(1)

By electronic notification dated 30 August 2006, registered the same day at the Commission, the Hungarian authorities notified a case of application of existing regional aid schemes in favour of an initial investment project by IBIDEN Hungary Gyártó Kft. The notification was made pursuant to the individual notification requirement laid down in paragraph 24 of the Multisectoral Framework on regional aid for large investments projects 2002 (2) (hereafter: MSF 2002).

(2)

The Commission requested additional information by letters of 13 October 2006 (D/58881) and 13 March 2007 (D/51161).

(3)

By letters registered at the Commission on 14 November 2006 (A/39085), 3 January 2007 (A/30004), 15 January 2007 (A/30441) and 27 March 2007 (A/32641) the Hungarian authorities asked the Commission to extend the deadline for providing additional information, which the Commission accepted.

(4)

The Hungarian authorities submitted additional information by letters registered at the Commission on 31 January 2007 (A/30990) and 15 May 2007 (A/34072).

(5)

On 11 December 2006 and on 25 April 2007, meetings were held between the Hungarian authorities and the Commission services where also representatives of IBIDEN Hungary Gyártó Kft. were present.

(6)

By letter dated 10 July 2007, the Commission informed Hungary that it had decided to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the aid.

(7)

The Commission Decision to initiate the procedure was published in the Official Journal of the European Union (3). The Commission invited interested parties to submit their comments on the aid measure.

(8)

The Commission received four comments from interested parties:

(9)

By letter dated 4 December 2007 (D/54826), the Commission forwarded the observations received to Hungary which was given the opportunity to react.

(10)

The opinion from Hungary to the comments of interested parties was received by letter dated 4 January 2008, registered at the Commission on the same day (A/151).

(11)

The Hungarian authorities intend to promote regional development by providing regional investment aid to IBIDEN Hungary Gyártó Kft. for the setting up of a new manufacturing plant for the production of ceramic substrates for Diesel Particulate Filters in the Dunavarsány Industrial Park, in the region of Central Hungary (Pest County), which is an assisted area in accordance with Article 87(3)(a) of the EC Treaty with an aid intensity ceiling of 40 % Net Grant Equivalent (NGE) for the period 2004-2006 (4).

(12)

The aid beneficiary is ‘IBIDEN Hungary Gyártó Kft.’ (hereinafter: IBIDEN HU). The aided project aims to set up the second production plant within IBIDEN’s ceramics division of ceramic substrates for Diesel Particulate Filters in the European Union, besides IBIDEN DPF France S.A.S. in France (set up in 2001).

(13)

IBIDEN HU was established on 5 May 2004 by IBIDEN European Holdings B.V. (The Netherlands) and IBIDEN Co., Ltd. (Japan). IBIDEN European Holdings B.V. is 100 % owned by IBIDEN Co., Ltd., which in turn is a joint-stock company with many proprietors: companies (e.g. banks) and private entities. IBIDEN HU is 99 % owned by IBIDEN European Holdings B.V. and 1 % by IBIDEN Co., Ltd. IBIDEN DPF France S.A.S. has been owned by IBIDEN European Holdings B.V. by 100 % since the end of 2005.

IBIDEN Co. Ltd.

Companies (for e.g. banks) and private entities.

100 %

1 %

IBIDEN European Holdings B.V.

100 %

IBIDEN DPF France S.A.S.

99 %

IBIDEN Hungary Kft.

(14)

The parent company IBIDEN Co., Ltd. is a multinational company that was established in 1912, as a company generating electric power, and has its headquarters in Gifu, Japan. Its operations can be divided into five segments whose shares in the 2005 annual sales turnover were the following: 50 % for the electronics division, 22 % for the ceramics division, 16 % for the housing materials division, 4 % for the construction materials division and 8 % for other small divisions (such as oil products, information services, synthetic resin, agriculture, livestock and fishery processing departments). According to the Annual Report of 2006 (5), the IBIDEN Group consists of 47 subsidiaries and one affiliated company, which is not active in the ceramic sector. In 2006 consolidated net sales were Yen 319,0 billion, operating income was Yen 43,6 billion, and net income was Yen 27,2 billion. In the same year, the group counted 10 115 employees in its business representations and factories all over the world.

(15)

The notification concerns the second phase of an investment project, which aims to set up a plant to produce ceramic substrates for Diesel Particulate Filters in the Dunavarsány Industrial Park.

(16)

By letter dated 1 April 2005 the Hungarian authorities, in line with paragraph 36 of the MSF 2002 (6), informed the Commission about the State aid granted to IBIDEN HU for the first phase of the investment project.

(17)

The Hungarian authorities indicate that the two phases of the investment by IBIDEN HU in the Dunavarsány Industrial Park have to be considered as a single investment project within the meaning of paragraph 49 of the MSF 2002: the two investment phases concern the same production site, the same company, the same product and they were started within a period of three years.

