Laying the tracks for the regulation of foreign subsidies: revisiting the acquisition of Vossloh Locomotives by CRRC

The EU Foreign Subsidies Regulation (FSR) becomes applicable this year. To assess its potential impact, we ask: what might have happened had the Regulation been applied to the acquisition of Vossloh Locomotives by CRRC, the Chinese state-owned supplier of rolling stock equipment? The Bundeskartellamt cleared the merger in 2020, even though it concluded that CRRC had ‘theoretically unlimited access’ to subsidies. We highlight how, from an economics perspective, the assessment might have been different under the FSR, with the potential to lead to a different outcome.

The FSR grants the European Commission the authority to assess the existence, and impact, of subsidies provided by countries outside the EU to companies operating within the EU (‘foreign subsidies’).¹

The Regulation is designed to address a gap in the regulatory toolkit, which includes EU state aid control, anti-subsidy rules under the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures, and the monitoring and control of foreign direct investments. Its aim is to ensure a level playing field in the Single Market by limiting the potentially distortive impact on competition arising from foreign subsidies.

From 12 July 2023 onwards, the Commission will be able to launch on its own initiative (ex officio) investigations into undertakings that it suspects may have received distortive foreign subsidies.² From 12 October 2023 onwards, companies involved in significant concentrations and public procurements will also have to obtain prior clearance from the Commission through compulsory notifications.³

If the Commission concludes that foreign subsidies have caused distortions to the Single Market that are not mitigated by the positive effects of these subsidies, it can impose behavioural or structural redressive measures, including requiring the beneficiary to divest certain assets or repay the foreign subsidy.⁴

To illustrate how the FSR may be used in practice to fill the gap that existed prior to its adoption, we assess here the questions that would need to have been addressed from an economics perspective if the FSR had been applicable at the time of an acquisition that was cleared in 2020, despite concerns being raised at the time in the EU about the impact of foreign subsidies.

The acquisition of Vossloh Locomotives by CRRC: existing merger control rules and the impact of ‘theoretically unlimited’ subsidies

In August 2019, Vossloh, a company operating in the EU that specialises in the manufacture and maintenance of locomotives, announced its plan to sell its subsidiary Vossloh Locomotives to a company owned by the Chinese state, CRRC ZELC.⁵ CRRC ZELC is owned by the majority state-owned company CRRC Corporation Limited (CRRC), the world’s largest supplier of rolling stock equipment.⁶

As the acquisition did not have a Community dimension, the European Commission did not have direct jurisdiction to review the transaction. It was instead reviewed by the Bundeskartellamt (the German Federal Cartel Office).⁷

Despite concerns raised by industry participants in relation to alleged foreign subsidies,⁸ given the scope of the merger control framework the Bundeskartellamt was limited in the extent to which it could assess the impact of foreign subsidies on competition.⁹ Despite considering that CRRC had ‘theoretically unlimited access to state aid’,¹⁰ and finding that the ‘recorded subsidies’ in its accounts amounted to €75m in 2018,¹¹ the Bundeskartellamt cleared the acquisition in April 2020, concluding that it would not significantly impede effective competition, and in particular would not create a dominant position (see the box below).

Summary of the Bundeskartellamt’s decision regarding subsidies

What if the FSR had been applicable at the time?

While the availability of subsidies can represent one of the factors assessed by competition authorities in merger rules, they typically do so only to the extent that subsidies may affect market power, the ability and incentive to foreclose, or other sources of concern more typical of a merger review assessment.

In the case at hand, the Bundeskartellamt concluded that CRRC could have access to ‘theoretically unlimited […] state aid’,¹² but went on to highlight that investigating and assessing alleged ‘previously granted’ or ‘hidden’ subsidies received by CRRC was ‘neither possible nor necessary’ for it to do.¹³

Although the acquisition was not of a sufficient size to meet the FSR’s thresholds for automatic notification,¹⁴ the Commission will be able to request the notification of smaller concentrations prior to their implementation when it suspects the undertakings involved may have received distortive foreign subsidies.¹⁵

If the transaction had to be notified under the FSR, the merged entities would have been required to provide the Commission with all ‘financial contributions’ that they received from third countries over the three years preceding the transaction.¹⁶ For example, this could include, among others, any loans, bonds, financial guarantees and equity injections provided by public authorities; operating costs funded from public authorities such as wage subsidies; the purchase of goods and services (such as energy) from state-owned entities; sales to state-owned entities; and tax exemptions.

