Report on Developments and Enforcement of Competition Policy
and Laws in the Western Hemisphere
Submitted by the OAS Trade Unit to the FTAA Working Group on Competition Policies
Mexico: Report on Developments and Enforcement of Competition Policy and Law (1995 - 1996)
I. Recent Developments and Changes in Law or Policies
The legislation on competition in Mexico consists of the Federal Law on Economic Competition (LFC), which entered into force on June 3, 1993, and the Internal Regulation of the Federal Competition Commission (CFC), was published in the Official Gazette on October 12, 1993. A regulation of this law is now being drafted.
In addition, in recent years a new regulatory framework has evolved focused on regulation and market liberalization, particularly to open up sectors traditionally regulated or subject to state intervention. In 1995 and 1996, the Federal Telecommunications Law, the Regulatory Law on Rail Services and Airports, and the Regulation on Natural Gas were all promulgated. The Commission has participated actively in formulating these legal provisions in an effort to incorporate criteria and safeguards for competition, so as to contribute to the creation of an environment favorable to competition.
II. Enforcement of Competition Laws and Policies
The proceeding before the Commission for enforcing the Competition Law may be initiated sua sponte or at the request of a party. The 1995-1996 period has seen the most activity in the three years since the Commission was formed, as evidenced by the 77% increase in cases concluded with respect to the previous year.
A. Anticompetitive practices
During this period 28 cases of monopolistic practices came in to the Commission. Nonetheless, at the outset of the period there were still 30 cases to solve, so that there were 58 cases in all. Of the 28 new cases, 14 were brought by complaints, and 14 through sua sponte investigations. Of these, 18 were resolved, four were dismissed, and three were abandoned; a total of 33 cases remain to be resolved.
2. Significant cases
a. Singer Mexicana S.A. de C.V., Manufacturera Electrónica Sim, S.A. de C.V., and Grupo Bler de México, S.A. de C.V. v. Vitro, S.A., Distribuidora Cónsul S.A. de C.V., and Mabesa, S.A. de C.V.
The companies Singer, Sim, and Grupo Bler brought a complaint against Vitro, Distribuidora Cónsul, and Mabesa for alleged anticompetitive practices entailing:
a) Several actions taken by Mabe (a subsidiary of Mabesa) to displace the Singer market, including refusal to sell refrigerators to Singer.
b) Entering into trade agreements and strategic alliances between the companies against whom the complaint was brought and U.S. appliance manufacturers.
c) Contracts between Cónsul and Vitromatic (subsidiaries of Mabesa and Vitro, respectively) with retailers (Salinas y Rocha S.A. and Errsa) through which a 2% discount was given to these retailers. The discount was conditioned on not selling appliances manufactured outside of the area of the North American Free Trade Agreement (NAFTA).
Singer and Sim both market refrigerators and stoves imported from Korea. In addition, Singer offers its own brands (Singer and Premier by Singer), manufactured in Mabe plants. At the same time, Mabesa and Vitro are shareholders of the companies that make up the Mabe Organization and the Vitro Grupo, respectively. These include Cónsul and Vitromatic. Both import and distribute refrigerators and stoves from the United States, and market those manufactured by the companies associated with their groups.
With the lone exception of the contracts between Cónsul and Vitromatic and retailers, the facts alleged both came about and terminated prior to the entry into force of the Competition Law in June 1993. Nonetheless, the investigation covered the years prior to this date so as not to omit possible anticompetitive, systematic, and international conduct, related to the illicit practices that persisted after the Competition Law entered into force.
Within this context the Commission determined that:
- There was no information to prove that the facts described in paragraphs (a) and (b) would have constituted actions aimed at the unlawful displacement of other economic actors, the imposition of barriers to access, or collusion between competitors. Moreover, Mabe did not have substantial power in the refrigerators and stoves market, and therefore it was unlikely that on its own it could affect the competition in these items through the actions mentioned in paragraph a).
- The contracts mentioned in paragraph (c) were signed in July and August 1992, for a duration of six months. They were renewed for similar periods in January and July of 1993; and finally in January 1994 they were extended for one year. Nonetheless, Salinas y Rocha falsely expressed that it had not signed them in the last stage.