(18)

According to the information provided by the Hungarian authorities on the two investment phases, the production of ceramic substrates for Diesel Particulate Filters will take place in two newly built buildings of 24 000 m2 and 30 900 m2 respectively in the Dunavarsány Industrial Park. By 2007, four production lines will be installed in building I and five lines will be installed in building II.

(19)

By 2007 the project will create a total of 1 100 new direct jobs in Dunavarsány.

(20)

The Hungarian authorities confirm that no other products than those concerned by the investment project will be produced at the aided facility for five years after the completion of the investment.

(21)

In addition, the Hungarian authorities confirm that the beneficiary accepted to maintain the investment at the site for a minimum period of five years after the completion of the investment.

(22)

The works on the investment project have already started in October 2004. Production linked to the project started in August 2005 in building I and in May 2006 in building II. Full capacity linked to the project was expected to be reached in April 2007. Table I provides further details on the timing of the project:

Table I

Timing of the investment project

(23)

The total eligible investment costs of the project are HUF 47 570 933 882 (EUR 190,83 million) in nominal value. In present value this amount is HUF 41 953 072 670 (EUR 168,30 million) (7). Table II provides a breakdown of the total eligible costs by year and category.

Table II

Eligible investment costs (Phases I and II) nominal value in million HUF

(24)

The Hungarian authorities confirmed that the own contribution by the beneficiary exceeds 25 % of the eligible costs, which is free of any public support.

(25)

The financial support to IBIDEN HU is granted on the basis of the following two legal basis:

(26)

The total nominal aid amount is HUF 15 591 223 750 (EUR 62,55 million), which corresponds to HUF 9 793 809 933 (EUR 39,29 million) in present value. On the basis of the eligible costs indicated in paragraph 23 above, this corresponds to an aid intensity of 22,44 % in net grant equivalent (NGE) (10).

(27)

The aid is being provided in the form of the following two aid instruments. First, the Ministry of Economy and Transport is making a grant with a total amount in nominal value of HUF 3 592 000 000 (EUR 14,41 million) dispersed over the years of 2005 till 2007. Second, the Ministry of Finance is providing a corporate tax allowance (11) estimated at HUF 11 999 223 750 (EUR 48,14 million) in nominal value disbursed over the years 2007 until 2016. The grant in present value amounts to HUF 3 118 450 763 (EUR 12,51 million) and the tax allowance in present value is HUF 6 675 359 170 (EUR 26,78 million).

(28)

The Hungarian authorities specified that aid in the amount of HUF 7 411 828 735 (EUR 29,73 million) in present value (HUF 11 745 422 640 or EUR 47,12 million in nominal value) had already been granted to IBIDEN HU on the basis of the existing regional aid schemes (12) up to the individual notification threshold established in paragraph 24 of the MSF 2002. For the first phase of the investment project the Ministry of Finance granted aid on 25 February 2005 in the amount of HUF 4 832 595 058 (EUR 19,39 million) in present value (HUF 8 773 422 640 or EUR 35,20 million in nominal value) and the Ministry of Economy and Transport granted aid on 3 March 2005 in the amount of HUF 1 875 354 000 (EUR 7,52 million) in present value (HUF 2 142 000 000 or EUR 8,60 million in nominal value). For the second phase of the investment the Ministry of Economy and Transport granted aid in the amount of HUF 703 879 677 (EUR 2,82 million) in present value (HUF 830 000 000 or EUR 3,33 million in nominal value) on 22 December 2006.

(29)

Thus, according to the Hungarian authorities, the aid amount, which is subject to the notification, is the difference between the total amount of aid and the support already granted, i.e. HUF 2 381 981 198 (EUR 9,56 million) in present value (in nominal value this amount is HUF 3 845 801 110 or EUR 15,43 million).

(30)

Regarding the remaining aid amount to be granted for the second phase of the investment, the Hungarian authorities have suspended the decision-making process until the decision of the European Commission. Thus, the authorisation of the notified aid is subject to Commission approval.

(31)

The Hungarian authorities confirm that the aid for the project cannot be cumulated with aid received for the same eligible costs from other local, regional, national or Community sources.

(32)

The Hungarian authorities confirm that the aid applications for the first phase of the investment project were submitted on 5 December 2003 at the Ministry of Economy and Transport and on 16 September 2004 at the Ministry of Finance. The aid applications for the second phase of the investment project were submitted on 28 March 2005 and on 31 May 2005 respectively. Therefore, the respective aid applications had been made before work started on the first phase on the project on 6 October 2004 and on the second phase of the project on 20 June 2005.

(33)

The Hungarian authorities committed themselves to submit to the Commission:

(34)

The notified project concerns the production of ‘ceramic substrates for diesel particulate filters’ (hereafter: DPF), which are installed in diesel passenger cars and light duty trucks. The ceramic part, which is produced by IBIDEN HU, is an intermediate product (TIER 3), which is then sold under market conditions to independent companies, which apply a precious metal coating of the substrate to form a coated DPF (TIER 2). The coated DPFs are then sold to exhaust manifold producers (TIER 1), which are the direct suppliers of car assembly factories.

