The Breakdown

Industrial companies operating in Europe face a new era of scrutiny as merger enforcement intensifies. High energy costs, revived tariffs, and environmental/social liabilities are forcing strategic shifts—including M&A, joint ventures, and site rationalizations. The European Commission’s evolving approach centers on capacity, market structure, and the concept of “pivotality” when evaluating the competitive landscape for basic industries such as chemicals, steel, and cement. As a result, deal feasibility hinges less on headline market share and more on the interplay of physical capacity, geographic reach, and adaptability to shifting trade flows.

Analyst View

The Commission’s focus on production capacity and pivotality as the principal metrics fundamentally reorients how B2B leaders in chemicals and industrials must strategize growth, market positioning, and investment. Companies that formerly relied on headline sales shares or broad market definitions must now undertake more granular analyses into the structure and elasticity of capacity at both supply and demand levels. Geographic market definitions are becoming narrower and more sophisticated, reflecting not just national but real operational catchment areas defined by distance, logistics, transport costs, and customer concentration.

Strategic consolidation—often motivated by the need to remove inefficient, underutilized assets—faces hurdles in the form of merger control. The standards for approving transactions are increasingly sensitive to whether enough spare capacity remains with rivals and external markets, recognizing that in many cases, imports or potential new entrants are discounted or under-represented in the Commission’s models. This creates a tension between rationalizing operations for sustainability and clearing regulatory obstacles.

Market participants must also factor in unpredictable geopolitical drivers—including shifts in tariff regimes, defense priorities, and evolving regulatory perspectives with a growing emphasis on environmental and social outcomes. These shifts inject new variables into competitive dynamics and value chain operating practices, altering the calculus for sustained profitability and investment.

Navigating the Signals

For senior industrial leaders, the operational and strategic planning landscape is now defined by how efficiently capacity can be managed, both internally and externally. M&A decisions must account not only for the absorption or shedding of assets but also for whether post-transaction footprint will leave the organization “pivotal” in the eyes of the Commission—exposing deals to in-depth scrutiny or potential prohibition. The competitive environment is no longer just about “who’s selling the most,” but “who can reliably supply demand under multiple market definitions.”

The key internal questions for leadership become:

• Are our operational footprints and expansion/reduction plans aligned to withstand more granular, capacity-centered regulatory reviews?
• What are the real competitive threats or buffers provided by imports and non-traditional entrants, especially under fluctuating tariff regimes?
• How do changes in fixed and sunk costs—energy, labor, compliance—interact with our ability to flex capacity under regulatory pressure?
• Do we have robust evidence and data to substantiate the competitive impact of imports, asset divestitures, or alternative supply routes?

Leadership must also anticipate that structural remedies, not behavioral commitments, are likely to be prerequisites for securing deal approval—often requiring the pre-identification of viable buyers with capabilities spanning the value chain.

Source
Read full article on www.aoshearman.com