EUROPEAN COMMISSION DG Competition

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REGULATION (EC) No 139/2004 MERGER PROCEDURE

Article 6(1)(b) NON-OPPOSITION Date: 20/06/2016

In electronic form on the EUR-Lex website under document number 32016M8023

EUROPEAN COMMISSION

Brussels, 20.06.2016 C(2016) 3909 final

In the published version of this decision, some information has been omitted pursuant to Article 17(2) of Council Regulation (EC) No 139/2004 concerning non-disclosure of business secrets and other confidential information. The omissions are shown thus […]. Where possible the information omitted has been replaced by ranges of figures or a general description.

PUBLIC VERSION

MERGER PROCEDURE

To the notifying party:

Dear Sir/Madam,

(1) On 13 May 2016, the European Commission (the "Commission") received notification of a proposed concentration pursuant to Article 4 of the Merger Regulation by which Hon Hai Precision Industry Co., Ltd. ("Hon Hai", Taiwan), trading as Foxconn, acquires within the meaning of Article 3(1)(b) of the Merger Regulation sole control of the whole of the undertaking Sharp Corporation 3 ("Sharp", Japan) by way of purchase of shares (the "Transaction").Hon Hai is also referred to as the "Notifying Party". Hon Hai and Sharp are designated hereinafter as the "Parties".

11 OJ L 24, 29.1.2004, p. 1 (the 'Merger Regulation'). With effect from 1 December 2009, the Treaty on the Functioning of the European Union ('TFEU') has introduced certain changes, such as the replacement of 'Community' by 'Union' and 'common market' by 'internal market'. The terminology of the TFEU will be used throughout this decision.

22 OJ L 1, 3.1.1994, p. 3 (the 'EEA Agreement').

33 Publication in the Official Journal of the European Union No C 184, 21.05.2016, p. 9.

Commission européenne, DG COMP MERGER REGISTRY, 1049 Bruxelles, BELGIQUE Europese Commissie, DG COMP MERGER REGISTRY, 1049 Brussel, BELGIË

Tel: +32 229-91111. Fax: +32 229-64301. E-mail: COMP-MERGER-REGISTRY@ec.europa.eu.

1. THE PARTIES

(2) Hon Hai provides third-party electronic manufacturing services ("EMS") to original equipment manufacturers ("OEMs") of electronic products such as computers, mobile phones, video game consoles and televisions. Hon Hai has operations across the Americas, Asia and Europe.

(3) Sharp is active in developing, manufacturing and selling multiple electronic products such as products incorporating thin film transistor (TFT) liquid crystal display ("LCD") panels, including LCD television sets and LCD monitors, solar panels, mobile communication handsets, video projectors, multi-function printing devices, microwave ovens, air conditioners, cash registers, complementary metal-oxide-semiconductor (CMOS) and charge-coupled device (CCD) sensors and flash memory. In addition to its own branded products, Sharp produces certain consumer electronic products including LCD television sets and mobile communication handsets for third parties, which then sell them under their own brand.

2. THE OPERATION AND THE CONCENTRATION

(4) Sharp is currently not controlled by any entity and it has a very dispersed shareholder base in which the ten largest shareholders account for less than 22% of Sharp's total shares (the largest of them, Nippon Life Insurance Company, having less than 2.8%). Hon Hai will subscribe to newly issued shares and receive a 26.14% direct interest in Sharp. In addition, Foxconn (Far East) Limited, a fully owned subsidiary of Hon Hai, will also subscribe to new shares and receive a direct interest of 18.41% in Sharp.

(5) Following the issuance of new shares, the shareholding of all current shareholders will be diluted to 34% (with the current largest ten shareholders holding together less than 8%). The combined 44.55% interest in Sharp held by Hon Hai directly and via its subsidiary Foxconn (Far East) Limited results in the acquisition by Hon Hai of sole control of Sharp because: (i) it allows Hon Hai to be able to pass shareholder resolutions that have to be adopted by a majority of the votes of the 4 shareholders present at the meetingand, (ii) under Japanese company law, a shareholding greater than one third (33.4%) (in the hands of a single shareholder) enables its holder to block approval of special resolutions, which, in this case, 5include the appointment of senior management.

