost which will result from the acquisition of the assembler by the producer. This decision, sheds light to one of the syncopating aspects of production as stated earlier. The allowance of mergers and acquisitions between vertically operating enterprises could be regulated via communiques and as the exemption regulations portray, resulting in a relatively more definitive regulatory framework. This would, in return, allow relatively more comprehensible criteria regarding vertical integration, in addition to sustaining calculable business plans concerning all aspects of the production and supply chains.  


Joint Ventures and Exemption 


In order to outline the involvement of TCA, the difference between mergers, acquisitions and joint ventures should be stressed further. Joint venture is a business agreement, in which two or more parties agree to pool their resources for the purposes of accomplishing a specific task. Joint ventures of two or more competing enterprises (horizontally integrated establishments) may propose a risk to competitive practices unless deemed individually exempt through Art.5. These specific horizontal agreements regarding a venture of multiple establishments in susceptible industries can be considered a violation of Art. 4. The legal framework on exemption mainly segregates following the relation of the parties of the venture under consideration. Some joint ventures mainly of vertical nature, are subjected to group exemptions due to the gravity of the innovative and inventive step of the industry through various communiques and regulations under Art.5(3). Group (block) exemptions are initially evaluated on the requirements for individual exemptions under Art.5. The exemption, therefore, legalizes the Art.4 violation specifically on those vertical integrations deemed exempt. This, however, does not directly correspond to a certain compliance and is still under evaluation by the TCA once filed for authorization. Those joint ventures legally considered as agreements between horizontally integrated establishments, are subject to review by TCA once a request of exemption under Art. 4 is filed. TCA, when considering exemption, specifically evaluates (i) Increase in efficiency, (ii) Consumer interest, (iii) Not inducing a restraint on competition that is more than essential, (iv) Not eliminating competition in a substantial part of the relevant market resulting from the agreement at hand.  

The main requirement is considered to be the resulting developments in the technical and economic progress, the "innovative step" by the agreement under consideration. This criterion holds a greater significance in industries more susceptible to the technological advancements including the automotive industry. 


One of the notable decisions by TCA would be the decision to procure an individual exemption on Art.5 to the agreement between Tofa≈ü Turkish Automotive Factory Co. and Peugeot S.A. on the supply of lightweight vehicles for two years. The decision establishes the common criteria stated above. According to the TCA, "The agreement between the companies stems from the Product Development and Manufacturing Agreement (PDMA) and concerns mainly lightweight commercial vehicles (including Citroen Nemo, Fiat Fiorino and Peugeot Bipper)." The decision initially evaluates the economic benefit criterion and on the premises of decreasing the cost of R&D, concludes that, "‚Ķcollective production for another two years would be fiscally beneficial for general reduction in the cost of production and distribution as well as increasing the product quality, improving the sustainability of supply and not creating a noticeable barrier to entry." The second requirement regarding the individual exemption is derived from the good of consumers and is generally deemed directly proportional with the first requirement of fiscal cost reduction. Overall ability to decrease the cost of production and sustain the supply on track with the demand of the consumers is presumed sufficient in pursuance of this criterion. An additional condition for individual exemption is not eliminating competition in a substantial part of the relevant market and for the given companies (Fiat, Peugeot and Citroen) in the market of lightweight commercial vehicles, the shares were 27.5%, 3.9% and 4.5% respectively. The market share threshold generally refers to 40% in total after the agreement, thus making the agreement at hand less threatening to the competitive environment. The final condition evaluated is that the agreement must not induce a restraint on competition that is more than essential, which is referred to as the "principle of proportionality" by the scholars. This criterion requires the establishments to choose the least hindering strategy possible to the competitive environment when aiming for the economic and innovative enhancements decided within the agreement. Specifically with this criterion, the TCA evaluates whether any clauses are hindering or impeding the decision-making of the parties at the specified operational field. TCA, may request a modification or annulment of specific clauses if it finds necessary and allow exemption under modified conditions. The executed agreement between the parties was not deemed impeding and received an individual exemption for two additional years. 


Leap of Innovation: Electric Vehicle (EV), Plug-in Hybrid Electric Vehicle (PHEV) and Hybrid Electric Vehicle (HEV) Production


Production of Ford, Fiat, Mercedes-Benz and other brands' commercial vehicles, as well as passenger vehicles of Hyundai, Renault, Honda, Fiat and export of unassembled Toyota accessories take place in Turkey. This, in return, situates manufacturers in Turkey at the heart of the original equipment manufacturers (OEMs). The increase of shares in target markets of vehicles produced through exports lead to 85% production/export rate. The growth in European target market induced a 5% growth in exportation of passenger cars, which makes up approximately $12.5 million in valuation. According to Organisation Internationale des Constructeurs d'Automobiles (OICA) statistics of 2018, Turkey produced 1,550,000 vehicles, accordingly drawing ahead of eight countries exporting finished vehicles. Being substantially prominent, positions Turkey at the center of major changes regarding the electric battery production. Global sales of EVs are expected to double by 2023 and within the forthcoming years, a steady increase in the production of HEV's, which are considerably low in marginal cost of production, is expected to take place. The prevalence of EV's in the global market necessitates both adequate legal measures in terms of distinguishing and easing the change in production and the establishment of competent infrastructure for the transition in production and supply chains from solely motor vehicles to HEVs and EVs. Battery production for HEVs and EVs, therefore require substantial innovative incentive be it through monetary and fiscal policy by active participation, or competition policy with passive permits. 

