GLG News by Miguel Mesquita da Cunha

Implications: By restricting Microsoft's ability to bundle unrelated features (such as media players, server software) to Windows, the EU ruling will bolster competition & innovation in the software industry.   The judgement further asserts that companies may not unfairly prevent rival products from functioning properly with their offerings.   More generaly, the ruling confirms the EC legal power to pursue abuses of market dominance.

Analysis:

Lest one would be swayed by intemperate remarks from publicity-seeking politicians, three facts must be borne in mind:

1 Windows has a market share of about 90% of operating systems;  this makes its attitude towards rivals (& its ability to stymie them) uniquely significant.

2. The basic competition principles the EC fought on, & that were vindicated by the Court, were interoperability and no extension of monopoly power into new markets.    Whatever the industry, in the absence of such rules, innovation & the emergence of rival firms are smothered.

3. This ruling should not be misconstrued as a transatlantic rift.    Many of the parties that spoke against Microsoft were unimpeachably US companies, such as Adobe Systems, IBM, Linspire, Oracle, RealNetworks, Red Hat, and Sun Microsystems.   A very similar ruling might have been handed down by American courts, had the DoJ & FTC under their current leadership not adopted a rather lenient view of abuses of market power by dominant companies.

Implications: French business and equities would take a plunge if Ms. Royal were elected President in April next.

Ms. Royal’s personal economic views are statist & interventionist; if elected she would have to govern with an alliance of unreconstructed Socialists and Communists. 

Far from reforming products, services and labor markets, a Royal administration would most probably impose extra burdens on companies and entrepreneurship.

Analysis: French business and equities would take a plunge if Ms. Royal were elected President in April next.

Ms. Royal’s personal economic views are statist & interventionist; she has little understanding of the importance of profitable and dynamic companies for a country to be prosperous. Worse, if elected she would have to govern with a National Assembly most probably dominated by a largely unreconstructed, backward- and inward-looking alliance of Socialists and Communists.

The risk is not so much a repeat of widespread nationalizations as decreed by Francois Mitterrand twenty-five years ago, but rather the pursuance of ‘social engineering’ measures, in the mould of the ‘thirty-five hours of labor‘ week legislated by a socialist government barely a decade ago. 

Little would be done to liberalize products, services and labor markets, to trim public debt and budget deficits, to simplify tax and commercial law; on the contrary, Ms. Royal’s electoral platform contains a long list of proposals that amount to extra burdens on companies and entrepreneurship.

The FT is probably right to suggest that after a couple of years, realities would reassert themselves, Socialists would come to their economic senses and things would start picking up again. But in the meantime, much havoc would have been wrecked on France and French business.

Implications: The European Commission plans to propose measures to bring emissions of greenhouse gases from the average new car down to 120g of CO2 per kilometer by 2012 - 25% below the 2005 level of 162g/km.

Final provisions will depend on a host of complex negotiations, but the overall trend is clear:  the competitive advantage for car manufacturers to offer more efficient engines is likely to become ever more pronounced in the years ahead.

Analysis: The European Commission is to propose measures to bring emissions of greenhouse gases from the average new car down to 120g of CO2 per kilometer by 2012 - 25% below the 2005 level of 162g/km. Car makers would be be responsible for getting emissions down to 130g/km through better car technology, whereas increased use of biofuels, better tires & measures to foster smoother driving would save the extra 10g/km.

These proposals are part of the Commission’s opening gambit; this is early days in the legislative process, so that the final provisions will depend on a host of complex negotiations.

Yet, as for other measures under the EU comprehensive energy & climate change strategy, there is no mistaking the European authorities’ determination to implement effectual policies that will have a real impact on overall emissions.

On top of EU legislation, individual member states are considering fiscal measures that will further weigh on fuel-guzzlers.

The overall direction is thus clear:  the competitive advantage for car manufacturers to offer more efficient engines is likely to become even more pronounced in the years ahead.

Implications: Total’s incoming CEO has declared his company’s intention to enter the nuclear electricity business. Given France’s wealth of nuclear expertise, Total seems better positioned than many other oil companies to acquire this new competence.  