44 The attendance rate of the current shareholders in the last three annual shareholders' meetings has been no more than 60%. Even if the newly issued shares (66% of the future shareholders) will be fully represented in future shareholders meetings, an attendance rate of 60% or less of the previous shareholders that will continue to represent 34% of all shares will result in a likely attendance rate of 86.4% or less. With a shareholding of 44.55% of all shares, Hon Hai will therefore be able to pass shareholder resolutions that have to be adopted by a majority of the votes of the shareholders present at the meeting.

55 Strategic commercial decisions, including decision in relation to budget or business plans, are generally taken by the board of directors. None of Sharp's other shareholders would individually have the ability to approve or veto the appointment of new directors post-Transaction.

(6) The Transaction therefore constitutes a concentration within the meaning of Article 3 (1)(b) of the Merger Regulation.

3. UNION DIMENSION

(7) The undertakings concerned have a combined aggregate world-wide turnover of more than EUR 5 000 million (Hon Hai: EUR 127 190.84 million, Sharp: 6 EUR 21 033.45 million).Each of them has an EU-wide turnover in excess of EUR 250 million (Hon Hai: EUR [>250] million, Sharp: EUR [>250] million), but they do not achieve more than two-thirds of their aggregate EU-wide turnover within one and the same Member State. The notified operation therefore has an EU dimension.

4. RELEVANT MARKETS

(8) The proposed transaction combines Hon Hai, mostly a provider of EMS, with Sharp, an original electronics manufacturer. The Parties' activities overlap in both EMS since Sharp engages in some EMS activities (notably at the request of other OEMs) and in the production of some electronic components as Hon Hai produces, amongst others, camera modules and displays.

4.1. Electronic manufacturing services

(9) OEMs produce electronic devices such as computers, mobile phones, video game consoles and televisions. EMS can be provided by third party EMS providers to OEMs and can consist of the many products and services that an OEM requires to produce its end products, such as component selection and procurement, prototyping, production, assembly, testing, failure analysis, logistics and distribution.

(10) Some OEMs also perform EMS for other OEMs. However, according to Hon Hai, 70% of EMS is not outsourced to a third party but undertaken in-house by the respective OEMs.

4.1.1. Product market definition

(11) In previous decisions, the Commission contemplated a possible segmentation of EMS according to the final product for which these services are provided (e.g. mobile phones, TVs, computers) and whether EMS provided by OEMs should be included in the relevant product market, but ultimately left this issue open.

(12) Hon Hai states that the EMS production chain is largely identical irrespective of the final product being produced and that EMS consist of generic production lines that are able to easily shift equipment, processes and staff. Therefore, the Notifying Party submits that it would be inappropriate to segment EMS further, either by type of EMS or by the products being manufactured by the EMS provider.

(13) Concerning EMS conducted by OEMs for their own products (i.e. in-house EMS), the Notifying Party claims that OEMs can easily outsource EMS and bring them back in-house at low cost and on short notice. Therefore, Hon Hai argues that OEM's in-house EMS should be included in the relevant product market.

6 Turnover calculated in accordance with Article 5 of the Merger Regulation.

7 M.5870 - Foxconn / Sony LCD TV Manufacturing Company in Slovakia (2010), M.5765 – Foxconn/Dell (Products) Poland (2010).

(14) According to the market investigation, cost, efficiency, flexibility and quality are among the most important characteristics that lead OEMs to decide to use third-party EMS.In relation to the competitive constraint exerted by EMS provided by OEM's in-house and by EMS provided by other OEMs, the responses from the market investigation were mixed. For example, some respondents submitted that OEMs as a third-party EMS provider could exert a competitive constraint provided they offered a competitive advantage in terms of cost or quality, while others did not believe that OEMs could exert such a constraint.Likewise, some OEMs considered it possible to bring EMS back in-house at reasonable costs and delays, while others submitted that it would not be an option as they would lack in-house equipment or expertise.

(15) A majority of respondents to the market investigation submitted that the extent to which EMS providers can switch equipment to produce products for different OEMs depends on the specific product.Some submitted that the typical equipment can be used for a large range of products and customers. According to some respondents, the timelines and costs involved for shifting production among products would span from a few hours to several months and the costs can be substantial.

(16) In relation to a further segmentation of EMS, some respondents to the market investigation argued that looking at specific products would be more meaningful (hence having different product markets) while others considered that EMS is provided as a manufacturing service for an overall product market. Some respondents further detailed that certain products which require more specialised equipment (such as medical, automotive or defence equipment) are subject to specialised regulatory requirements and form therefore part of separate markets.