This can be seen through the recent decision of TCA, allowing the joint venture for production, supply and development of electric batteries through battery cells between Peugeot SA, Opel Automobile GmbH and Saft Groupe SA, under Art. 5. Along with permits regarding horizontal joint ventures, the crucial specialization born in mind, it's substantial that joint ventures and mergers of business initiatives on electronics with global research and development (R&D) resources and car battery producers are permitted under Art.5 through individual or group exemptions. Panasonic Corp. and Toyota Corp. recently filed for permission to TCA for a joint venture on R&D, production and sales of lithium-ion car batteries. Both Toyota and Panasonic possess significant R&D resources on automotive battery production through years of global research and production. TCA's stated that, "The venture being a vertical integration did not pose a risk to the competitive environment in the short run". This, although hindering further possibilities of determining the industrial effects on innovation, resulted in the authorization of the agreement due to a failure to reach the required threshold of vertical mergers following Art.7 of PCA. The overall policy to identify these types of joint ventures between electronics establishments and car battery production companies as vertical integration and rightfully so, leads to an increase in sectoral integration which constitute a building block for innovation. The effects, on the other hand, must be identified through economic analysis, using the data that TCA's allowed to collect and receive through Art.14(2) of APC for further estimates. 


Block Exemption on the Vertical Agreements in Automotive Industry


Another prominent decision of TCA on the individual exemption under Art. 5(3) was decided upon an exportation agreement between Volvo Truck Corp. (VTC) and Temsa Industrial Machinery Production, Marketing and Sales Co. (Temsa) in which each of the heretofore consolidated criteria were evaluated, only this time in the production and distribution of heavy weight commercial vehicles and through an agreement allowing Temsa to receive free of charge and exclusive production and other services of vehicle bodies, truck frames, and other morsel, accessories and vehicle parts from VTC. In addition to the aforementioned criteria, (on the individual exemption requirements under Art.5 of the APC) given the vertical integration of the parties, the Communique no. 2005/4 Art.4(3) was also taken into account as it was in effect at the time of the case. 

The Communique on Block Exemptions for Vertical Agreements in the Motor Vehicle Industry (hereinafter will be referred to as the Communique on BE in MVI) no. 2017/3 entered into force in 2017 replacing the communique under the same name numbered 2005/4. The changes therefore, must be addressed, for it is the basis of the stated decision above. The Communique numbered 2005/4 required (i)The permission of the provider for the transfer of rights and obligations from one distributor to another within the distribution chain under the agreement, (ii)The agreement to consist of detailed, written and objective obligation on justifications for the notice of termination, (iii) The threshold for market shares after the agreement was determined to be 30% for exclusive production systems and 40% for quantitative selective distribution within the relevant market of operation, (iv) For contracts of indefinite duration, the appointed period of termination and notice should be no less than 2 years and (v) Conflict resolution can be appointed to an arbitrator and even so, the parties shall not impede on each other's will to apply to a court deemed competent and authorized by the law. 

The TCA, after evaluating each of the requirements had procured a judgement that the agreement was not only compliant with the individual criteria of exemption but also met the projected requirements of the Communique no.2005/4. 

Art. 5 of Communique on BE in MVI, today requires: (i)The threshold market share after the agreement of 30% for both exclusive production systems and selective distribution systems, (ii) The agreement to be no less than 5 years, (iii) The agreement to consist of a non-renewal clause which should be enunciated to both of the parties 6 months prior following the termination of the contract, (iv) For contracts of indefinite duration, the appointed period of termination and notice should be no less than 2 years.

Both of the Communiques did not regulate a threshold market share for qualitative distribution systems. Under the light of the Communiques, the decrease of the threshold of market shares to 30%, would not make a difference for the decision at hand and aims to protect the in-brand competition as stated in the preamble. The threshold market share being 40% for individual exemptions regulating horizontal agreements between competitors; increasing the rigidity of preconditions for block exemptions that regulate mainly vertical agreements and are already subject to individual exemption requirements under Art.5 of APC can be criticized through a legislative perspective and restricts the scope and possible opportunities that may result in a substantial decrease in production and distribution costs. 


In addition to the requirements promulgated under Art.5, a contract/agreement must not contain the restrictions listed in Art.6 to be deemed exempt.


One of the recent cases regarding block exemption include the TCA's decision to characterize the agreement between Ford Automotive Industry and Commerce Co. (Ford) and Otokoç Automotive Commerce and Industry Co. (Otokoç), on authorized service for light/medium weight commercial vehicles based on quantitative distribution systems as exempt according to Communique on BE in MVI no.2017/3. Accordingly, TCA evaluated the requirements set forth in Art.5 later considering whether the contract includes one of the restrictions promulgated under Art.6. In conclusion, TCA stated that, "the agreement at hand was indeed a violation of Art.4 and yet was granted exemption under The Communique numbered 2005/4."

Daily fuel-saving through EVs are estimated to be 7.3 billion barrels in 2040. The expansion of EVs will be considerably high through claiming the shares of PHEV and HEV markets in the following years. The undeniable inadequacy of infrastructure for fiber internet providers in Turkey due to the tardiness of privatization of internet providing services along with the lack of fiscal and legal incentives may iterate in the automotive industry if regarding measures stated in various reports (including KPMG, ODD, EU and OICA) for both fiscal and legal policy are not taken and founded accordingly. Automotive production and assembly is critical for Turkey's economy specifically since OEMs are one of the main sources of imports. The governmental policy to increase investments on R&D of electric battery production, decrease the cost of production of various locally produced commercial and passenger vehicles can be seen through TCA's decisions and Communiques. Pressing providence in production costs combined with the allowance of R&D instead should aid tackle with the syncopating aspects previously determined. 


Author: Beliz Inpinar