In these conditions, the Commission took note of possible antecedents in terms of anticompetitive intentions and determined that the contracts were clearly anticompetitive for the following reasons:
- The similarity in the terms and discounts granted by Cónsul and Vitromatic required their agreement. This is an absolute monopolistic practice involving the agreement among economic actors who are competitors with one another for the purpose of manipulating the sales price of the products offered by them.
- The discounts conditioned on refusing to sell appliances manufactured outside the NAFTA region were not justified by the search for customer loyalty. In effect, Cónsul granted the discounts independent of the retailers offering articles manufactured in the region by their competitors. The same observation applied to the discounts offered by Vitromatic. Therefore, it was clear that the contracts were entered into for the purpose of unlawfully displacing Singer and Sim from these markets.
These contracts constitute a relative monopolistic practice when the responsible persons have substantial power in the relevant markets. This was the case of Mabe and Vitro in the refrigerators and gas stoves markets in Mexico, since their concerted action was backed by a combined share of 86.1% and 83.3%, respectively, of those markets. It should be noted that the contracts signed before entry into force of the Competition Law were only considered for the purposes of the investigation, yet were outside the scope of the Law, since Article 14 of the Constitution provides that the Law shall not be applied retroactively.
Finally, the Commission resolved as follows:
- To order Mabesa, Cónsul, Vitro, and Vitromatic to strike the clause of the contracts that updates the monopolistic practices described, informing them that otherwise they will be fined as provided for in the Law.
- To impose a fine on Cónsul for not complying, in the proceeding, with the requirement to deliver a certified copy of their distribution contracts, agreements, or commercial terms in effect as of the date when they were requested, to the Commission.
- To impose a fine on Salinas y Rocha, S.A., for having made false statements during the proceeding.
b. Chicles Canel's, S.A. de C.V. v. Chicles Adams, S.A. de C.V.
On June 22, 1994, Chicles Canel's filed a complaint against Chicles Adams for alleged relative monopolistic practices involving a "pricing policy" the purpose of which was to unlawfully displace it from the market. Both firms include among their activities the manufacture, distribution, and sale of chewing gum. The first has the Canel's brand, and the second several brands, including Chiclets-4 and Clarks.
The following information emerged from the investigation:
a) In 1984, Adams launched Clarks, a product similar to Chiclets-4. They are produced at similar facilities and with similar production costs. In addition, they are distributed in the same markets through similar mechanisms and channels. These products are marketed with a price differentiation policy that assigns the higher price to Chiclets.
The Commission considered it important to analyze what happened in the years prior to entry into force of the Law (June 22, 1993). This background information is necessary to analyze the facts after that date, since they provide a perspective that makes it possible to avoid confusing predatory acts with situations that correspond to normal practices, while also providing indications that help clarify the conduct and the performance of the economic actors involved.
b) From August 1990 to April 1994, the relative prices of Clarks fell with respect to Chiclets-4.
c) From 1991 to 1993, Adams considered purchasing Canel's.
Based on the investigation it was determined that: The relevant market is the chewing gum market, which is national in scope. The expert accounting opinions suggest that from 1991 until the first four months of 1994, Clarks was sold at a loss, which cannot be explained by a promotional effort. They also indicate that Canel's showed a profit for the 1991-1993 period. Adams has substantial power in the relevant market. In this respect: Adams held a 53% share of the market which, added to its diversification and distribution capability, enabled it to significantly influence the chewing gum market. Adams had significantly increased the relative prices of Chiclets-4 and other Adams brands with respect to Clarks and Canel's. In addition, the increases in Chiclets-4 had occurred despite reductions in its production cost and in demand for this brand.
With the sole exception of Canel's, new competitors of significant size have not entered the market, even though Adams enjoys substantial margins in its products, except for Clarks.