(17) In any event the Commission considers that for the purposes of the present case, the exact definition of the product market for electronic manufacturing services can be left open, since no serious doubts as to the compatibility of the Transaction with the internal market arise under any plausible alternative product market definition.

4.1.2. Geographic market definition

(18) In relation to the geographic market definition for EMS, Hon Hai submits that the relevant geographic market is worldwide. Hon Hai and Sharp, like many other major EMS providers and OEMs, have plants and sales offices across the globe. To satisfy customers' global requirements, both companies continuously sell and provide services across borders and across continents.

(19) In past decisions, the Commission has considered whether the geographic market for EMS is EEA-wide or worldwide, but ultimately left this question open. A majority of respondents to the market investigation that provide EMS submitted that they typically provide these services worldwide. The majority of OEMs responded that they also procure EMS worldwide.

(20) For the purposes of the present decision, the Commission considers that it is not necessary to conclude on the exact geographic market definition as no serious doubts as to the compatibility of the Transaction with the internal market arise under any plausible alternative geographic market definition (EEA-wide or worldwide) for EMS.

4.2. Display panels

(21) Display panels are comprised of screens capable of displaying graphical output of TV devices, mobile phones, PCs, laptops, notebooks, public displays, and so forth and include several display technologies, such as liquid crystal display (LCD), plasma, organic emitting diode (OLED) and others. Displays may come in different sizes. There are a number of competing technologies as companies are trying to improve the quality of display panels in terms of contrast, brightness as well as thickness. For example, thin-film transistor (TFT) technology improves image quality while requiring less electricity to operate than other display technologies. In addition, different types of silicon can be used for different display technologies, such as a-Si (amorphous silicon), poly-Si (polycrystalline silicon), LPTS (low-temperature poly-Si), high-temperature poly-Si, and so forth. Most recently, companies have started to sell so-called OLED display panels.

4.2.1. Product market definition

(22) The Notifying Party argues that it is not appropriate to segment display panels by technology used, size or end application due to strong supply side substitution.

(23) The Commission has examined the display markets in a number of past decisions. While the Commission has ultimately left open the relevant market definition for displays, it has contemplated segmentations according to the size of the panel, the technology used to produce the displays, and the end-use application in which panels are used.

(24) In relation to a possible segmentation of display panels based on the technology used, some respondents submitted that LCD panels constitute a different product market than other display technologies such as plasma or OLED. A majority of respondents to the market investigation submitted that all LCD panels based on different silicon (a-Si, p-Si) or different technologies (TFT, IPS) are part of the same product market.

13 M.6603 – Hon Hai / Sharp / Sharp Display Products, decision of 22 June 2012, paragraphs 16-21; M.3459 – Seiko Epson / Sanyo / Sanyo Epson Imaging Devices JV, decision of 22 September 2004, paragraphs 7-11; M.3693 – TPV / Philips (Monitors), decision of 5 August 2005, paragraphs 6-15; M.5414 – Samsung SDI / Samsung Electronics / SMD, decision of 23 January 2009, paragraphs 10-24; M.5589 – Sony / Seiko Epson, decision of 22 September 2009, paragraphs 9-22; M.5762 – Innolux / Chi Mei / TPO, decision of 25 February 2010, paragraphs 9-20.

(25) In relation to the size of the display, the Commission has considered in the past a possible segmentation of small- and medium-sized displays (up to 10 or 11 inches) and large displays. Small- and medium-sized displays are used inter alia for cameras, mobile phones, game consoles, while large displays are used for computer monitors and TVs. A majority of respondents to the market investigation agreed that distinguishing between small and medium, on the one hand, and large panels on the other hand, is necessary and sufficient.

(26) In any event, the Commission considers that for the purposes of the present case, the exact definition of the product market for display panels can be left open, since no serious doubts as to the compatibility of the Transaction with the internal market arise under any plausible alternative product market definition.

4.2.2. Geographic market definition

(27) The Notifying Party submits that the relevant geographic market is worldwide because Sharp, and other major providers have plants and sales offices across the world sell products and provide services across borders and across continents and barriers to trade and shipping costs remain low relative to price.

(28) In past decisions, the Commission considered that the geographic scope of the market for display panels is worldwide, based on low transportation costs, homogeneous prices, and the large volumes of display panel products traded globally across borders.

(29) For the purposes of the present decision, the Commission considers that it is not necessary to conclude on the exact geographic market definition as no serious doubts as to the compatibility of the Transaction with the internal market arise under any plausible alternative geographic market definition for display panels.