The Commission would then assess whether these foreign financial contributions constitute a foreign subsidy. Among other aspects, this would involve assessing whether the contributions confer a ‘benefit’ to the recipient.¹⁷ It is likely that economic tools similar to those deployed in the state aid context (such as the market economy operator principle, MEOP¹⁸) could be used to carry out this assessment (see the box below).

How to assess whether a financial contribution confers a benefit

Having determined whether certain financial contributions constitute foreign subsidies under the FSR, the Commission would then assess any distortions created by these subsidies,¹⁹ and whether these might be offset by the positive effects of the subsidies (i.e. the ‘balancing test’).²⁰ Remedies would be required only for subsidies whose negative effects are not outweighed by their positive effects.²¹

Below, we revisit the acquisition of Vossloh Locomotives in light of the FSR. In particular, based on publicly available information and from the perspective of the FSR, we explore in a high-level, indicative way, the extent to which the Commission might have concluded that CRRC had benefited from foreign subsidies. We then consider possible theories of harm that could be explored under the FSR.

A new first step: detailed ‘fact-finding’ on the existence of foreign subsidies

CRRC could have received a number of different forms of financial contribution from various foreign countries. For the purposes of this article, however, as CRRC is majority-owned by the Chinese State and its main activities are in China, we focus on the financial contributions that could have been provided by China.²²

What foreign subsidies might the Commission have found? While it would base its detection of subsidies on a detailed list of financial contributions, in the absence of this list, we discuss in turn some of the possible types of subsidy, based on information available from CRRC’s accounts.

Government grants

A first, obvious type of financial contribution and foreign subsidy to consider is government grants. These will typically be captured in a company’s financial statements, with the cash-flow statement reporting the amount of financial support received by a company.²³

As such, an analysis of subsidies reported in a company’s accounts, such as that carried out by the Bundeskartellamt,²⁴ provides a first glimpse into the subsidies received by CRRC. Based on our high-level review of CRRC’s audited accounts, the total amounts of grants received in 2018 and 2019 were approximately €165m and €257m respectively.²⁵

However, as a general point, an initial glimpse into the grants received from governments does not provide a full picture, and is likely to represent a lower bound on the amount of foreign subsidies that could have been received by any undertaking. In particular, if government support does not involve an explicit transfer of funds to the company, and instead consists of favourable terms of a transaction, it may not be directly reported as a subsidy in the financial accounts.

State support through lower costs or higher sales prices

State intervention can lead to a reduction in a company’s operating costs in a variety of ways, including the company paying artificially low prices for goods and services provided by the state, or conversely, providing goods and services at above market prices to the state. Both possibilities are not readily identifiable from an analysis of a company’s accounts alone.

In a ‘country report’ on distortions in China’s economy (used in the context of trade defence investigations), the Commission has identified that there is significant state intervention in pricing in the energy market in China, and in the market for raw materials such as metals and industrial minerals^.26 Under the FSR, transactions between CRRC and public authorities or state-owned companies (in China as well as in other countries where CRRC operates) would have to be reported. This would enable the Commission to assess whether CRRC benefited from artificially low prices for these inputs in the preceding three years.

Similarly, this would enable an assessment of whether CRRC sold any goods or services to state-owned entities at above-market prices.

Impact of state support on equity and debt financing

The two main sources of financing for companies consist of debt and equity.