(35)

The Commission, in the Decision to initiate the formal investigation procedure indicated that the Hungarian authorities suggested a broad definition of the relevant market, covering both key parts of the exhaust gas treatment system of diesel engine vehicles, namely Diesel Oxidation Catalysts (hereafter: DOC), which treat gases (i.e. CO and HC) and to a certain extent the soluble organic fraction (SOF) of particulate matter (PM); and Diesel Particulate Filters (hereafter: DPF) (13), which are effective in treating the insoluble fraction of particulate matter, i.e. soot. They argue these devices are very similar to each other, since both aim to reduce harmful substances from emissions, and therefore belong to the same relevant market. They also argue that the production processes and technologies to manufacture the two components are very similar.

(36)

The Commission, in the Decision to initiate the formal investigation procedure in the present case, noted that it had doubts on the compatibility of the aid with the common market based on Article 87(3)(a) of the EC Treaty and on the MSF 2002. The Commission also noted that the approach of the Hungarian authorities with regards to the relevant market was also not supported by the two independent market studies (the study by Frost & Sullivan Ltd (F&S) (14) and by AVL List GMBH (AVL)) (15), which were submitted by the Hungarian authorities.

(37)

In particular, the Commission expressed doubts whether DOC and DPF can be considered as substitutes, which belong to the same relevant product market of after-treatment devices and, at the moment of the initiation of the formal investigation procedure, the Commission considered that the relevant product market was narrower and covered only substrates of Diesel Particulate Filters to be fitted in diesel exhaust systems.

(38)

First, the Commission noted that the DPF’s main function is to treat solid inorganic and insoluble particulate matter (i.e. soot), while the DOC aims to clean hazardous gases and the soluble organic fraction (SOF) contained in particulate matter, without being able to collect soot. While it is true that there is some overlap between the two functions insofar as the coated DPF treats as well harmful gases to a certain extent, this does not eliminate the need for a separate DOC in the exhaust gas treatment system. Both components will continue to co-exist and have to be installed together in the period to be considered (i.e. until 2008). For future Euro 5-6 technologies DOCs will continue to be used for oxidation of CO, HC and SOF. Thus, the Commission noted that there appeared to be no substitutability on the demand side, as these are two separate and complementing devices.

(39)

The Commission also noted in the decision to initiate the formal investigation procedure that, according to one of the studies, a truly multi-functional product, which integrates on one ceramic monolith the functions of both DOC and DPF, had recently been introduced by the company Eberspächer and it was used in the Volkswagen Passat. However, the Commission doubted whether IBIDEN HU’s product is suitable for such a complete multi-functionality.

(40)

Second, the Commission noted that the substitutability on the supply side was also questionable. No concrete evidence of substrates for DOCs producers, which are also capable of producing substrates for DPFs with the same equipment without major additional investment costs, or vice versa, were provided. Furthermore, substitutability is also doubtful because the price of the DPF is around four times higher than the price of the DOC.

(41)

Finally, the Commission observed that while the aid appears to meet the conditions of the Guidelines on national regional aid 1998 (16), the Commission had doubts whether the market share of the beneficiary in the relevant market is below 25 % as required by paragraph 24(a) of the MSF 2002. The market studies submitted by the Hungarian authorities indicate that the share in volume terms of IBIDEN in the DPF market in Europe substantially exceeds the 25 % threshold both before and after the investment. Thus the condition under paragraph 24(a) of MSF 2002 is not respected if the DPF is regarded as the relevant market. However, in the combined market of the DPF and DOC, which is considered as relevant by the Hungarian authorities, IBIDEN’s market share would remain below 25 % both before and after the investment in volume terms.

(42)

In response to the publication of its Decision to open the formal investigation procedure in the Official Journal of the European Union, the Commission received observations by the following interested parties:

(43)

The arguments put forward by the above-mentioned interested parties can be summarised as follows.

(44)

The aid beneficiary IBIDEN HU and Aerosol & Particle Technology Laboratory are in favour of taking a broad market definition, which would cover all components (mainly DOC and DPF) in the exhaust gas treatment system of diesel engine vehicles. They observe that DOC and DPF are very similar to each other, since both aim to reduce harmful substances from emissions, and therefore belong to the same relevant product market.

(45)

According to this opinion, both DOC and DPF would be regarded as PM removal components, although IBIDEN HU acknowledges that DOC is ineffective in treating the insoluble part of PM (i.e. soot). The interested parties argue that due to the fact that IBIDEN HU’s product is able to filter HC and CO in addition to its main function of filtering soot, it belongs to the same market as DOC. It is up to car manufacturers to decide whether to construct the exhaust gas treatment part from independent components for detoxifying gaseous harmful substances and for treating the particle substances or to use the multifunctional component.

