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C 266/6 EN Official Journal of the European Communities 25.8.


CØ76/97 (ex NNØ115/97)

(98/C 266/05)

(Text with EEA relevance)

(Articles 92 to 94 of the Treaty establishing the European Community)

Commission notice pursuant to Article 93(2) of the EC Treaty to other Member States and
interested parties concerning aid for Daewoo Electronics Manufacturing Espaýa SA (Demesa)

By the letter reproduced below, the Commission Demesa might benefit, in order to examine their
informed the Spanish Government of its decision to cumulative effect with the abovementioned fiscal
extend the Article 93(2) procedure. credit;

—ÙDemesa’s free-of-charge use of a 500Ø000Ùm2 plot in
‘1. PROCEDURAL ASPECTS the Jundiz industrial estate since 1996 as well as a
possible sale price for the land not being in line with
In June 1996, the Commission received a complaint from market prices.
ANFEL, the Spanish federation of manufacturers of
household appliances. The complaint mentioned the In the same letter, the Commission also decided to
establishment by the Korean conglomerate Daewoo of a enjoin the Spanish Government to provide information
plant for the production of refrigerators in the Basque enabling an assessment of:
Country (Spain) which, according to the complainant,
was receiving subsidies and fiscal incentives which went
beyond the aid ceiling permitted for regional aid in the —Ùthe non-refundable grant amounting to ESP 2Ø958,9
area. The Commission received further complaints from million covering 25Ø% of the tangible investment in
[.Ø.Ø.], a competitor of Demesa; CECED, the European fixed assets (ESP 11Ø510,9 million) and the start-up
Committee of Manufacturers of Domestic Equipment expenses entered in the books as depreciable expenses
and ANIE, the Italian Federation of Manufacturers of (ESP 324,8 million), granted to Demesa respected all
Household Appliances (through the Italian Permanent the conditions laid down in the regional aid scheme
Representation). EkimenØ(Ð);

—Ùthe investment costs provided by the Spanish
By letter dated 21 October 1997, the Commission Government (ESP 11Ø835,7 million) corresponded to
informed your Government that the case had been the real amounts invested by Daewoo (the
registered as non-notified aid, pursuant to Article 93(3) complainants alleged that the real cost of the plant
of the EC Treaty. It also pointed out that the would not be higher than ESP 5Ø785 million)Ø(Ñ).
information received from your Government was
considered unsatisfactory.

On 16 December 1997, the Commission decided to open
the Article 93(2) procedure in relation to: The beneficiary of the measures is the firm Daewoo
Electronics Manufacturing Espaýa SA (Demesa), a
—Ùthe fiscal credit applied as a 45Ø% reduction of the 100Ø% subsidiary of Daewoo Electronics Co., Ltd, one
final quota to be paid in corporate taxØ(Î) and other of the Daewoo Group’s companies. The firm was created
fiscal measures also granted in the framework of the in November 1996 and is established in the Jundiz
fiscal regime of the Province of @lavaØ(Ï) from which industrial estate, where its production plant has been
(Î)ÙSixth Supplementing Provision to Norma Foral 22/1994 of
20 December on the implementation of the budget of the
Province of @lava for 1995, as extended by Norma Foral
33/1995 of 20 December (Fifth Supplementing Provision), (Ð)ÙApproved by the Commission on 13 December 1996 and
Norma Foral 24/1996 of 5 July (Derogatory Provision, allowing an aid intensity of 25Ø% gross.
point 2.11) and Norma Foral 31/1996 of 18 December (Ñ)ÙThe complainants have provided DG IV with a report in this
(Seventh Supplementing Provision). sense drafted by a company specialised in building this kind
(Ï)ÙNorma Foral 24/1996 of 5 July on the corporate tax. of plant.
25.8.98 EN Official Journal of the European Communities C 266/7

Daewoo Electronics Co., Ltd was created in 1971. It 3.3. Financing of the plan
manufactures consumer electronic products and domestic
appliances for both the Korean and foreign markets. Its According to the plan, the financing of the project would
sales in 1995 totalled USD 4Ø061 million worldwide. be done through different means and, in particular,
through a non-refundable grant of up to 25Ø% of the
tangible investment in fixed assets, broken down as

Total investment Subsidy
3.1. The Collaboration Agreement
Land 474,4 118,6

A ‘‘Collaboration Agreement’’ was concluded on 13 Buildings 2Ø000ØÙ 500ØÙ
March 1996 between the Basque regional authorities and
Daewoo Electronics Co., Ltd. The Agreement stated the
intention of Daewoo to establish a refrigerator manufac- Production equipment 7Ø396,1 1Ø849ØÙ
turing plant in the Basque country and the Basque
regional authorities stated their commitment to Moulds 1Ø603,5 400,9
collaborate in this investment by providing certain grants.
Office equipment 36,9 9,2