The Commission’s country report on China identified that the state plays an active role in debt financing in the Chinese economy.²⁷ According to the report, the Chinese government directs investment into strategic sectors through subsidised loans and guarantees, while incentivising the extension of credit to companies active in these sectors.²⁸ CRRC could be considered to be strategically important, as it plays a key role in high-profile Chinese government programmes, such as the ‘Belt and Road Initiative’.²⁹

As such, under the FSR, where companies are required to list all financial contributions granted in the past three years, the Commission would have been able to assess the terms of CRRC’s borrowings. According to CRRC’s accounts, the majority of its borrowings and credit facilities in 2018 were from Chinese state-owned banks.³⁰ In that year, its reported cost of long-term borrowing ranged from 0% to 9%.³¹ The low end of this range is significantly below the cost of borrowing of the Chinese state at the time.³² On that basis, it is plausible that the assessment under the FSR would have considered in detail whether these loans constituted foreign subsidies.

In relation to equity financing, any capital injections from the Chinese state granted in the three years preceding the transaction would also have been reported as a financial contribution. Based on CRRC’s accounts, no such injections appear to have taken place between 2017 and 2019. However, if one or more injections had taken place, they could be assessed by the Commission, as they would represent a foreign subsidy if the expected returns were not commensurate with the returns that would be expected by private shareholders.

New theories of harm for a potentially different outcome?

The detailed assessment of notified financial contributions and whether they constitute subsidies, as described above, in itself contrasts with the Bunderskartellamt’s statement that identifying previously granted subsidies was ‘neither possible nor necessary’.³³

However, this more detailed ‘fact-finding’ exercise does not by itself mean that the FSR would lead to a different conclusion than merger control rules would. Indeed, the Bundeskartellamt’s decision to clear the transaction still recognised ‘theoretically unlimited access’ to subsidies.³⁴

As a result, in this case, any difference in conclusions between the assessment under the FSR and existing merger control rules would necessarily arise from differences in the assessment of the effects of the subsidies. Indeed, the FSR would enable the Commission to explore new theories of harm beyond the traditional concerns that would be raised in a merger assessment.

In this case, the Bundeskartellamt considered whether CRRC would have been able to leverage the support from the Chinese government to engage in a low-price strategy to gain market share.³⁵ Despite the Bundeskartellamt acknowledging that this was likely, it considered that the merged entity would not have a dominant market position,³⁶ and that lower prices also presented benefits to its clients in Europe.³⁷

In contrast, under the FSR, the assessment of distortive effects would have considered the impact of the foreign subsidies in terms of enabling and facilitating the transaction itself. However, we note that, based on publicly available information, the price of the acquisition itself appears to have been low,³⁸ such that a theory of harm centring on the idea that the acquisition was made possible by the availability of ‘soft’ loans or other sources of subsidised financing would appear less credible.

Nevertheless, there are other, more subtle ways in which foreign subsidies may have had an effect on the acquisition itself. Indeed, the Bundeskartellamt noted in its decision that Vossloh Locomotives was on the decline, pointing out its ‘reduced competitiveness’, its recent inability ‘to successfully stand its ground in the competition for major contracts’, and the fact that ‘necessary investments [had] not been made’ since mid-2013.³⁹ Therefore, the Commission could have explored whether the company represented a less attractive target for other market participants than for a subsidised operator. This could be the case if the subsidies affected the valuation itself, for example by inflating the company’s profitability prospects as a result of subsidised costs, or through the availability of significant subsidised resources to inject into the company to improve its performance.

Under the FSR, the potential distortions arising from the concentration, i.e. in the underlying markets, could also have been considered. In this context, the Bundeskartellamt recognised that ‘due to its close connection to the Chinese state, CRRC indeed has superior possibilities when it comes to engaging in a price war compared to the established providers’,⁴⁰ but concluded that this would not lead to a significant impediment to effective competition.

In contrast, the test for distortions under the FSR does not require the existence of a significant impediment to effective competition, but instead considers whether ‘a foreign subsidy is liable to improve the competitive position of an undertaking in the internal market and where, in doing so, [it] actually or potentially negatively affects competition’.⁴¹ This sets an arguably lower bar for the effects described by the Bundeskartellamt to be considered sufficiently distortive, and it is therefore possible that the Commission would have raised concerns regarding the impact of the foreign subsidies on the acquisition if the FSR had been in place at the time.

