A new day for antitrust enforcement
The business community has a number of good reasons to fear the Obama administration, particularly on taxes, carbon emissions, pay rules and regulations generally. Lately, the fear has focused on the Justice Department's new antitrust chief, Christine Varney, and the prospect of her imposing a European Union-style competition policy, to wit, one that's much more hostile to market-leading companies and friendlier to their rivals.
The European Commission's decision today to levy a record $1.45 billion fine on Intel Corp. provides a good illustration of the difference. It ruled that Intel violated European law in part by offering what amounted to exclusionary volume discounts. In particular, the commission said Intel gave rebates to four computer manufacturers that agreed to buy 80% to 100% of their chips from the company. Intel denies that it did so, saying instead that it simply competed on price and that it sold no chips for less than it cost to make them.
Under the Bush administration's Justice Department, antitrust experts say, big firms could compete aggressively on price as long as they didn't sell below cost. If natural efficiencies in their operators enabled them to price competitors out of the market, so be it, because consumers paid less for the products. The Intel case, however, shows that the European Commission expects firms to change their pricing behavior once they become dominant in a market. In the EC's view, preserving a meaningful degree of competition is critical to promoting innovation and deterring gouging.
The U.S. Justice Department won't play a similar role in the dispute between Intel and microchip rival AMD; the Federal Trade Commission is investigating Intel, and a federal court in Delaware is hearing AMD's antitrust lawsuit against the company. But Varney, an FTC commissioner during the Clinton administration, made it clear in a speech Monday that she'll be tougher on dominant firms than her predecessors in the Bush administration were. According to Varney, the previous administration's approach put too much weight on preserving possible efficiencies of big firms, and it allowed "all but the most bold and predatory conduct to go unpunished and undeterred." She didn't mention the EC or cite any overseas precedents, but the message was clear enough.
Photo: Justin Sullivan / Getty Images
I find this EU fine against Intel biased, anti-competitive and an attack to the entire global free trade system.
The European Union has, starting in the mid 1990s, engaged massive subsidies to artificially develop the so called “Silicon Saxony” around Dresden, Germany; an artificial economic development project that is now floundering as most EU and German "investments" of taxpayer money in AMD, Quimonda, Infineon and others are becoming massive and quasi-permanent corporate welfare programs. Just yesterday, those subsidies where once again implicitly extended through the “Cool Silicon” initiative for Silicon Saxony.
AMD (and its newly created spinoff Globalfoundries) has, over the past 10 years, received nearly $3 billion in “public incentives” from the EU; and a similar amount from the German government and the state of Saxony; and delivered nothing but massive operating losses for the last 11 consecutive quarters, that now exceed $7 billion. Predictably, AMD and Globalfoundries are facing imminent exhaustion of EU subsidies, and are now actively looking to exploit taxpayers elsewhere through similar “regional development” models based on dysfunctional corporate welfare programs masked as private-public partnerships. (Recently, NY State granted a $1.2 billion in subsidies to AMD and Globalfoundries to partially fund Globalfoundries’ Fab 2 in Malta, NY. Just the beginning a long string of public subsidies to companies that simply can’t compete in the marketplace.)
It is no surprise that, as Germany and the EU increasingly accept the failure of their "job creating" subsidies in Saxony, the EU Commission accelerated the issuance of fines against Intel because of, according to the EU Commission, Intel has engaged in business practices that in the US are standard operating procedures among most corporations, most of them revolving around manufacturers’ incentives, selective rebates, volume discounts and other more or less standard volume pricing practices. Essentially, Intel is accused of practices that is unclear resulted in damage to EU consumers, and quite the contrary, EU consumers received quantifiable benefits through significant product savings; much of those savings subsidized by Intel for the benefit of EU consumers.
The EU decision explicitly indicates that citizens of the EU member countries have been hurt by Intel’s business practices; when in reality EU politicians, for nearly 10 years have been hurting their own citizens by dilapidating taxpayers resources in failed corporate welfare programs such as those supporting Silicon Saxony.
Ironically, AMD and Globalfoundries, as disclosed in their last 10-Q filing for the quarter ending in March 2009, are engaged in a pricing practice that could just as easily be construed as “intersegment price dumping” if this practice were to continue following the complete separation of the two companies since one is primarily located in the EU and the other in the US. AMD’s 10Q Filing for Q1’09 shows in “#6 Segment Reporting” that out of $938M of AMD’s Revenue related to MPUs (Processors), only $283M are being allocated to wafer purchasing from Globalfoundries, which in turn sustains a NET OPERATING LOSS of $298M. Simply said, the price of the wafers being sold by Globalfoundries to AMD is being discounted by at least 50% from real production cost; or that the price per wafer being sold to AMD should be at least double in order to recoup production costs and close Globalfoundries' operating deficit.
This decision of the EU is not only an unfair attack on Intel success, but on the entire global free trade system, and an unprecedented act of government meddling in perfectly legal private transactions between willing business partners; the anti-trust action is being enforced for the sole purpose of elevating EU protectionist barriers through the use of subsidies, regionally biased legislation and selective use of anti-trust legislation to promote and protect a failed corporation (AMD and Globalfoundries).
These two companies, AMD and Globalfoundries, have elevated to new heights and on a global scale out-of-control lobbying of elected government officers by encouraging the dilapidation of public resources, by systematically creating quasi-conflict of interests involving public servants, by manipulating the media, and even by involving investors whose only qualification is having abundant petro-dollars; all of these practices for the purpose of competing against Intel, a company that has shown superb entrepreneurial execution since its founding, constantly innovating ahead of the competition by boldly extending Gordon Moore’s law, and diligently competing primarily in the marketplace instead of through obscure lobbying of public servants.
Intel should appeal this decision not only because is abusive and excessive, but because the future of the global business enterprise based on free trade practices is increasingly in danger, as so many aspects of the anti-trust decision of the EU Commission against Intel clearly exemplify.
Posted by: Adolfo Gutierrez | May 14, 2009 at 09:37 AM