Daewoo would create a company with its seat in the
Tangible assets 11Ø510,9 2Ø877,7
Basque country (Demesa), whose purpose would be to
sell consumer electronics and electrical products. The
company would then establish a business plan which
would be presented to the regional authorities for its (in million ESP)
Total investment Subsidy

Part 3 of the Agreement made reference to the grants Expenses prior to start-up 104,9 26,3
and other facilities that the project could receive from
the regional authorities. Demesa would be able to Monitoring 24,9 6,2
benefit, amongst others, from a non-refundable grant of
up to 25Ø% (which is the limit applicable to regional aid
Training 162,7 40,6
in the Basque country) of the tangible investments in
fixed assets to be made in accordance with the project,
and of the start-up expenses entered in the books of the Technical information 32,3 8,1
company as depreciable expenses. This grant was to be
awarded in the framework of the Ekimen aid scheme. Depreciable expenses 324,8 81,2

3.2. The business plan According to the information presented, the total subsidy
amounted to ESP 2Ø958,9 million, and was to be paid
over the period of four years:
Demesa concluded the business plan in September 1996
and then presented it to the Basque regional authorities. —ÙESP 30,5 million in 1996,
The plan, which covers the period 1996 to 2001, refers
to the establishment of a plant in the Basque country for —ÙESP 1Ø557,6 million in 1997,
the manufacturing of refrigerators.
—ÙESP 759,9 million in 1998,

—ÙESP 610,9 million in 1999.
The foreseen investment is, according to the plan, of
ESP 11Ø835,7 million, with the creation of 745 jobs.
Sales were foreseen to begin in 1997, aimed mainly at Amongst the conditions imposed by the scheme, to be
the domestic (Spanish) market, as well as France and eligible the project has to be implemented within a
Italy. As of 1998, sales would extend to the UK, period of three years from the date of granting of the
Germany and the rest of Europe. At the outset, the aid. The information provided by your Government
majority of the turnover would come from domestic mentioned that Demesa’s plan covered the period 1996
sales, but exports would increase in importance each to 2001, i.e. six years. The financial forecasts provided
year, reaching over 60Ø% of the total in three to four also mentioned the payment of the subsidy over the
years. period 1997 to 2001. Nevertheless, the Basque regional
C 266/8 EN Official Journal of the European Communities 25.8.98

authorities explain in a convincing way that the subsidies 5 million per job created (except in the case of strategic
cover the period 1996 to 1999 and that the payment will projects) and a maximum of ESP 4Ø000 million per
be made over a period of three years (although given the project.
date of signature of the contract, 24 December 1996, it
will be split in four budgetary allocations). The
Commission considers that the explanation given by the The non-refundable grants are given according to the
Basque regional authorities regarding this point is satis- following percentages, depending on the type of project.
factory. The total aid granted cannot go, in any case, beyond the
25Ø% (35Ø% for SMEs) limit for regional aid in the
Basque country:
The non-refundable grant covering 25Ø% of the tangible
investment in fixed assets was allegedly granted on 24 —Ù10Ø% as the general rule,
December 1996 within the framework of Ekimen, a
regional aid scheme approved by the Commission by —Ùan extra 5Ø% for those projects considered strategic
letter SG(96) D/11028 of 13 December 1996Ø(Ò). (i.e. those that consist of an investment of at least
ESP 10Ø000 million or that create 300 jobs within
three years),
The scheme covers the period 1996 to 1998. Its purposes
are regional development and the creation of jobs. The —Ùan extra 5Ø% for those projects with a significant job
aid takes the form of a non-refundable grant or a soft creation (i.e. those that invest ESP 750 million and
loanØ(Ó). It covers the creation of new establishments or create 50 jobs),
the extension or modernisation of existing ones.
—Ùan extra 5Ø% for those projects located within a pref-
erential interest area (listed in Annex I of Decree
The beneficiaries are industrial companies, or those 289/1996)Ø(Õ),
active in extractive activities or that provide services for
the latter. They also have to comply with the following
conditions: —ÙAlternatively, there may be a 5Ø% complementary
increase based on the following criteria:

—Ùthe investment project has to be technically, econ- —Ùthe project’s integration in the Basque industrial
omically and financially viable; sector,

—Ùthe project’s effects in a strategic sector for the
—Ùit has to be implemented within a period of three Basque country,
years from the date of concession of the aid;
—Ùthe project’s significant job creation.
—Ùthe investment has to be over ESP 360 million;