(46)

Nevertheless, IBIDEN HU acknowledges in its submission that in spite of the additional function of IBIDEN HU’s DPF that helps cleaning gases (HC and CO) more efficiently, the combined use of DPF and DOC is necessary to ensure compliance with emission regulations. A high quality, well-developed DPF can reduce the size and sophistication of the DOC that car manufacturers need to install in their cars, thus, the DPF has had a huge impact on the DOC, and vice versa, which means that as one device becomes more sophisticated, the other device has to correspond to these changes.

(47)

Both IBIDEN HU and Aerosol & Particle Technology Laboratory refer to a trend in the technological development of DOC and DPF leading to a new generation of filters, which could incorporate the advantages, characteristics and former technologies in one unit, thereby combining the DOC and DPF on the same monolith substrate (for instance, Volkswagen has already introduced fourth generation after-treatment components to its Passat model, using just one DPF with no DOC). IBIDEN HU however indicated that it currently produces the ‘third generation’ (18) DPF and carries out continuous product improvement so that it can be converted into the ‘fourth generation’ DPF capable of fully incorporating the functionalities of the DOC.

(48)

IBIDEN HU also indicated that, although the Commission in the Decision to open the formal investigation procedure suggests the opposite, in reality the price of IBIDEN’s product is not four times more than the price of a DOC. IBIDEN HU manufactures a semi-finished product, and therefore the final product (coated DPF) is much more expensive than IBIDEN HU’s semi-finished product. The current industry experience shows that the market price of the device after the coating, canning and application of the mat is 2,5 times higher than that of the substrate, the product of IBIDEN Group: for example, in 2007 the market price of a DPF was EUR 453 and the price of the substrate (semi-finished product) was only EUR […], while the market price of a DOC was EUR 102 in 2007 (19).

(49)

Moreover, regarding the supply side substitution, IBIDEN HU indicates that the production technologies of DOC and DPF are very similar: the only main differences are that in the case of DPF a plugging process is added to that of DOC’s and the phase of cutting is earlier than in the case of DOC.

(50)

Furthermore, IBIDEN HU claims that according to several studies, including a document by Johnson Matthey Japan, there are manufacturers that produce both DOC and DPF, so the distinction between DOC manufacturers and DPF manufacturers is blurred.

(51)

Two of the four interested parties — Saint-Gobain and the party whose identity is withheld — supported the Commission’s doubts expressed in the Decision to open the formal investigation procedure. According to them, DOC and DPF cannot be considered as substitutes and thus they do not belong to the same relevant product market. Therefore, they argue that in the present case the DPF market alone is the relevant product market. According to these parties, the main reasons for this are the following:

(52)

The interested parties indicate that the main characteristics of the substrates for a DOC and a DPF are different: a DOC substrate is usually made from non porous cordierite which must resist 400 °C temperatures or from stainless metal foil. A DPF substrate is in general made of porous silicon carbide which must resist 1 000 °C (resistance to such high temperature is needed to burn-off soot and avoid blockage of the coated filter). Thus, due to very different thermal characteristics, customers cannot switch between substrates for DPF and substrates for DOC in case of relative price increase for one of the products.

(53)

According to Saint-Gobain, since the materials used for the substrates for DPF are higher performance materials, there is also a difference in prices between the two components: a substrate (without the cost of catalyst coating and canning) of a DPF on average costs EUR 120, while a substrate of a DOC on average costs between EUR 12-EUR 20 (also without the cost of catalyst coating and canning). Therefore, as Saint-Gobain claims, DPF manufacturers can obviously not switch to a DOC substrate for technical reasons (which they would otherwise do given the price difference) and a DOC producer would not substitute a DOC substrate with a DPF substrate as he/she would get a much more expensive product without an oxidation function comparable to a DOC substrate.

(54)

Saint-Gobain and the party with withheld identity also emphasize the differences in the use of a DOC and a DPF (20): the primary purpose of a DOC is to oxidise certain gases by way of chemical reaction, while the primary function of a DPF is to filter out soot by way of mechanical process. While, under certain circumstances, a DPF performs — as a collateral effect — some of the functionality of the DOC, the full oxidation effect cannot be achieved without the installation of both devices. Even the coated DPF that uses the substrate produced by IBIDEN HU does not have the full functionality of a DOC, since it only serves the purpose of providing sufficient temperature for the burning-off the soot, but it does not have the same purification effect as a full-function DOC. They indicate that, according to the expectations of many car manufacturers and automotive suppliers, a DOC and a DPF will remain separate devices installed next to each other in the gas exhaust line.

(55)

Further, Saint-Gobain and the party with withheld identity also indicate that the production process of the DOC and DPF substrates are very different: the non porous cordierite used for the DOC substrate is sintered in the air at 400 °C temperature. While silicon carbide, the material used for a DPF substrate (which is also the material of IBIDEN HU’s substrate), must be prepared at very high temperature (above 2 000 °C) in the oxygen free atmosphere. This difference of temperature alone is so vital that one of the most essential and costly production elements cannot be used to produce both types of product.