Possible losses from Clarks from 1991 to April 1994, along with the positive performance of Canel's in the same period, would not allow one to discard the possibility that losses from Clarks were due to causes other than the alleged predatory pricing. The Commission also determined that a dangerous possibility that Adams might displace Canel's from the market could not be concluded based on the performance of Canel's. Not withstanding these conclusions, the Commission found that losses from Clarks, together with all the other information yielded by the investigation, made it necessary to be on alert for anticompetitive practices.
After an extensive investigation, the Commission resolved not to impose any sanction on Adams, as no determination was made of relative monopolistic practices. Given the indications of possible predatory conduct on the part of Adams, the Commission warned Adams to refrain from any act that might unlawfully harm or impede the process of competition and the free market in the chewing gum market. To determine by how much costs exceeded sales prices, in the proceedings before the Commission, by establishing accounting criteria that consider: a) Historical costs and not the standard costs used internally by the companies investigated; b) Preferably, reference to the structure of the sales cost, prorated based on indirect expenditures; and c) The exclusion of cost items only when this is done in the partial studies ordered by the Commission or in the independent studies provided to it by the companies investigated, so long as they are reliable in the view of the Commission.
c. Baramin, S.A. de C.V.; Baricosta, S.A. de C.V.; Minerales y Arcillas, S.A. de C.V.; Barita de Sonora, S.A. de C.V.; and Barita de Santa Rosa, S.A. de C.V.
The Commission investigated, sua sponte, possible absolute monopolistic practices by the above-listed companies. The practices corresponded to an arrangement among competitors to sell their products to Pemex Exploration and Production.
The arrangement was undertaken to set terms and sales conditions and to suppress the call for bids organized by Pemex for purchasing barite. In this context, the firms agreed among themselves and proposed to Pemex: a.The tonnage of barite each producer would supply. b.The same price, at destination, for all producers. c. Suspension of the call for bids to keep the losing companies from ending up without any orders. In this way they sought to eliminate the risk of the losing companies closing.
Participating in absolute monopolistic practices is punished per se. Each of the companies involved in the collusion was fined.
B. Mergers and Economic Concentrations
In this period 180 cases of market concentration came in, yet at the beginning of the period there were 29 cases pending decision, so there were 209 cases in all. Of the 180 cases that came in, 167 were notifications, two were complaints, and 11 were sua sponte investigations. In all, 161 cases were the subject of rulings, two were dismissed, and three were abandoned, leaving 43 cases to be decided.
2. Significant cases
a. Kimberly Clark de México, S.A. de C.V./Compañía Industrial de San Cristóbal, S.A.
In 1995 Kimberly Clark Corporation (KCC) announced plans to concentrate with Scott Paper Company (Scott) in the United States. That merger was to lead to high levels of concentration in several markets in Mexico, given their shareholder equity in Kimberly Clark de México (KCM) and in the Compañía Industrial de San Cristóbal (Crisoba).
KCM and Crisoba have a significant share in the production and marketing of feminine hygiene products, tissue paper products, paper for writing and printing, and moist towelettes for cleaning babies. Their merger had the following implications:
- Feminine hygiene products. KCM and Crisoba had a joint share of 63%. The rest of the supply came from Procter & Gamble (22%), and imports and other manufacturers (15%). Further, the technology and promotional costs drive up the entry cost for new firms. As for competition from imported goods, the nationally manufactured goods offer greater advantages, given import costs. Under these conditions, concentration would give substantial power over the relevant market and would facilitate monopolistic practices.
- Tissue paper products. KCM and Crisoba account for more than two thirds of the national sales of tissue paper products. This volume, large for Mexico, is hardly significant in relation to the major international companies. In this context, the following points merit special mention: a) KCM has a 70% share of the facial tissues and paper towels markets; b) in facial tissues, Kleenex and Scotties (owned by KCM and Crisoba, respectively) cover 98% of national demand; c) in napkins, KCM's Regio brand covers 12% of national demand; d) in paper towels, the largest market shares are held by Kleenex and Vogue, of KCM, and Pétalo, of Crisoba; and, e) the largest share of the business of both companies is in toilet paper, where they control the two largest brands in the Mexican market (Regio and Pétalo), each of which accounts for just over 20% of the market.