However, the practical meaning of the test will be clarified only by the Commission’s case practice under the FSR, and eventually (by 12 January 2026) through guidelines,⁴² especially given that its closer sibling, the concept of distortions under EU state aid rules, is of limited predictive use, as distortive effects of state aid are in many contexts all but assumed, and not discussed in detail.⁴³

Against this background, the question of where the bar for distortive effects will be set remains open, and a number of aspects will need to be considered. For example, the detailed ‘fact-finding’ exercise of the FSR is backward-looking, in that it identifies subsidies granted in the past. How will the Commission then consider theories of harm that would rely on subsidies being granted on an ongoing basis?

Similarly, the identification of subsidies granted may cover multiple entities in a group. Would the Commission then need to consider the extent to which subsidies received by a larger group (e.g. CRRC) would be channelled to the particular market that is assessed (e.g. to CRRC ZELC, its subsidiary active in the locomotives segment), as opposed to other parts of the group? Although the notion of causal link is not set out in the FSR as clearly as it is in trade defence rules,⁴⁴ and the Commission can rely on a number of high-level ‘indicators’,⁴⁵ it may be required to discuss and assess these aspects in detail.

While the bar for raising concerns about distortions may arguably be lower under the FSR, the question remains open as to where it will be set, and what evidence will be required to demonstrate that it is met or not.

As a response to the theories of harm and concerns that the Commission might have raised, in the context of the balancing test of the FSR, it is possible that CRRC and Vossloh would have outlined the positive effects of the foreign subsidies. For example, without the acquisition and in the absence of another willing buyer, it is possible that the Vossloh Locomotives unit may have ultimately ceased operations,⁴⁶ which could have caused negative impacts in the EU, such as a reduction in employment. Furthermore, a proportion of the subsidies could have been justified as achieving public policy objectives, based, for example, on the importance of the rail sector for the decarbonisation of the economy.⁴⁷

The FSR as a potential game-changer?

Revisiting the Vossloh Locomotives/CRRC merger through the lens of the FSR allows the key differences to be illustrated between this new tool and existing ones, such as competition rules. From an economics perspective, these include a more detailed analysis of existing subsidies, and the potential for new theories of harm to be explored.

Many questions remain open as to how the Commission will enforce its new powers, such as how it will assess distortions and apply the balancing test. However, while the outcome of FSR cases in front of the Commission will of course depend heavily on the legal issues, from an economics perspective alone, the differences introduced by the FSR appear to be sufficiently significant to potentially lead to different conclusions.

As such, with the FSR acting as a potential game-changer, industry participants and practitioners alike will no doubt keep a close eye on the first cases to see how the new game plays out.

¹ Regulation (EU) 2022/2560 of the European Parliament and of the Council of 14 December 2022 on foreign subsidies distorting the internal market, OJ L 330.

² FSR, Articles 9, 10 and 54.

³ See FSR, Article 54. Where one or both of the merging undertakings, the acquired undertaking or the joint venture have a turnover in the EU in excess of €500m, and where the parties have received more than €50m in combined foreign financial contributions in the three years prior to the merger or acquisition, they are required to notify the Commission of individual financial contributions received from third countries. See FSR, Article 20. As part of the tender process, for projects with an estimated value of at least €250m, the bidder and the main sub-contractors will need to disclose financial contributions from third countries if the financial contributions exceed €4m from any third country over the previous three years. See FSR, Article 28.

⁴ FSR, Article 7.

⁵ See Vossloh (2019), ‘Vossloh signs contract on the divestiture of its Locomotives business’, 26 August, https://www.vossloh.com/en/press/press-releases/detail/pressdetail_29633.html.

⁶ Based on CRRC’s website, https://www.crrcgc.cc/g5141.aspx#:~:text=CRRC%20is%20the%20world’s%20largest,product%20lines%20and%20leading%20technologies.

⁷ The combined aggregate turnover of Vossloh and CRRC did not exceed the threshold of €100m in at least three member states, and therefore the turnover thresholds for a Community dimension under Article 1 of the EU Merger Regulation were not met. See Bundeskartellamt (2020), ‘Merger Control Proceeding Decision’, File number B4-115/19, 27 April, para. 49.