(56)

Further, a substrate for the DOC is always a single block honeycomb cylinder, the channels of which are not plugged. A substrate for the DPF is normally formed by gluing several filtering elements, and channels of the DPF are plugged. For the manufacture of DPF substrates a non-oxide high temperature sintering furnace, gluing and plugging equipment are needed, which are not necessary for the production of substrates for DOC. Thus, the interested parties argue that it is not possible to produce DPF on the DOC’s production lines or vice versa.

(57)

The Hungarian authorities support the view of Aerosol & Particle Technology Laboratory and IBIDEN Hungary Gyártó Kft. in relation to the relevant product, market, price, demand side and supply side specificities.

(58)

According to the Hungarian authorities, modern diesel emission control is based on the integration of different functionalities at system level. The close inter-dependency of all sub-units (such as DOC and DPF) in a diesel emission control system, has led to multi-player supply-chains, linking substrate, coating and exhaust system manufacturers, and the performance characteristics of each individual sub-unit create challenges to the entire supply-chain. Therefore the diesel emission control system or diesel after-treatment system should be defined as the relevant product.

(59)

They also argue that the product of IBIDEN HU is a multifunctional part fitted into the exhaust pipe system. The combination of this product and a DOC creates the third generation after-treatment device. Furthermore, the product of IBIDEN HU is a semi-finished product due to the fact that it will be coated at a further level. Without coating the product is not fully-functional and may not be classified as a finished product in terms of third-generation DPF. This is also supported by the fact that the final product is much more expensive than IBIDEN HU’s semi-finished product: currently the market price of the final device is 2,5 times higher than that of the filter produced by IBIDEN HU.

(60)

Further, the Hungarian authorities indicate that, in practice, DPFs are installed in most diesel-engine cars, and manufacturers that need a DOC also need a DPF. The demand creates a common market for the products, as the same manufacturers use the same methods, infrastructure and efforts to obtain the products. On the supply side, DOC and DPF manufacturers usually use the same manufacturing processes, production technology and materials. In terms of materials, both DOCs and DPFs use cordierite. In production they undergo the same processes, such as material preparation, mixture, tempering, and moulding, drying, finishing and firing. The only differences between the production process of the two products are an extra stage (plugging) and the rescheduling of another stage (cutting). Consequently, the same manufacturers will be involved with supply, and DOC and DPF compete with each other in the exhaust gas after-treatment market.

(61)

The Hungarian authorities emphasize that IBIDEN HU is able to produce substrates for particulate filters with the same equipment without any significant investment, as any manufacturer with the same production technology could. As the DPF is a form of developed DOC, the cost of the modification is not an initial investment in another product line, but an essential development of production assets.

(62)

In addition, the Hungarian authorities indicate that a clear trend can also be seen in the technological development of DOC and DPF, which is leading to a new generation of filters which could incorporate the advantages, characteristics and former technologies in one unit, thereby combining a DOC and a DPF. When defining the relevant market and calculating the market share, the DOC should also be taken into account as it constitutes a combined after-treatment device with a DPF, and together they ensure compliance with the regulations.

(63)

In view of the above arguments, the Hungarian authorities consider that the only supportable definition of the relevant market is the whole diesel after-treatment devices market, including both DPF and DOC. According to the study prepared by an independent market research company AVL, IBIDEN’s market share in the diesel after-treatment devices market remains below 25 % both before and after the investment, thus, fulfilling the condition in paragraph 24(a) of MSF 2002. Therefore, the Hungarian authorities consider that the Commission should terminate the Article 88(2) procedure by a positive decision.

(64)

In the Decision to initiate the formal investigation procedure, the Commission concluded that the financial support given by the Hungarian authorities to IBIDEN Hungary Gyártó Kft. on the basis of the existing regional aid schemes (HU 1/2003 ‘Earmarked Scheme for Investment Promotion’ and N 504/2004 ‘Development Tax Benefit’) in the form of a grant and a tax credit constitutes State aid within the meaning of Article 87(1) of the EC Treaty. The Hungarian authorities have not contested that conclusion.

(65)

By notifying the measure in 2006, the Hungarian authorities complied with the individual notification requirement of paragraph 24 of the MSF 2002.

(66)

In line with paragraph 63 and footnote 58 of the Guidelines on national regional aid for 2007-2013 (21), the Commission assessed the aid measure under the provisions of the Guidelines on national regional aid 1998 (hereafter: RAG) and the MSF 2002.

(67)

In the Decision to initiate the formal investigation procedure, the Commission indicated that the aid is granted in conformity with the existing regional aid schemes (22) and concluded that the standard compatibility criteria laid down in the RAG (such as compatibility criteria concerning initial investment in the region eligible for regional aid, eligible costs, own contribution, incentive effect, maintenance of the investment, cumulation) are respected.

(68)

Paragraph 49 of the MSF 2002 states that an investment project should not be artificially divided into sub-projects in order to escape the provisions of the framework. A ‘single investment project’ includes all the fixed investments on a production site in a period of three years (23). A production site is an economically indivisible series of fixed capital items fulfilling a precise technical function, linked by a physical or functional link, and which have clearly identified aims, such as the production of a defined product.