Yet, Total may be tempted to buy, as opposed to build up internally, the array of skills required; though this may seem a long shot, an eventual purchase of Suez, [whose subsidiary Tractebel has been in the nuclear industry for over 30 years and produces 5800 MWe in four nuclear plants] would with one stroke bring Total the required know-how.

Analysis: Given the hurdles major oil companies face in augmenting oil production, branching out into new business is quite rational. Appealing though renewables may be, nuclear energy is a much more promising field in the medium term. New design "Generation III" nuclear plants are inherently safer, simpler, cheaper and quicker to build than their predecessors, and they burn less fuel and produce less waste. Even taking into account decommissioning costs, nuclear energy is cheaper than almost any other alternative. Indeed, some 24 new reactors are now being built worldwide, mostly in Asia and eastern Europe. A further 41 are planned or on order, and another 113 are under consideration. In total, this would equal 40 per cent of the world's present nuclear capacity.

Total’s move will likely be supported by most in the nuclear field (AREVA as a supplier; the CEA & their very powerful network of ‘hauts fonctionnaires,’ as their influence will grow), as well as by the energy regulator and the ministry of industry in general. By contrast, EDF will probably agitate against the arrival of a powerful new competitor.

Given the wealth of nuclear expertise available in France and the plentiful supply of competent scientists & engineers from France’s ‘grandes écoles,’ Total seems better positioned than many other oil companies to obtain the vast array of skills required to become a credible actor in such a complex, high-tech field.

However, it would be much faster for Total to purchase these skills, as opposed to building them up piece by piece. One neat way to proceed would be at some point to purchase Suez, which has been in the nuclear industry for over 30 years and currently produces 5800 MWe in four nuclear plants. The expertise of various Suez subsidiaries (AXIMA, COYNE & BELLIER, TRACTEBEL ENGINEERING, ELECTRABLEL, ENDEL, FABRICOM GTI, INEO, SITA, TECNUBLEL) would at one stroke bring Total the required know-how.

Should Ms. Royal win the forthcoming French presidential elections and implement her promise to prevent the GdF/Suez merger in order to merge GdF with EdF (something the EC would not countenance without majors divestments), then the French authorities would probably actively back a Total bid for Suez, as a means to reinforce France’s dominance of the civilian nuclear energy industry.

Implications: In the context of the new EU overall energy and environmental strategy, the European Commission proposed on 31 January a revision to the 1998 fuel quality directive that will have far-reaching implications for the oil industry. Oil industry representatives are up in arms, claiming that the proposed changes are too onerous and that the car industry should shoulder more of the effort. These proposals will now be discussed by member states and the European Parliament, with a view to adopting legally binding decisions by the end of the year.

One can expect vigorous lobbying from both sides in the months ahead. On current form however, the car industry tends to carry more political influence than the oil business. The gist of the Commission proposals is thus likely to be enacted.

Analysis:

The Commission proposals comprise three main planks:

• From 2011 fuel suppliers will have to reduce the greenhouse gas emissions that their fuels cause over their life-cycle, ie when they are refined, transported and used by 1% a year per unit of energy, from 2010 levels. This should result in a 10% cut by 2020.
• A separate petrol blend will be established with a higher permitted content of oxygen-containing additives, including up to 10% ethanol. To compensate for an increase in emissions of volatile organic compounds that will result from greater use of ethanol, the Commission will propose the mandatory introduction of vapor recovery equipment at filling stations later this year.
• From 1 January 2009 all diesel fuel will have an ultra-low sulphur content (no more than 10 parts per million), and the maximum permitted content of poly aromatic hydrocarbons (PAHs) will be reduced by one-third.

These new rules will initially entail costs for all concerned, so that fierce industry resistance is to be expected. (The oil industry is arguing that it is being unfairly burdened and that most of the fuel economy effort should be carried by the car industry; however, on current form the car industry is likely to carry more political influence than the oil business.)