⁸ See UNIFE (2019), ‘UNIFE urges the European institutions to ensure a level playing field between the European and the Chinese rail supply industry’, 2 September, https://www.unife.org/news/unife-urges-the-european-institutions-to-ensure-a-level-playing-field-between-the-european-and-the-chinese-rail-supply-industry/ (last accessed 19 June 2023).

⁹ The Bundeskartellamt stated that ‘[u]nder competition law, there is only a limited number of instruments that can be applied to such subsidies to counter distortions of competition resulting from this. For this purpose, special regulations such as state aid law or the rules on dumping have been created and take priority; public procurement law also plays an important role’. Bundeskartellamt (2020), op. cit., para. 564.

¹⁰ Bundeskartellamt (2020), op. cit., para. 398.

¹¹ Bundeskartellamt (2020), op. cit., para. 404. During the proceedings, competitors argued that the ‘unrecorded hidden subsidies’ amounted to roughly €200m, although the parties to the merger denied this. See Bundeskartellamt (2020), op. cit., para. 405.

¹² Bundeskartellamt (2020), op. cit., para. 398.

¹³ Ibid., paras 400–403.

¹⁴ According to the Bundeskartellamt, the combined aggregate turnover of Vossloh and CRRC in 2019 did not exceed the threshold of €100m in at least three member states. See Bundeskartellamt (2020), op. cit., para. 49. Furthermore, from Vossloh’s 2019 group accounts, it can be seen that the total turnover of its locomotives segment amounted to c. €143m and c. €201m in 2019 and 2018, respectively. Thus its turnover in the EU, which is the relevant metric for the purposes of the FSR, Article 20, would have been, at most, this, and therefore below the €500m threshold. See Vossloh, ‘Annual report 2019 – Focused. Dynamic. Green’, pp. 108–109, https://media.vossloh.com/media/dokumente/investor_relations_1/finanzpublikationen/geschaeftsberichte/vossloh_geschaeftsbericht_2019_us.pdf

¹⁵ FSR, Article 21(5) .

¹⁶ FSR, Article 20.

¹⁷ In addition to conferring a benefit on its recipient, for a financial contribution to constitute a foreign subsidy, other criteria also need to be met: the contribution must be ‘limited in law or in fact to one or more undertakings or industries’, and the beneficiary must be an ‘undertaking engaging in an economic activity in the internal market’ (FSR, Article 3(1)).

¹⁸ The MEOP is used under EU state aid rules to assess whether a financial measure provided by the state is in line with market terms. For further details about how economics and finance concepts used in the state aid context could be applied in the context of the FSR, see Robins, N. and Couto, F. (2023), ‘Familiar Tools in Foreign Settings: Practical Considerations for Complying with the New Foreign Subsidies Regulation’, CPI Antitrust Chronicle, May.

¹⁹ FSR, Articles 4 and 5.

²⁰ FSR, Article 6.

²¹ FSR, Articles 6(2) and 7.

²² Under the FSR, the obligation to notify the Commission covers financial contributions received from any third country. As such, an assessment of a transaction such as the CRRC/Vossloh acquisition would consider financial contributions provided by countries other than China.

²³ Accounting standards require companies to record explicit subsidies differently depending on their nature. Government grants relating to the purchase or construction of long-term assets are initially recorded on the company’s balance sheet and are transferred to the income statement on the basis of the accrual principle. Government grants received as compensation for expenses or losses already incurred, or expected to be incurred by the end of the year, are immediately credited to the income statement.

²⁴ Bundeskartellamt (2020), op. cit., para. 404.

²⁵ This estimate is higher than that identified by the Bunderkartellamt, as its analysis focused on one type of grant only—the grants captured in CRRC’s balance sheet—and these relate only to support that will be recognised in the income statement in the future upon meeting certain performance or investment obligations. The Bundeskartellamt does not appear to have assessed the grants and subsidies that are recognised in the income statement, which relate to ongoing expenses. In any event, for the purposes of an assessment under the FSR, financial contributions would be reported on the basis of the date of granting. In contrast, the analysis presented above on the basis of the cash-flow statement relies on the date of disbursement of the amounts, which may differ.