(69)

As IBIDEN HU already received regional aid in the past for the first phase of the investment project on the same location and as the notification refers to the second phase of the investment project, it is necessary to establish whether the two phases form part of the same single investment project.

(70)

In this regard the Commission observes that the two investment phases concern the same production site (the Dunavarsány Industrial Park, the region of Central Hungary), the same company (IBIDEN HU), the same product (ceramic substrates for Diesel Particulate Filters) and the start of works on each project were commenced within a period of three years (the first phase started in 2004, while the second phase started in 2005). Consequently, the Commission considers that the criteria of the definition of a ‘production site’ in paragraph 49 of the MSF 2002 are fulfilled and that the two phases of the investment form part of the same single investment project.

(71)

In addition, the Commission observes that the Hungarian authorities agree that the two phases of the investment by IBIDEN HU in the Dunavarsány Industrial Park have to be considered as a single investment project.

(72)

As the first and second phases of the investment are considered to form a single investment project, they both are taken into account to calculate the maximum aid intensity of the project.

(73)

Given that the planned eligible expenditure in present value is HUF 41 953 072 670 (EUR 168,30 million) and the applicable standard regional aid ceiling is 40 % (NGE), the adjusted maximum aid intensity in NGE resulting from the scaling down mechanism of paragraphs 21 and 22 of the MSF 2002 is 23,34 %.

(74)

Since the aid intensity for the project is 22,44 % NGE and thus is below the maximum aid intensity allowed under the scaling down mechanism (23,34 % NGE), the proposed intensity of the overall aid package complies with the adjusted regional aid ceiling.

(75)

Since the total aid amount of HUF 9 793 809 933 (EUR 39,29 million) in present value exceeds the individual notification threshold of EUR 30 million, the compliance of the notified aid with paragraph 24(a) and (b) of the MSF 2002 has to be assessed.

(76)

The Commission’s Decision to allow regional aid to large investment projects falling under paragraph 24 of the MSF 2002 depends on the market share of the beneficiary before and after the investment and on the capacity created by the investment. To carry out the relevant tests under paragraph 24(a) and (b) of the MSF 2002, the Commission has first to identify the product(s) concerned by the investment, and to define the relevant product and geographic markets.

(77)

According to paragraph 52 of the MSF 2002, ‘product concerned’ means the product envisaged by the investment project and, where appropriate, its substitutes considered to be such, either by the consumer (by reason of the product’s characteristics, prices and intended use) or by the producer (through flexibility of the production installations). When the project concerns an intermediate product and a significant part of the output is not sold on the market, the product concerned will be deemed to include the downstream products.

(78)

The notified project concerns the production of ‘ceramic substrates for diesel particulate filters (DPF)’. DPF is an automotive part, which is fitted into the exhaust gas treatment system of diesel engine vehicles and which cleans the exhaust gas generated by engine combustion (24).

(79)

The ceramic part, which is produced by IBIDEN HU, is an intermediate product. After having produced it in the factory (TIER 3), it is sold under market conditions through IBIDEN Deutschland GmbH (25) to independent companies (the main customers are […], […] and […]), which perform the precious metal coating of the substrate, and thus the DPF becomes a coated DPF (TIER 2). The coated DPFs are then sold to exhaust manifold producers (TIER 1), which are the direct suppliers of car assembly factories. The end users of ceramic substrates are diesel passenger cars and light duty trucks.

(80)

No other products for sale on the market or use by other IBIDEN Group’s plants will result from the investment project. The Hungarian authorities confirmed that no other products than those notified and assessed will be produced at the aided facility for five years after the end of the project/full production.

(81)

Following the above, the Commission will consider the ceramic substrate for DPF, which is installed in diesel passenger cars and light duty trucks as the product envisaged by the investment project.

(82)

The definition of the relevant product market requires the examination of what other products could be considered as substitutes to the product envisaged by the investment project within the meaning of paragraph 52 of the MSF 2002. In this regard and, having taken into account the comments from the interested parties and the Hungarian authorities, the Commission has looked which products could be considered as substitutes for DPF. The summary of this analysis is presented below.

(83)

Emission reduction is a complex area with many interactions between technologies, impact on fuel economy, driving performance, durability and costs. Emission reduction measures can be divided into two main areas:

(84)

The exhaust gas of diesel engines contains hazardous substances: significant amounts of particulate matter (‘PM’, such as soot and Soluble Organic Fraction (SOF) (26)), and hazardous gases (such as hydrocarbons (HC), carbon oxides (COx), nitrogen oxides (NOx)). These materials are treated by the exhaust gas treatment system installed in vehicles.