—Ùit must entail the creation of a minimum of 30 jobs;
The Commission must examine first whether the
non-refundable grant given to Demesa in the framework
—Ùa minimum of 30Ø% of the investment has to be of Ekimen is covered by the general scheme and satisfies
financed by the beneficiary’s own resources. the conditions laid down in the decision approving it.
From the outset, the Commission had serious doubts
regarding the respect of the conditions laid down in the
The eligible costs include land, buildings and plant, with scheme. Therefore, according to the case law of the
a maximum of 25Ø% net grant equivalentØ(Ô) (35Ø% for Court of JusticeØ(Ö), the Commission enjoined your
SMEs). Within the 25Ø% limit, other expenses may be Government on 16 December 1997 to supply all the
eligible. However, aid may not go beyond a limit of ESP information necessary in order to examine this question.
This information was provided by your Government by
letter dated 23 January 1998.
(Ò)ÙState aid NØ529/96. The Decree of the Basque regional
government establishing the scheme (Decree No 289/1996
of 17 December), was published in the Official Journal of the
Basque Country on 23.12.1996.
(Ó)ÙThe interest rate applied can be two and five points lower (Õ)ÙThe areas included are in industrial decline, included in
than the nominal interest rate. objective 5b (structural funds) or some where fishing has a
(Ô)ÙThe maximum limit for regional aid in the Basque country, special incidence. Vitoria is not included in the list.
according to the present Spanish map for regional aid (OJ (Ö)ÙCases C-47/91 Italy v. Commission [1994] ECR I-4635 and
C 25, 31.1.1996, p. 3). C-278/95 P Siemens SA v. Commission [1997] ECR I-2507.
25.8.98 EN Official Journal of the European Communities C 266/9

On the basis of the information currently available to the have stated that the sector suffers from excess
Commission, serious doubts remain about the conditions production capacity and is a mature market
under which the scheme has been implemented in this where 95Ø% of the sales are based on
case: replacements. In the last two years, the size of the
European market has diminished by 5Ø%, which
is a very significant figure for a mature industry.
In 1996, an important part of the investments of
—ÙThe aid intensity in Ekimen is calculated according the European companies were done outside the
to the location of the beneficiary company and the EU, in particular, in regions with lower labour
type of project envisaged. To the general 10Ø% which costs.
any eligible company receives, an extra 5Ø% is
granted to those projects considered strategic.
The CECED and ANFEL declared that the
refrigerators/freezers line is undergoing an
In relation to the strategic consideration of the increasing production over-capacity, which is
investment, the Basque authorities refer to the more than 4 million units in the European Union
economic theory of clusters as the basis of their and the European factories have a potential
industrial policy whose aim is to improve the unused production capacity which varies from 15
competitiveness of their industry. This theory refers to 45Ø%. Consequently, it is difficult to
to the hypothesis that in order to improve the inno- understand that an investment in such a sector be
vation and competitiveness levels within a given considered as strategic,
cluster/sector (the household appliances industry and
its part suppliers constitute a cluster), a new, strong
and external competitor has to be introduced into it.
The Basque authorities consider that a new —Ùaccording to Demesa’s business plan, the demand
enterprise, such as Daewoo, will force the existing of refrigerators/freezers products in Spain has
Basque industry in this sector to be more efficient. decreased since 1994 and the imports have
The justification of such a radical treatment is that increased so that the internal production has been
companies in this sector are mainly cooperatives reduced. In relation to the Basque country, the
which do not compete among themselves and are not domestic appliances sector is one of the most
very dynamic. significant ones and, considering both the manu-
facturers and the supplier industries, it reaches up
to 6Ø% GDP of the region. The participation of
the Basque industries in the Spanish domestic
The Commission cannot accept these arguments for appliances market reached 29Ø% in 1994.
the following reasons:

The Fagor group, located in the Basque country,
—Ùthe Commission has no information that the is the leader in the Spanish domestic appliances
mechanisms for eligible cost control set out in the sector (with a market share of 24Ø%) and it has a
Ekimen aid scheme have been implemented with significant and consolidated position in the
respect of the Demesa investment project. In European Union. The Basque authorities have
addition, the Commission has not received from always referred to FAGOR as a model for other
your authorities any independent audit detailing companies not only in the region but also in the
the effective investment costs of such project. On rest of Spain and in Europe.
the other hand, the complainants have provided
an estimate from an Italian firm generally
recognised as the main constructor of this kind of Moreover, the arguments given by the Basque
plant in Europe, stating that the real cost of the authorities are contradictory with Demesa’s
investment cannot be higher than ESP 5Ø785 business plan which outlines the following strong
million. This estimate would include, amongst points of the Basque domestic appliances
others, land, construction, machinery, equipment, industry:
technical facilities and other facilities,

