EU launches first in-depth investigation under Foreign Subsidies Regulation

First test case for the EC’s new investigation power demonstrates that FSR can create a level playing field between EU and non EU companies.

The European Commission launched its first investigation under the Foreign Subsidies Regulation (FSR) against a Chinese company participating in an EU tender. On February 16, 2024, the European Commission (EC) launched an in-depth investigation into Chinese train maker CRRC Qingdao Sifang Locomotive Co Ltd., a subsidiary of CRRC Corporation (CRRC). This is the first test case for the EC’s new investigation power under the FSR. This case ticks all the boxes for the EC, and it also has some history.

What is the FSR?

The European Union’s FSR, which entered into force on January 12, 2023, and has been applicable since July 12, 2023, is designed to target distortions in the internal EU market caused by financial subsidies granted to companies operating in the European Union by non-EU governments.

The FSR introduced two mandatory sets of notification obligations for beneficiaries of support from third country governments, namely when participating in merger and acquisition transactions and in public procurement tenders in the European Union, respectively.

The notification obligations became effective on October 12, 2023. Furthermore, a third enforcement tool under the FSR grants the EC the power to initiate an investigation if it suspects a distortion of competition as a result of foreign government support conferring a selective advantage upon a particular company operating in the internal EU market.

The present in-depth investigation relates to a public procurement procedure.

What is this case about?

Not all the details have emerged yet, but the investigation was initiated on February 16, 2024, following a notification submitted to the EC by CRRC, a Chinese state-owned train manufacturer, in relation to its participation in a public procurement procedure opened by Bulgaria’s Ministry of Transport and Communications. The tender is for the provision of several electric “push-pull” trains, as well as related maintenance and staff training services, with a reported value of €610m (around $657m).

After its preliminary review of the notification received from CRRC, the EC decided to open an in-depth investigation, since there were prima facie “sufficient indications” that this company has been granted a foreign subsidy that distorts the EU internal market.

At the end of its in-depth investigation, the EC will determine whether there is a distortion of competition in the EU internal market due to the foreign subsidy. In such a case, the EC may (1) accept commitments proposed by the company if the commitments fully and effectively remedy the distortion or (2) prohibit the award of the contract by the Bulgarian government. If the EC concludes that no such distortion exits, it will issue a no objection decision and business would proceed as usual.

The EC has until July 2, 2024, to make a final decision (110 working days from the submission of CRRC notification on January 22, 2024). The opening of an in-depth investigation does not prejudge the outcome of the investigation. If a distortion is found, companies can be fined as much as 10% of their annual aggregate turnover or face periodic penalty payments of 5% of the average daily aggregate turnover in the preceding financial year if they do not comply with a decision imposing commitments.

Analysis of the CRRC case

This case ticks all the boxes as the first test case for the EC’s power to initiate an in-depth investigation under the FSR for the following reasons.

First, it targets a company from a jurisdiction that has been the EU’s focus for using its deep pockets to support the operations of its companies in the EU (and elsewhere). By contrast, EU companies face strict conditions under the EU state aid rules to be able to benefit from government funding or other public support.

Second, the case targets an infrastructure sector of the EU’s traditional economy that has long been subject to competition from non-EU companies that receive substantial support from third country governments but fall outside the EU state aid rules. In addition, while Europe had liberalized and opened its rail infrastructure markets to competition, some non-EU countries have kept their markets closed or at least restricted to EU companies.

Third, the case hits the center of the perceived enforcement gap. In fact, there is some history to this case. In 2019, the EC prohibited Siemens’ takeover of Alstom’s rail transport business and concluded that the market entry by CRRC and others did not appear likely, timely, or sufficient to deter or defeat any potential anticompetitive effects of the takeover. [1]

Unfair competition

However, in 2020, the German Federal Cartel Office (FCO) authorized the acquisition of Vossloh’s shunter division by another subsidiary of CRRC. This decision was deplored by some domestic competitors who argued that the FCO should not have granted the authorization because of unfair competition from CRRC on the market, precisely because of the financial and other support granted to it as a state-owned company. At the time, the FCO examined the allegations but concluded that these were not substantial enough to prohibit the acquisition and stated the following.

“Possible state subsidies, the availability of technical and financial means and strategic advantages from other shareholdings were considered in the competitive assessment of the merger. We also looked into the threat of low-price and dumping strategies and the cost advantages resulting from CRRC’s state-subsidised activities in many other markets. CRRC plays an important role in China’s industry strategies. Furthermore, in complex vehicle approval procedures for shunters CRRC can benefit from Vossloh’s expertise as an established manufacturer in the future. However, our existing concerns were not reason enough to justify prohibiting the merger project.”

Fast forward to 2024, and the European competition authorities now have a new, more potent and tailored regulatory tool. While the FSR is enforced by the EC, there is very close cooperation and liaison with member state competition authorities.

The EC is also using this case to demonstrate to EU businesses (which are unhappy to be also subject to the FSR), that the FSR really is a tool to create a level playing field between European companies and non-EU companies in the internal EU market.

Finally, the CRRC case sends a clear warning that parties’ own notifications under the FSR can lead to undesired results in the form of a full investigation by the EC into possible competition distortions caused by third country government support. Notifications to the EC under the FSR will therefore need to be very carefully prepared and potential ramifications managed. The issue merits serious consideration given the unexpectedly high number (about 100) of FSR notifications for EC reviews in the context of EU tenders since the FSR entered into force.

Moreover, while the rules may be viewed as primarily targeting one jurisdiction, firms with investments from sovereign funds owned by Middle Eastern states or even from EU trading partners such as the United States are subject to notification obligations if a company has received any material government subsidy. As discussed in our prior detailed publications, the definition of a government subsidy is very broad.

[1] EC decision of February 6, 2019, SIEMENS/ALSTOM, Case M.8677, para. 533.

Written by Morgan Lewis partners Christina Renner, Izzet Sinan and associates Jasmeen Bahous, Noelia Martinez and Maciej Bernard Plotka in the Brussels office.