4.3. Camera modules

(30) Camera modules are small digital camera units which typically include an image sensor, a lens and other components. Camera modules are typically built into mobile phone, PCs and gaming devices.

4.3.1. Product market definition

(31) The Notifying Party submits that it is not necessary to segment the product market for camera modules into further segments. Even though camera modules can be distinguished based on a number of factors, such as auto-focus speed, image formats supported and waterproof and shockproof capability, the Notifying Party argues that the manufacturing process does not vary significantly.

14 M.5762 – Innolux / Chi Mei / TPO, decision of 25 February 2010, paragraphs 12 and 15.

15 Responses to market investigation, questions 28 and 29.

16 M.5414 – Samsung SDI / Samsung Electronics / SMD, decision of 23 January 2009, paragraph 27; M.5589 – Sony / Seiko Epson, decision of 22 September 2009, paragraphs 23-25; COMP/M.5762 – Innolux / Chi Mei / TPO, decision of 25 February 2010, paragraph 21.

(32) Some respondents to the market investigation are of the view that not all camera modules are interchangeable, as different characteristics are needed depending on the final product (e.g., camera modules for smartphones may need to be smaller or thinner). Others submitted that the basic functions and specifications are similar across applications and the material and the manufacturing equipment required is also broadly similar.

(33) In any event, the Commission considers that for the purposes of the present case, the exact definition of the product market for camera modules can be left open, since no serious doubts as to the compatibility of the Transaction with the internal market arise under any plausible alternative product market definition.

4.3.2. Geographic market definition

(34) In relation to geographic market segmentation, Hon Hai submits that the relevant geographic market is worldwide.

(35) The Commission considers that the presence of global manufacturers of camera modules, such as Sharp, suggests that the geographic scope of the market could be global, or at least EEA-wide.

(36) However, for the purposes of the present decision, the Commission considers that it is not necessary to conclude on the exact geographic market definition as no serious doubts as to the compatibility of the Transaction with the internal market arise under any plausible alternative geographic market definition for camera modules.

5. COMPETITIVE ASSESSMENT

5.1. Horizontal assessment

(37) The business activities of the Parties overlap in the provision of EMS as well as in the production of camera modules.

(38) There is also a minimal overlap in the production of television sets. However, since the Parties' combined market share for TVs or LCD TVs is below 5% for 2015 and 2014 on a worldwide level and the increment is only [0-5]%, this overlap is not discussed any further as it does not give rise to an affected market.

5.1.1. EMS

(39) Both Parties provide EMS. As further explained below, the Commission considers that the Transaction does not raise horizontal concerns in any of the potential markets for EMS irrespective of the product and geographic market definition.

(40) According to the Notifying Party, in case in-house EMS are not regarded as part of the market for EMS, they act as strong competitive constraints for third-party providers of EMS, as has been recognised in previous cases. In any event, whether or not in-house EMS are regarded as part of the product market for EMS does not affect the assessment of horizontal concerns caused by the Transaction.

17 Form CO, paragraph 83.

(76) The Transaction would combine Sharp's upstream provision of camera modules and Hon Hai's downstream EMS, which use these camera modules as an input in the manufacturing processes of several electronic devices. In 2015, Hon Hai used EUR […] billion worth of camera modules sourced from Sharp. The Notifying Party submits that this only represents [<15]% of the global sales of camera modules and [<70]% of Sharp's production. According to data from the Fuji Chimera Research Institute, Sharp and Hon Hai only had a combined market share of [10-20]% by volume in 2015 on a potential market for camera modules for mobiles.

30 See Non-Horizontal Merger Guidelines, paragraph 59.

31 When considering whether the merged entity would have the ability to foreclose access to downstream markets, the Commission examines whether there are sufficient economic alternatives in the downstream market for the upstream rivals (actual or potential) to sell their output. See Non-Horizontal Merger Guidelines, paragraph 61.

* Should read Hon Hai.

32 Responses to market investigation, question 46.

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(77) The Commission therefore assessed the potential foreclosure of Sharp's camera modules to Hon Hai's downstream competitors in EMS service provision (input foreclosure). It also assessed potential customer foreclosure: a scenario where the merged entity would source camera modules exclusively from Sharp for the merged entity's EMS activities, thereby foreclosing Sharp's competitors from selling to the merged entity, a large buyer of camera modules.