(85)

Accordingly, there are certain components within the system which clean hazardous substances. In general, these can be devices: (1) which clean the gas components and (2) which clean the particulate matter (including soot). The following two emission after-treatment devices, which are relevant for the present case, are used in diesel passenger cars and light duty trucks:

(86)

DPFs first appeared in series production in 2000 in the Peugeot 607 diesel car and have since become more and more widespread, witnessing a tremendous growth in the last 3-4 years. This growth is due partly to the tax incentives offered on diesel vehicles equipped with DPFs in several countries, partly to the more environmental conscious approach of the consumers, and also to the anticipation of tightening emission norms, notably, with regard to PM limits (in the EEA emission reduction is regulated by the ‘Euro’ emission standards). It is expected that before Euro 5 (27) comes into effect in 2009, an increasing share of diesel cars will already be equipped with DPF. This trend will ensure a further expanding market for DPFs in the coming years.

(87)

Different types of DPFs can be distinguished on the basis of the material of the filter (for instance, ceramic, cordierite or metal) and the filter regeneration strategy. Regeneration is necessary in order to eliminate (i.e. burn-off) the accumulated particles. In practice this is achieved either through an additive mixed with the fuel which lowers the oxidation temperature (the latter is known as an ‘uncoated DPF with fuel borne catalyst’) or through a precious metal coating covering the walls of the substrate which helps in the burn-off process (the latter is referred to as a ‘coated DPF’ or as an ‘impregnated catalysed DPF’).

(88)

Due to the precious metal coating, this type of coated DPF also treats, to a limited extent, HC and CO gases by way of a chemical oxidation process. IBIDEN HU’s product belongs to this category. It is a ceramic substrate which is subsequently coated at TIER 2, and then integrated into the exhaust manifold system at TIER 1.

(89)

In the Decision to open the formal investigation procedure, the Commission expressed several doubts, which have been summarised above, whether DOC and DPF can be considered as substitutes, which belong to the same relevant product market.

(90)

The Commission considers that the arguments put forward by the aid beneficiary IBIDEN HU, the interested party Aerosol & Particle Technology Laboratory and by the Hungarian authorities do not dispel the initial doubts of the Commission, which were confirmed by the comments of Saint-Gobain and the interested party whose identity is withheld. In particular the Commission observes the following:

(91)

The substrates of DPF and DOC do not belong to the same relevant product market as their product characteristics are different, as a consequence of which there is neither demand side nor supply side substitution between the two products.

(92)

From the demand side perspective, the Commission observes that there are significant differences in product characteristics, intended use and price between substrates for DPF and substrates for DOC:

(93)

Further, from the supply side perspective, there are differences in the production processes of the DOC and DPF substrates. Since the DPF substrate must have high temperature resistance, the material (mostly silicon carbide) must be prepared at very high temperatures and under oxygen free atmosphere. The cordierite which is predominantly used for the DOC substrate is sintered in the air and at relatively much lower temperature. Moreover, the substrate for DOC is a single block honeycomb cylinder whereas the DPF substrate is formed by gluing several filtering elements and the channels of the DPF are plugged, which is not the case for DOC. It follows then that the production of the DPF substrate necessitates a non oxide high temperature sintering furnace, gluing system and plugging machines and these equipments are not necessary for the production of the DOC substrate. It appears therefore that it is not possible to produce DPF and DOC substrate on the same production lines without significant additional costs.

(94)

As regards, the argument put forward by IBIDEN HU and the Hungarian authorities that there are manufacturers that produce both DOC and DPF and that the distinction between DOC manufacturers and DPF manufacturers is thus blurred, the Commission considers that it is not relevant whether the same manufacturer can produce or not both products. What is relevant is whether the same equipment can be used for the production of both substrates without significant additional costs. This was not demonstrated by the interested parties or the Hungarian authorities. Notably, no concrete evidence of DOC substrate producers, which would produce substrates for DPFs with the same equipment without major additional investment costs, or vice versa, was provided.

(95)

In view of the above-mentioned arguments, the Commission considers that although a DOC and a DPF belong, together with the other components (for instance, Lean NOx Trap, the purpose of which is to reduce the NOx in the exhaust gas) to a diesel passenger car’s or light duty truck’s after-treatment/diesel emission control system, the mere fact that they exist next to each other in the same exhaust line or influence each other’s development does not make them substitutes from the demand side and/or supply side viewpoint, as these are two separate components with different characteristics, prices and intended use. Moreover, as regards substitutability on the supply side, there are differences in the production processes of the DOC and DPF substrates, leading to the conclusion that there is no substitutability between DOC substrates and DPF substrates on the supply side.

(96)

On the basis of the above and for the purpose of this Decision, the Commission considers that the relevant product market covers only substrates for Diesel Particulate Filters to be fitted in the exhaust systems of diesel passenger cars and light duty trucks.

(97)

In the Decision to initiate the formal investigation procedure the Commission considered that the relevant geographical market should be EEA-wide due to the differences in emission regulation and fuel quality standards compared to third countries and the lower share of diesel vehicles in other major automotive markets (29). At present demand seems to be very low for after-treatment devices for diesel light duty vehicles in markets other than EEA. With the development of more advanced after-treatment devices for diesel vehicles, which will then be able to meet the requirements regarding exhaust-gas emission in some third countries, the market for after-treatment devices is expected to expand geographically only after 2008.