²⁶ European Commission (2017), ‘Commission Staff Working Document on significant distortions in the economy of the People’s Republic of China for the purposes of trade defence investigations’, SWD (2017) 483 final/2, 20 December, pp. 233–234 and pp. 325–326.

²⁷ European Commission (2017), op. cit., pp. 260–261.

²⁸ Ibid., p. 260.

²⁹ According to CRRC, ‘[t]he Company will serve the national strategies, such as the “Belt and Road Initiative”, “international capacity cooperation” and “going global”’. See CRRC Corporation Limited, ‘Annual Report 2019 – Mobility for future connection’, p. 48, https://www.crrcgc.cc/Portals/73/Uploads/Files/2020/4-27/637235827333140166.pdf. 

³⁰ The largest credit facilities are from the Bank of China, the Export-Import Bank of China and the state-owned CITIC Group, based on CRRC Corporation Limited, ‘Annual Report 2019 – Mobility for future connection’, p. 102, https://www.crrcgc.cc/Portals/73/Uploads/Files/2020/4-27/637235827333140166.pdf.

³¹ CRRC Corporation Limited, ‘Annual Report 2019 – Mobility for future connection’, p. 250, https://www.crrcgc.cc/Portals/73/Uploads/Files/2020/4-27/637235827333140166.pdf.

³² Based on data for five- and ten-year Chinese government bond yields denominated in RMB, the official currency in China, from Refinitiv Eikon, the yield on these bonds was respectively 3.0–3.9% and 3.3–4.1% for five- and ten-year bonds.

³³ Bundeskartellamt (2020), op. cit., para. 401.

³⁴ Ibid., paras 398.

³⁵ Ibid., paras 535–603.

³⁶ Ibid., para. 659.

³⁷ Ibid., paras 420 and 563.

³⁸ According to Vossloh, ‘[t]he proceeds from the sale of the Locomotives business unit failed to fully cover the negative free cash flows from discontinued operations of €54.1 million’. See Vossloh, ‘Annual Report 2020 – Enabling Green Mobility’, p. 41, https://media.vossloh.com/media/dokumente/investor_relations_1/finanzpublikationen/geschaeftsberichte/vossloh_geschaeftsbericht_2020_us.pdf.

³⁹ Bundeskartellamt (2020), op. cit., paras 2–4.

⁴⁰ Ibid., para. 660.

⁴¹ FSR, Article 4(1).

⁴² FSR, Article 46.

⁴³ European Commission (2016), ‘Commission Notice on the notion of State aid as referred to in Article 107(1) of the Treaty on the Functioning of the European Union’, OJ C 262, 19 July, para. 187.

⁴⁴ See, for example, Article 8(5)–(6) of the Anti-subsidy ‘Basic Regulation’, i.e. Regulation (EU) 2016/1037 of the European Parliament and of the Council of 8 June 2016 on protection against subsidised imports from countries not members of the European Union.

⁴⁵ FSR, Recitals 18–19 and Article 4(1).

⁴⁶ The parties to the merger presented Vossloh Locomotives as a failing company. While the Bundeskartellamt deemed such claims to be ‘exaggerated’, it noted that ‘neglecting investments over the past five and a half years has resulted in a considerable competitive gap between the target company and its competitors’. See ‘Bundeskartellamt (2020), op. cit., para. 4. We might expect the Commission to apply the same criteria to assess these alleged effects as those it relies on when using merger control rules in the context of the ‘failing firm defence’. See European Commission (2004), ‘Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings’, OJ C 31, 5 February, para. 90.

⁴⁷ For example, the EU’s strategy to achieve a 90% reduction of greenhouse gas emissions in transport by 2050 relies on a doubling of traffic on high-speed rail by 2030, and rail freight traffic by 2050. See European Commission (2020), ‘Factsheet – The Transport and Mobility Sector’, 9 December, p. 2, https://ec.europa.eu/commission/presscorner/detail/en/fs_20_2350.