1.Ùthe adequate competitive position of the
—Ùthe consideration of any investment as strategic in Basque companies as to the modernisation of
a mature market is doubtfulØ(ÎÍ). Both the Spanish the production,
and the European Committees of Manufacturers
of Domestic Equipment (CECED and ANFEL)
2.Ùthe predominant position of the Basque
(ÎÍ)ÙSuch as it has been recognised by Daewoo itself in industry in the Spanish market (with the
Demesa’s business plan. leadership of the Fagor group),
C 266/10 EN Official Journal of the European Communities 25.8.98

3.Ùthe response capacity when facing new market job creation of this investment is doubtful if, as the
conditions (development of new activities and complainants (especially those also established in the
conquest of new emergent markets), Basque country) stated, other European, and
particularly Basque, producers would have to reduce
significantly their workforce.
4.Ùthe important role given to R@D,

5.Ùand, finally, the existence of a domestic —Ùas to the extra 5Ø% (which totals the limit of 25Ø%
appliances cluster characterised by the inten- regional aid permitted) destined to those projects
sification of the links among the different located within a preferential interest area, Vitoria
manufacturers, which guarantees the competi- (where Demesa is located) is not included in this
tiveness of the companies in this sector. area,

On the basis of the above, the Commission raises the —Ùin their letter dated 23 January 1998, the Basque
following points: authorities refer to a discretional 5Ø% foreseen in the
Ekimen when there are both an important strategic
component of the project and a significant number of
1.Ùonce more, it has to express reservation about the jobs created, so that they could decide to grant 25Ø%.
strategic condition of this investment for the As indicated above, the Commission has reservations
Basque industry which will more likely suffer its regarding the strategic consideration of the project,
consequences, as well as the effective job creation of this investment.

2.Ùthe assertion by the Basque authorities that it is
particularly necessary to increase the competi- Consequently, in relation to the total aid intensity which
tiveness of the Basque domestic appliances cluster has been granted to Demesa under the Ekimen, the
with the entry in the market of Demesa is not Commission can at this stage accept that only a
supported by the facts which show that the Basque non-refundable grant amounting to 10Ø% of the tangible
domestic appliances sector has a strong position investment in fixed assets and the start-up expenses
within the EU, respect the terms and the conditions of the scheme. The
information so far provided by your authorities have not
allowed the Commission’s doubts to be overcome as to
3.Ùmoreover, the Commission has to underline that the compliance of the Demesa project with the
until now the Spanish authorities have not given conditions laid down in the Ekimen, as regard the
any indication of the impact of the investment for application of the different aid bonuses.
the Basque, Spanish and European industry.

The Commission also enjoined your authorities to
4.Ùconsequently, the Commission considers that the provide information on the effective investment costs
justification of the strategic character of the which, according to the complainants, had been over-
investment given by the Basque authorities is valued. Were this to be the case, the company would
contradictory and unsatisfactory and that in view actually be receiving aid covering 51,14Ø% of the
of the situation of the sector, only regional and investment.
other kinds of incentives (which have been the
object of the opening of the Article 93(2)
procedure by letter dated 16 December 1997) may
have convinced Daewoo to carry out such an In their letter of 23 January 1998, the Basque authorities
investment, reply that the subsidies will be paid following presen-
tation of invoices and state that an external audit carried
out by an independent consultant to check the equiv-
—Ùaccording to Demesa’s business plan, the Vitoria alence between data provided by the company and
plant will reach a production of 600Ø000 annual units Daewoo’s real expenses is at the Commission’s disposal.
in 2001. 63,3Ø% of the production will be exported to
other EU markets. These new units would have a
clear impact on a market where excess of production The Commission would like to point out the following
capacity is calculated at 5 million units per year. aspects:

—ÙTherefore, the Commission also has serious doubts —Ùit is obvious that the payment of the subsidies under
about the significant job creation of the project presentation of invoices is not necessarily a sufficient
which may increase the aid intensity in another 5Ø% guarantee that the expenses have not been over-
in accordance with the Ekimen scheme. The effective valued,
25.8.98 EN Official Journal of the European Communities C 266/11