Given that these measures fit the double purpose of fighting global warming and benefiting public health, it is very likely that the Council (Ministers representing member states) and the European Parliament will eventually approve the gist of the Commission’s proposals.

Implications:

This short and sharp article should be carefully considered by any senior manager worth his salt. “Companies that prosper in an environment of changing climate and policies will tend to be those that are early to recognise its importance and inexorability, foresee at least some of the implications for their industry and take appropriate steps well in advance.”

Such is very much the prevailing view within the European Commission:  though EU climate change policies are being designed primarily to tackle global warming, they will also aim to endow EU companies with the comparative advantage of being amongst the first to devise and to implement innovative energy-saving technologies and practices.

Analysis: One of the main features of the EU comprehensive energy and climate change strategy [presented by the European Commission in early January & due to be adopted by the European Council (i.e. summit of Heads of Government) on 8 & 9 March] has to do with energy efficiency and savings.

In this regard, the objective is to save 20% of total primary energy intensity of output by 2020, building upon two clusters of directives currently being implemented throughout the EU:

·on the energy performance of buildings, of domestic appliances; 

·on power generation & the distribution of electricity, gas, heating and fuels to households, transport and industrial consumers.Furthermore, the new EC policy & legislative proposals set

·a 20% target for renewables in the EU's overall energy mix by 2020;

·an obligation for each member state to have 10% biofuels in their transport fuel mix by 2020;

·a binding target to slash the EU's greenhouse gas emissions by 20% in 2020 compared with 1990 levels (mostly through the European Emissions Trading Scheme).


These various objectives will be supported by a European Strategic Energy Technology Plan to radically re-focus EU R&D efforts on energy saving and low carbon technologies.

The influential Vice-President of the European Commission in charge of Industry, Gunther Verheugen, is currently spearheading discussions, (both within the three main EU institutions and with business representatives), so that the final wording of these rules, however onerous for environmental reasons, may also turn into business opportunities.

Implications: The related areas of energy policy & climate change are now firmly at the forefront of the European Commission’s program for the years ahead. Despite tactical retreats, as on CO₂ emissions targets for the motor industry, the overall trend points towards significant liberalization of energy markets, accompanied by stringent action on the environment. Yet, the final shape of legislation remains open to debate; countries, companies and industries can use their lobbying power to influence legislative outcomes, as the car industry has just done.

Analysis: Hitherto, the main areas of EU legislation had to do with external trade, the single market (including financial services), social policy and agriculture. Yet, during the last eighteen months or so the related areas of energy and climate change have sprung to the forefront of the EU political agenda.

Given both mounting scientific evidence and the heightened sensitivity of European public opinion, the momentum towards pricing or regulatory measures aiming at a lower carbon content of economic activity is unstoppable. Consequently, the Barroso Commission has staked a lot of its political capital in further liberalizing energy markets and in tackling climate change.

EU policies in these areas are coalescing around three clusters: liberalizing markets (driven by Commissioner Neelie Kroes), harmonizing the energy policies of member states (Commissioner Andries Piebalgs), and devising environmental rules (Commissioner Stravos Dimas). The Commissioner in charge of industry, Gunther Verheugen, usually supports Neelie Kroes on competition issues, but tends to take a more cautious view on any measure that may hurt companies in the short run. President Barroso steers the debate within the Commission, whilst being very sensitive to the views of member states.

The Commission a few weeks ago presented a major ‘Energy & Climate Change Package’ of policy & legislative proposals. The main measures in the offing have to do with the European Emissions Trading Scheme (EU-ETS), with energy end-use efficiency (with wide implications for transport, industry and domestic consumers, as well as for producers of all manner of appliances), and finally with R&D (including on greater use of bio-fuels & renewables).

The next milestone will be the European Council (i.e. summit of Heads Government) on 8 and 9 March, which is due to decide on the Commission’s proposals & to set in motion a common European Energy Policy.

Yet, in the EU as in any democracy, the final shape of legislation is open to debate till the end, particularly as most measures will require the assent of the European Parliament. Countries, companies and industries have ample scope to apply their lobbying in the months ahead, as the car industry has just successfully done.