5.2.2.1. Input foreclosure

(78) Input foreclosure concerns would arise if the merged entity would have the ability and incentive to foreclose downstream competitors of the EMS business of Hon Hai from camera modules produced by Sharp and if such foreclosure strategy would have a significant detrimental effect on effective competition in the downstream market.

(79) The Notifying Party submits that the presence of Sharp in the production of camera modules is limited, with the presence of large competitors including LG, Samsung or Japan Display. As a result, there would be no credible prospect that the Transaction would give rise to input foreclosure of camera modules.

(80) The Commission considers, first, that Sharp's camera modules do not appear to be a must-have product. According to the respondents to the market investigation, there seem to be a number of alternative suppliers of camera modules, such as LG, Samsung, Sony or Lite-On. The merged entity would only produce some [10-20]% of the total camera modules and, therefore, a very large share of the camera modules market would still be served by competitors.

(81) Moreover, in order to have the ability to foreclose competing producers of camera modules, the merged entity would have to be able to select the producer of camera modules for the mobile phones for which it provides EMS to the respective OEMs. However, as discussed in paragraph (67), these are the OEMs and not the EMS who typically decide which camera modules are used in their products. The merged entity could therefore only foreclose competing manufacturers if it could decide which camera modules to source.

(82) The Commission also considers that even if some OEMs currently do not decide which camera modules are to be used, the strong competition on the EMS markets, together with the fact that most OEMs currently decide the supplier of camera modules indicate that even those OEMs who do not make the decision themselves could influence that decision.

(83) Finally, the fact that often OEMs choose the camera modules to be used by providers of EMS, is likely to influence Hon Hai's incentives to pursue an input foreclosure strategy. Vis-à-vis OEMs that are actual or potential customers and not competitors of Hon Hai, the merged entity would likely not have an incentive to pursue an input foreclosure strategy.

33 Responses to market investigation, question 43.

34 For example, the Notifying Party submits that only EUR […] out of EUR […] worth of camera modules used by Hon Hai in its assembly factories are purchased directly by Hon Hai (Form CO, Table 66).

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(84) For these reasons, the Commission finds that the Transaction does not give raise to concerns based on potential input foreclosure of camera modules.

5.2.2.2. Customer foreclosure

(85) The Commission also assessed whether the merged entity could foreclose the access to the downstream market for competing upstream producers of camera modules, in particular in the potential downstream EMS market for mobile phones given the strong position of Hon Hai in this potential market.

(86) In assessing the likelihood of an anticompetitive customer foreclosure scenario, the Commission examined (i) whether the merged entity would have post-merger the ability to foreclose access to downstream markets by reducing its purchases from its upstream rivals; (ii) whether the merged entity would have the incentive to reduce its purchases from its upstream rivals; and (iii) whether a foreclosure strategy would have a significant detrimental effect in the downstream market.

(87) In order to have the ability to foreclose competing producers of camera modules, the merged entity would have to be able to select the producer of camera modules for the mobile phones for which it provides EMS to the respective OEMs. However, as discussed in paragraph (67), the OEMs typically decide which camera modules are used in their products. The merged entity could therefore only foreclose competing manufacturers if it can decide which camera modules to source.

(88) In addition, Hon Hai currently incorporates only EUR […] worth of camera modules into its EMS activities, out of a global market for camera modules estimated at EUR […] in 2015. Therefore, competing EMS providers and OEMs already source camera modules from Sharp's competitors, which would likely continue to be the case post-Transaction.

(89) Furthermore, even if the merged entity were to pursue such foreclosure strategy, it appears unlikely that competing producers of camera modules for mobile phones would raise their prices as a result of less competition in the provision of camera modules, which would in turn, in the medium and long run, affect competition downstream and lead to increases in the prices for mobile phones. In particular, most respondents to the market investigation took the view that the competitors of Sharp currently selling camera modules for mobile handsets to Hon Hai are likely to be able to sell the camera modules to other customers using them for other end-

35 For example, the Notifying Party submits that only EUR […] out of EUR […] worth of camera modules used by Hon Hai in its assembly factories are purchased directly by Hon Hai (Form CO, Table 66).

36 Form CO, Table 27 and Table 66, USD 1=EUR 0.90 (average 2015).

37 Form CO, Table 27 and Table 66.

38 When considering whether the merged entity would have the ability to foreclose access to downstream markets, the Commission examines whether there are sufficient economic alternatives in the downstream market for the upstream rivals (actual or potential) to sell their output. See Non-Horizontal Merger Guidelines, paragraph 61.

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