(98)

None of the interested parties or the Hungarian authorities have contested this conclusion. On the basis of the above and for the purpose of this decision, the Commission considers that the relevant geographical market for DPF is EEA-wide.

(99)

According to paragraph 24(a) of the MSF 2002, an individually notifiable investment project will not be eligible for investment aid if the aid beneficiary accounts for more than 25 % of the sales of the product concerned before the investment or will, after the investment, account for more than 25 %.

(100)

To examine whether the project is compatible with paragraph 24(a) of the MSF 2002, the market share of the aid beneficiary at group level before and after the investment has to be analysed. As the investment of IBIDEN HU started in 2004 and the full capacity production of 2,4 million units per year was expected to be achieved in 2007, the Commission examined the market shares in 2003 and 2008.

(101)

The Hungarian authorities confirmed that there are no joint-ventures and long-term marketing arrangements between IBIDEN and other companies in the ceramic division.

(102)

The Hungarian authorities have provided market data from the following sources: Frost & Sullivan Ltd. and AVL List GmbH. The market shares of IBIDEN Group on DPF market before the start and after completion of the project in volume terms for Europe are given in Table III below.

Table III

Market share of IBIDEN at group level in Europe

(103)

The studies submitted by the Hungarian authorities demonstrate that the market share of IBIDEN at Group level in the DPF market both before and after the investment amounts to […] % — […] % in Europe in volume terms (31) and therefore substantially exceeds the 25 % threshold (32). Thus the condition in paragraph 24(a) of the MSF 2002 is not respected.

(104)

Paragraph 24 of the MSF 2002 provides that individually notifiable projects will not be eligible for investment aid if one of the conditions stipulated in paragraph 24 is not fulfilled. Although, as indicated above, the condition in paragraph 24(a) of the MSF 2002 is not respected, the Commission has also examined whether the investment project complies with another condition stipulated in paragraph 24(b) of the MSF 2002. According to paragraph 24(b) of the MSF 2002, the individually notifiable investment project will not be eligible for investment aid if the capacity created by the project is more than 5 % of the size of the market measured using apparent consumption data of the product concerned, unless the average annual growth rate of its apparent consumption over the last five years is above the average annual growth rate of the European Economic Areas’s GDP over the same period.

(105)

In this context the Commission observes that, as shown in Table IV below, the average annual growth of the apparent consumption (measured as total sales) in Europe of DPF over the last five years is substantially above the average annual growth rate of the EEA’s GDP (33).

Table IV

Growing market test

(106)

Consequently, the Commission concludes that the aid under scrutiny is in conformity with paragraph 24(b) of the MSF 2002, however, as shown above, the aid is not in conformity with paragraph 24(a) of the MSF 2002.

(107)

In accordance with the rules on regional aid, aid amounting to HUF 7 411 828 735 (EUR 29,73 million) in present value (HUF 11 745 422 640 or EUR 47,12 million in nominal value) had already been granted to IBIDEN HU on the basis of the existing regional aid schemes (34) up to the individual notification threshold established in paragraph 24 of the MSF 2002. The aid amount, which is subject to the present notification, is the difference between the total amount of aid and the support already granted, i.e. HUF 2 381 981 198 (EUR 9,56 million) in present value (in nominal value this amount is HUF 3 845 801 110 or EUR 15,43 million).

(108)

Paragraph 24 of the MSF 2002 provides that individually notifiable projects will not be eligible for investment aid if one of the conditions stipulated in paragraph 24 is not fulfilled. As demonstrated above, the aid under the scrutiny does not comply with paragraph 24(a) of the MSF 2002 because the market share of IBIDEN at group level in the DPF market in Europe both before and after the investment substantially exceeds the 25 % threshold.

(109)

The high market share of IBIDEN reflects the prevailing position of the company in the DPF market. According to the study by Frost & Sullivan Ltd (F&S) (35) and comments provided by the interested parties, IBIDEN enjoys an outstanding position in the European market for DPF, as it is one of the two major filter substrate manufacturers in the world (the other main manufacturer being NGK). The Commission observes that the DPF market in Europe has experienced tremendous growth over the last years, as all vehicle manufacturers adopt the technology to meet the Euro emission limits. It is a highly profitable market the future strong development of which also seems to be secured. The aid subject to the notification would even more strengthen the leading position of IBIDEN in this market, making it more difficult for new entrants to consolidate their position in this market. The aid subject to the notification is thus susceptible to create substantial distortion of competition.

(110)

On the basis of the foregoing considerations, the Commission concludes that the aid subject to the notification is not compatible with the common market. As the aid of HUF 2 381 981 198 (EUR 9,56 million) in present value (in nominal value this amount is HUF 3 845 801 110 or EUR 15,43 million) has not been granted, there is no need for its recovery,