Consequently, KCM/Crisoba would enjoy the advantages of a high degree of integration, a large distribution network, and a high degree of penetration of its brands. To equal them required large investments to establish an industry of national scope and to build a reputation for new brands. Those factors would give KCM/Crisoba substantial power in the relevant market, endangering the process of competition and the free market.
- Paper for writing and printing. KMC/Crisoba has a 36% share of this market. Imports account for 50% of supply. To face the competition from abroad, the Mexican industry is forced to increase its efficiency and quality. The concentration can increase the efficiency of KCM/Crisoba without placing the competition at risk, in most of the goods that make up this market. Nonetheless, in the specific case of notebooks, the concentration would pose risks to competition. In this product, KCM and Crisoba cover 80% and 6.5% of national demand, respectively. In these conditions the merger would further concentrate, but not drastically change, the structure of the respective market. Nevertheless, the market power implicit in such shares would impair competition.
- Moist towelettes for cleaning babies. KCM and Crisoba together account for 38% of supply in the form of imports. In addition, 70% of national consumption is covered by goods coming from the United States, where KCC and Scott are major producers. Considering these circumstances, the Commission determined that the concentration would restrict competition.
In these circumstances, the Commission determined that the merger reported by KCM and Crisoba could facilitate the displacement of competitors and the unilateral imposition of prices to the detriment of consumers. To prevent this, it adopted the following measures to diminish the market power of KCM/Crisoba and to facilitate the immediate participation of new competitors:
b. Corporación Internacional de Aviación, S.A. de C.V./Aerovías de México, S.A. de C.V./Corporación Mexicana de Aviación, S.A. de C.V.
- Feminine hygiene products. Disincorporation of the shareholder equity of Crisoba in Sancela and Comercializadora Sancela, as well as the brands manufactured and distributed by these companies (Saba, Confort, and Evax).
- Tissue paper products. a) Sale of the rights to the Regio brand of toilet paper and napkins; b) licensing for 25 years, extendable in equal terms indefinitely, of the rights to the Scotties brand of tissue paper; and, c) suppressing the Suavel brand of napkins. These measures were accompanied by the disincorporation of assets required to produce at least 67,000 tons of tissue paper, as well as the converters needed to manufacture toilet paper, facial tissues, and napkins in proportions equivalent to the market share of the Regio and Scotties brands. In addition, the purchasers of these assets would have the option to sign a supply contract for 13,000 tons of tissue paper annually.
- Notebooks. Sale of the rights to the Shock trademark, owned by Crisoba.
- Moist towelettes for cleaning babies. Licensing, for 25 years, extendable in like terms indefinitely, of the rights to the Baby Fresh trademark.
On May 25, 1995, the Corporación Internacional de Aviación, S.A. de C.V. (Cintra), Aerovías de México, S.A. de C.V. (Aeroméxico), and the Corporación Mexicana de Aviación, S.A. de C.V. (Mexicana) reported their interest in carrying out a concentration that involved the acquisition by Cintra of the shares of Aeroméxico and Mexicana.
Before the entry into force of the Competition Law, Aeroméxico acquired control of Mexicana with authorization of the Secretariat for Communications and Transportation (SCT). The worsening of the airlines' economic and financial problems finally led the creditor banks to take control of them. As of the reporting date, the banks held over 60% of the capital of Aeroméxico, which in turn controlled 54.6% of the capital stock of Mexicana.
In this context, the banks decided to form Cintra to put the finances of Aeroméxico and Mexicana in order through a corporate restructuring aimed at strengthening both airlines and guaranteeing their survival. With the concentration, Cintra would become the corporate entity with sole possession and controlling interest, listed with the Mexican Stock Exchange. This measure did not entail any changes in the vertical and horizontal integration of Aeroméxico and Mexicana, which had interests in several airlines and related services.
The relevant market of this concentration is regular air transport of freight and passengers provided in the national territory. The participation of Aeroméxico and Mexicana in the international market is marginal.
The following should be noted regarding the market power of Aeroméxico and Mexicana: a) Market share, taken together, of 65.3%, in terms of number of passengers transported; b) In recent years, their competitors have increased their share in the relevant market; c) As a result of the revised regulatory framework, the number of participants increased notably, along with the supply of services related to air transport.