—Ùboth the Collaboration Agreement and the regional Therefore, the Commission hereby informs the Spanish
aid scheme Ekimen refer to the Department of Government that it has decided to extend the current
Industry, Agriculture and Fisheries, as the body in Article 93(2) procedure concerning this new individual
charge of the control and follow-up of the projects aid, in order to assess its compatibility with the Treaty.
under the scheme. The Commission would like to be In this respect, the Commission has doubts regarding the
informed of this body’s conclusions about the costs compatibility of the aid because, for the reasons
alleged by Daewoo, previously outlined, the strategic nature of the
investment and the net employment creation have not
been demonstrated.
—Ùif the audit is already available, the Commission does
not understand the reason why the Spanish auth-
orities have not submitted it to the Commission. In addition, both the Cooperation Agreement signed
Moreover, recent press releasesØ(ÎÎ) allege that only between Daewoo and the Basque regional authorities,
now the Basque Government (in the Basque and the complainants recognise that the sector suffers
Parliament) is asking for such an audit. from excess of supply in Europe. It should be also
recalled that in this sector 95Ø% of the sales are based on
replacements. The difficult situation of the sector is
confirmed by the fact that many producers are restruc-
On the basis of the unsatisfactory information provided,
turing their activities by closing down several plants. Aid
the Commission is so far not able to conclude that the
given to Demesa is therefore likely to include a further
figures on the effective investment costs submitted by the
job reduction in its competitor’s plants in Spain and in
beneficiary of the aid correspond to a normal investment
the rest of the Community.
in the sector.

The Commission approved the regional aid scheme
EkimenØ(ÎÏ) considering that it favoured the regional
5. CONCLUSION development without affecting adversely trading
conditions to an extent contrary to the common interest.
However, as already said, in the present case it appears
The information provided by your authorities have not that the conditions laid down in the regime in question
served to remove the serious doubts expressed in the have not been completely fulfilled. Therefore, due to the
Commission’s decision of 16 December 1997 as regards difficult situation of the sector, the demonstration that
aid to Demesa will not adversely affect trading
conditions to an extent contrary to the common interest
—Ùthe effective respect of the conditions laid down in has still to be made by your authorities.
the Ekimen aid scheme to award the non-refundable
grant reaching 25Ø% (the maximum aid intensity
allowed for the Basque country) of the tangibile As part of the procedure, your authorities are hereby
investment in fixed assets, and of the start-up invited to present, within one month of this letter, their
expenses entered in the books as depreciable comments as well as any other information they might
expenses. consider relevant for the assessment of the case.

—Ùthe correlation between the investment costs provided The Commission would draw your attention to the
by the Spanish Government and the real amounts communication published in the Official Journal of the
invested by Daewoo. European Communities C 318 of 24 November 1983 and
to the letters sent to all Member States on 4 March 1991
and 22 February 1995, in which it was stipulated that
Accordingly, the Commission, due to the serious doubts any aid granted unlawfully may have to be recovered
which remain, informs your Authorities that it considers from the recipient firm in accordance with the
the aid received by Demesa – regarding the part not procedures laid down by the national law, including
covered by the general rule allowing an aid intensity of interest calculated at the reference rate used for regional
10Ø% of the effective eligible costs as a new individual aid and with effect from the date on which aid was
aid not covered by the approved regime, since it appears granted.
that the conditions laid down in the regime in question
have not been completely fulfilled.
The Commission hereby requests that your Government
inform the affected company without delay of the

(ÎÎ)ÙEl Diario Vasco of 22 February 1997 and El Paòs of
27 February 1998. (ÎÏ)ÙSee footnote No 3.
C 266/12 EN Official Journal of the European Communities 25.8.98

initiation of the procedure and of the fact that it might European Commission,
have to repay any aid improperly received. Directorate General for Competition (DGØIV),
State Aid Directorate,
The Commission also informs your Government that it Rue de la Loi/Wetstraat 200,
will publish the present letter in the Official Journal of the B-1049 Brussels,
European Communities giving the other Member States Fax No (32-2) 296Ø98Ø13.’
and other interested parties notice to submit their
comments. Please note that third parties demonstrating
sufficient interest can obtain a copy of this letter. You The Commission hereby gives the other Member States
are therefore invited to inform the Commission, within and interested parties notice to submit their comments on
seven days following the notification of this letter, the measures in question within one month of the date of
whether you consider that it contains any significant publication of this notice to:
market sensitive information which you would wish to be European Commission,
deleted before publication. You should state clearly the Rue de la Loi/Wetstraat 200,
specific reasons in each case. If the Commission does not B-1049 Brussels.
receive a reasoned request within the stipulated period, it
will consider that you agree to the publication of the full
text of this letter. Your request should be sent by The comments will be communicated to the Spanish
registered letter or fax to: Government.