UNITED STATES OF AMERICA
In the Matter of
EXXON CORPORATION, a corporation, THE SHELL PETROLEUM COMPANY LIMITED, a corporation, and SHELL OIL COMPANY, a corporation
Docket No. C-3833
The Federal Trade Commission ("Commission"), having reason to believe that respondents Exxon Corporation, The Shell Petroleum Company Limited, and Shell Oil Company, all corporations subject to the jurisdiction of the Commission, have agreed to form a joint venture, in violation of the provisions of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the Federal Trade Commission Act ("FTC Act"), as amended, 15 U.S.C. § 45, and it appearing to the Commission that a proceeding by it in respect thereof would be in the public interest, hereby issues its Complaint, stating its charges as follows:
I. THE RESPONDENTS
1. Respondent Exxon Corporation (Exxon) is a corporation organized, existing and doing business under and by virtue of the laws of the State of New Jersey, having its principal offices at 5959 Las Colinas Boulevard, Irving, Texas 75039.
2. Respondent The Shell Petroleum Company Limited is a corporation organized, existing and doing business under and by virtue of the laws of England, having its principal offices at Shell Centre, London SE1 7NA, England.
3. Respondent Shell Oil Company is a corporation organized, existing and doing business under and by virtue of the laws of the State of Delaware, having its principal offices at One Shell Plaza, Houston, Texas 77002.
4. At all times relevant here, Respondents have been, and are now, corporations as "corporation" is defined in Section 4 of the FTC Act, 15 U.S.C. § 44; and at all times relevant herein, the respondents have been, and are now, engaged in commerce as "commerce" is defined in Section 1 of the Clayton Act, as amended, 15 U.S.C. § 12, and in Section 4 of the FTC Act, 15 U.S.C. § 44.
III. THE PROPOSED JOINT VENTURE
5. On or about July 10, 1996, Exxon Chemical Company, a division of Exxon, The Shell Petroleum Company Limited, and Shell Oil Company announced an intention to form a joint venture to own and operate the businesses of Exxon Chemical Company, The Shell Petroleum Company Limited, and Shell Oil Company, engaged in the development, manufacture, marketing and sale of additives used in the production of fuels and lubricants (the Joint Venture). The value of the businesses to be combined in the Joint Venture is around $1.5 billion.
IV. THE RELEVANT MARKETS
A. Relevant Product Market
6. The development, manufacture, marketing and sale of viscosity index improver or viscosity modifiers for motor oil for automobiles and trucks ("VI improver") is the relevant line of commerce within which to analyze the competitive effects of the proposed acquisition.
7. VI improvers are synthetic rubber compounds, either polymers or styrenics, that are blended with refined oil to enhance the viscosity properties of the oil for use in motor oil.
8. The viscosity of a fluid is its internal resistance to flow. The higher the viscosity, the more resistance to flow. Lubricating oils must have enough viscosity to maintain a film of the proper thickness on the surfaces that they are intended to protect. Temperatures affect the viscosity of oil, higher temperatures lowering the viscosity. Motor oil, which is used to lubricate the interior of an engine, must have sufficient viscosity to adhere to the internal surfaces of the engine even after the engine gets hot and reduces the oils viscosity. At the same time, motor oil must have low enough viscosity to flow through the engine when the engine is cold, particularly in winter weather.
9. Refined oil by itself does not have both the needed high viscosity when the engine is warm and the low viscosity when the engine is cold. An oil with low viscosity which will flow well at low temperatures will lack the required viscosity to protect the engine at high temperatures. An oil with a high viscosity which will protect the engine at high temperatures will not flow well at low temperatures. The "viscosity index" of an oil is the relationship between the viscosity of the oil at two different temperatures, one low and one high. The higher the viscosity index, the smaller the relative change in viscosity with temperature. VI improvers are added to refined oil by companies that blend and market motor oil to give the resulting motor oil more consistent viscosity across changes in temperature and increase the viscosity index.