The prevailing conditions of competition made possible considerable reductions in the rates for routes such as Mexico City-Guadalajara, Mexico City-Monterrey, Mexico City-Mérida, Monterrey-Cancún, and Guadalajara-Tijuana. The strengthening and expansion of the conditions of competition require maintaining the number of suppliers and the services they provide. The withdrawal of Aeroméxico or Mexicana would therefore have negative effects on competition; the commercial integration of the two companies would lead to similar results.
In these conditions, the Commission determined that the competition would be harmed by the weakening or disappearance of either of the two airlines, such that it was advisable to facilitate their financial and managerial restructuring. Nonetheless, to avoid anticompetitive risk it was necessary to adopt measures that would guarantee the independent commercial operation of Aeroméxico and Mexicana. The conditions imposed by the Commission were as follows:
- Separate accounting and independent management for each of the two companies, each through its respective board of directors.
- Preparation of opinions on possible anticompetitive practices through: a) the establishment of rates by the Commission and the SCT, when in the Commission's view competitive conditions do not exist; b) immediate suspension of the unlawful practices detected by the Commission; c) establishment of agreements between the Commission and the SCT for the enforcement of measures that preserve or re-establish competitive conditions; d) cooperation by Cintra, Aeroméxico, and Mexicana to maintain or improve a competitive environment; and e) in extreme cases, total or partial dissolution of the concentration.
c. Call for Bids for Aseguradora Mexicana, S.A. de C.V. Call for Bids put out by: Grupo Financiero Asemex-Banpaís, S.A. Bidders: Grupo Nacional Provincial, S.A. de C.V.; Seguros de Comercial América, S.A. de C.V.; Valores Monterrey Aetna, S.A.; and Liberty de México Seguros, S.A.
Asemex-Banpaís (Banpaís) gave notice of its interest in selling 70% of the shares that represent the capital stock of Aseguradora Mexicana, S.A. de C.V. (Asemex). The remaining 30% belongs to Petróleos Mexicanos (Pemex) and the Federal Electricity Commission (CFE). These public enterprises are also major clients of this insurance company. The sale would be through a call for bids.
In view of several financial difficulties, Banpaís was intervened by the National Banking and Brokerage Commission in March 1995. That same month Banpaís received credit from the Fondo Bancario de Protección al Ahorro (Fobaproa: Banking Fund to Protect Savings), which was guaranteed by the shares representing 70% of the capital stock of Asemex. To conclude the reordering of its finances, Banpaís put these shares up for sale.
The relevant market for the concentration is life insurance, casualty insurance, health insurance, and liability insurance, offered nationwide. In this regard, the following data should be noted:
a) The bidders, with the exception of Liberty and Asemex, include the four largest insurance companies in the country, with a combined share of 64.1% of the relevant market.
b) The individual shares of the three bidders with the largest market share ranged from 11.4% to 20.7%. With the concentration, these figures would increase to 25.9% and 32.1%, respectively. In the case of Liberty de México, the transaction would not substantially alter the structure of the market.
c) The shares in liability insurance of the three largest bidders range from 8.9% to 18.4%. With the acquisition of Asemex, these figures would increase to 27.7% and 42.3%, respectively. This result would depend on the winner keeping the public sector as a client; to date it has been exclusively a client of Asemex.
The competition has intensified in recent years as a result of the amendments to the General Law on Insurance Institutions and Mutual Aid Societies, and the changes to this law as a result of the North American Free Trade Agreement (NAFTA). The reforms have facilitated the entry of new national and foreign companies, and have eliminated the regulations that had impaired the operation of the market. These pressures will be felt with greater force in the medium term, diminishing the market power of the insurance companies.
In these circumstances, the Commission decided not to object to the purchase by any of the bidders. Nonetheless, it warned that it would take the necessary actions to ensure that the concentration of insurance companies by the public sector would take place in equitable conditions.
Continue on to Section 3: Regulatory and Trade Policy Matters