Joint press statement by the Economic Development Department, the Department of Trade and Industry and the Department of Agriculture, Forestry and Fisheries on the Walmart/Massmart merger
2 Aug 2011
Government has noted the media reports and editorials regarding its application for the review of the Competition Tribunal's decision on the Walmart/Massmart merger. It is important to put Government's position into perspective.
Government's review application points to serious flaws in the Tribunal's process, including the inadequacy of the Tribunal's order relating to discovery (the Tribunal allowed only some of government's requests for information) and prejudice caused by limitations imposed on the time allowed for witnesses to make oral submissions and also the number of witnesses allowed (the hearings process).
Government has set out in its papers why these defects affected the ability of the Competition Tribunal to properly consider the potential damage of the merger and to impose appropriate conditions to mitigate the risk.
The main risk to South Africa that the merger poses is an increase in imports by Walmart/Massmart, causing a decline in local manufacturing and production, across a wide range of consumer products including in agro-processing, the furniture industry, electronics, plastics and household goods as well as clothing and textiles. These effects, if realised, will lead to the closure of a number of local businesses and local job losses.
In February the Competition Commission recommended the merger without conditions on the understanding that Government-brokered talks with Walmart/Massmart would yield concrete results regarding local procurement. But Walmart/Massmart would not move beyond vague undertakings.
Through its engagement in the Tribunal's hearings, Government was able to put pressure on Walmart/Massmart to table concrete undertakings, which they did on the final day in closing argument, and the Tribunal made those as conditions in its order. Government had sought a wider set of conditions that included commitments to avoid large-scale job losses in the Massmart supply-chain. It is government's view that the conditions imposed will prove to be insufficient. A R100 million supplier development fund could pale into insignificance given the likely impact of a substantial shift to imports by the merged entity.
The sheer scale of Walmart's international operations made government's intervention necessary. Walmart's revenue is estimated to be $408 billion - larger than South Africa's GDP. In 2004, Walmart, if it was measured as a country, would have been China's 8th largest trade partner and would have a GDP larger than 75% of countries worldwide. In 1995 no more than 5% of Walmart products were imported; by 2005 this figure had increased exponentially to 60%. Walmart's procurement division employs 1400 employees sourcing from 6000 factories across the world, though largely from China.
Government believes that given Walmart's global purchasing power, the merged entity will significantly increase imports and reduce purchases from local suppliers in South Africa. This will affect entire value chains from the suppliers of raw materials and components to the producers of the finished product. Government believes a ripple effect in the sector is inevitable - competitors of the merged entity will also respond by importing more and procuring less from local suppliers. Evidence tabled before the Competition Tribunal by one major competitor confirms this assessment.
The Government departments' intervention must be seen in the context of the economic situation in the country. South Africa ranks amongst the ten countries worldwide with the lowest level of employment. Less than half of all working-age South Africans are employed. Moreover, the economic downturn destroyed a million jobs and employment creation only returned at the end of 2010, more than a year after the economy began to grow again.
The benefits of direct investment to establish new enterprise and production are well known and undisputed. The benefits of mergers and acquisitions by foreign or indeed by local companies are however less assured. That is why the law requires that the Competition Commission investigate these deals with a view to protecting the public interest. In the case of Walmart taking over Massmart, Massmart was already more than 70% foreign owned by institutional investors before the acquisition, so this case is not about foreign investment per se.
Government's approach is in line with what happens in many countries elsewhere in the world. Many jurisdictions impose a public interest test on foreign direct investment. Canada's Investment Canada Act is an example. In some instances transactions are prohibited or conditions imposed upon them.
In the United States, for example, New York City, one of the most significant commercial centres in the world, prohibits Walmart from operating in its area. In Germany, prior to its withdrawal from that country, the Germany Supreme Court found Walmart guilty of illegal predatory pricing of certain products.
Government would like to emphasise that it fully supports a transparent and expeditious merger review process, in which all key stakeholders, including Government, can engage meaningfully in order to ensure outcomes which are pro-competitive and supportive of employment in South Africa. Government respects the independence of the Competition Tribunal, but may take a different view of a particular merger. Government is duty bound to advance the public interest in mergers that have such far-reaching effects as the Walmart one, and has the opportunity to do so through the processes of our law.
Statement issued by the Economic Development Department, August 2 2011
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