10. Consumers rely on motor oil containing VI improver to protect their car engines. There are no economic substitutes for VI improver.
11. Exxon Chemical Company and The Shell Petroleum Company Limited and Shell Oil Company develop, manufacture, market, and sell VI improver.
B. Relevant Geographic Market
12. The relevant geographic area in which to analyze the effects of the Joint Venture in the relevant line of commerce is North America.
13. Automobile and truck engine manufacturers, oil companies that produce motor oil, and companies that produce chemical additives to enhance the performance of motor oil jointly develop industry standards for the minimum performance of motor oil. These industry standards vary in different parts of the world. The VI improver marketed in North America is designed so that when combined with motor oil and other chemical additives, the motor oil will meet industry minimum standards for North America. VI improver marketed in other parts of the world may not allow motor oil to meet the minimum industry standards for North America.
14. The relatively low value to weight ratio of VI improver makes it generally uneconomic to transport VI improver from other parts of the world to North America for use in motor oil.
V. MARKET STRUCTURE
15. As measured by current sales to customers in North America, the relevant market is highly concentrated, whether measured by the Herfindahl-Hirschman Index (or "HHI") or by two-firm or four-firm concentration ratios. Exxon Chemical Company, The Shell Petroleum Company Limited, and Shell Oil Company collectively account for over one-half of the sales of VI improver for use in motor oil in North America. The proposed Joint Venture, if consummated, would significantly increase the HHIs in an already highly concentrated market.
VI. ENTRY CONDITIONS
16. Entry into the development, manufacture, marketing, and sale of VI improver requires more than two years. Entry into the VI improver market is difficult and would not be timely to prevent anticompetitive effects in the relevant markets.
17. The development of a VI improver that will enable motor oil to meet the applicable industry standards is very difficult and time consuming. It takes over two years to develop a marketable VI improver product.
18. The economies of scale in the manufacturing of synthetic rubbers of the type that can be used for VI improver require a manufacturing facility that is much larger than is needed to compete in the VI improver market. A new entrant into the market for VI improver must either build a plant for the production of synthetic rubber many times the size that is needed to compete in the VI improver market and simultaneously enter other markets to market the remaining production of the plant, or find an existing supplier of synthetic rubbers who will provide a supply of synthetic rubber of the design needed to make VI improver. Many of the current producers of VI improver have exclusive supply arrangements with suppliers of synthetic rubber to manufacture the synthetic rubber that the producer of the VI improver uses.
19. Building a new manufacturing facility for the production of synthetic rubber of the type that can be used in the production of VI improver is time consuming. It would take over two years to build a new synthetic rubber facility. There are few, if any, producers of synthetic rubber of the types that can be used for VI improver that do not already have an exclusive supply arrangement with a producer of VI improver that precludes that producer of synthetic rubber from supplying another VI improver producer.
VII. ACTUAL COMPETITION
20. Exxon Chemical Company, The Shell Petroleum Company Limited, and Shell Oil Company are actual competitors in the relevant lines of commerce in the relevant area.
VIII. EFFECTS OF THE PROPOSED MERGER ON COMPETITION
21. The effect of the Joint Venture, if consummated, may be substantially to lessen competition and to tend to create a monopoly in the relevant market in violation of Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the FTC Act, as amended, 15 U.S.C. § 45, in the following ways, among others:
IX. VIOLATIONS CHARGED
22. The proposed formation of a joint venture by Exxon Chemical Company, The Shell Petroleum Company Limited, and Shell Oil Company violates Section 5 of the FTC Act, as amended, 15 U.S.C. § 45, and would, if consummated, violate Section 7 of the Clayton Act, as amended, 15 U.S.C. § 18, and Section 5 of the FTC Act, as amended, 15 U.S.C. § 45.
WHEREFORE, THE PREMISES CONSIDERED, the Federal Trade Commission on this thirtieth day of October, 1998, issues its Complaint against said respondents.
By the Commission.
Donald S. Clark