The predecessor of FSO had been in business in Poland since the 1950s and was one of the two largest Polish car manufacturers. A joint venture agreement was concluded in 1996 between Daewoo Motor Corporation Ltd (‘DMC’) and the former Ministry of Industry and Trade. Daewoo acquired 70 % of the newly created entity DAEWOO-FSO MOTOR S.A. About 25 % of the company was owned by the State Treasury and the rest by minority shareholders. Since then the company name has been Fabryka Samochodów Osobowych (‘FSO’).

Some parts (notably the brand name and some Asian production plants) of the bankrupt DMC, but not FSO, were acquired by General Motors and harboured in a new subsidiary called GM DAT, which stands for General Motors Daewoo Auto & Technology.

FSO had been looking for a strategic investor since its difficulties began. In February 2004, it contacted the 29 biggest motor vehicle companies and sent them a memorandum presenting itself as an attractive investment opportunity. [Some companies] AvtoZAZ, […], [expressed] interest in principle in investing in FSO. AvtoZAZ, FSO’s key customer, expressed concrete interest in broadening cooperation with FSO. The Polish government started exclusive negotiations with AvtoZAZ for the sale of FSO.

On 25 June 2004 a Letter of Intent was signed between the State Treasury, AvtoZAZ and FSO. By resolution of 9 November 2004, the Council of Ministers approved the sale of FSO shares owned by the State Treasury. FSO and the State Treasury agreed to appoint KPMG as an independent consultant to appraise the market value of the company. The cost method (the book value of the Company’s assets and liabilities, with correction when necessary) and the liquidation method (the market value of forced FSO assets sales, less liabilities) were applied. In both cases the value of the FSO shares was negative. At the same time, the State Treasury selected a second independent consultant (PriceWaterhouseCoopers) to carry out its own appraisal. It confirmed the first valuation.

In the meantime, AvtoZAZ purchased (at a discount) 100 % of the remaining claims against FSO, with a nominal value of nearly […], of […] banks which were creditors of FSO.

In 1999, 640 000 new vehicles were sold in Poland and FSO’s market share was 28 %, making it the number one car manufacturer in Poland at the time. In 2003 the number of cars sold in Poland fell to 358 000 and FSO’s market share fell to 2,2 % (less than 8 000 cars sold). In 2004, FSO sold only 3 500 cars in Poland. The main competitors of FSO in Poland (and in Europe) are Fiat, Skoda, Renault, Toyota, Opel, Peugeot, Ford, Volkswagen and Citroen. On the Polish market, the share of imported vehicle sales rose from 25 % in 1998 to 75 % in 2003.

Production capacity in the European Union as a whole in 2004 (25 Member States) was 20,8 million cars, whereas production volume was only 14,5 million cars. With a production capacity utilisation rate of 70 %, the industry is therefore clearly suffering from a major excess of production capacity. While FSO’s 1999 sales level would have corresponded to an EU market share of over 1 %, FSO’s production in 2004 represented a market share below 0,5 %.

Since 2003, most of FSO’s production has been purchased by AvtoZAZ and sold on the Ukrainian market. New car sales in Ukraine have increased rapidly in recent years. From 2001 to 2005 they rose from 65 000 to 265 000. On the Ukrainian market the Daewoo cars produced by FSO face competition from the following brands: VAZ (Lada), ZAZ, Chevrolet and the other Daewoo models not produced by FSO. Skoda, Opel, Toyota, Mitsubishi, Nissan, Renault and VW are present on this market but have more limited market shares.

FSO also plans to export a part of its production to […]. Car sales in […] were around 1,6 million units in 2005. The domestic brands hold a 72,5 % market share and imported cars account for 27,5 % of sales. However, the low quality and outdated design of […] brand cars is leading to a steady increase in imports. Furthermore, foreign car manufacturers are building facilities in […]. Some 40 % of Western motor vehicle companies have already established factories in the area and a further 16 % are planning to do so.

• extending the right to manufacture the Matiz and Lanos models up to the end of 2006 (licence agreement signed with GM DAT in April 2004),

• entrance of AvtoZAZ as a strategic investor before the end of the first quarter of 2005 (originally end of 2004),

• production of a modified Lanos model from 2005 onwards (originally not mentioned),

• development of new own models and production start-up from 2007 (originally 2005/2006).

In subsequent letters the Polish authorities informed the Commission of delays in implementation of the initial restructuring plan and said that the intermediate sales objectives had not been achieved.

In 2005, the restructuring plan was modified in the sense that FSO no longer planned to develop its own new models but rather to produce an existing model of a major car manufacturer, called ‘the licensor’, as opposed to ‘the investor’, AvtoZAZ. All the components for their production would thus already be available and the investment expenditure would be limited to the technological adjustments to the existing FSO production lines, in order to allow production of the new model. To implement the new plan, FSO needed to attract a licensor.

The Commission observes that this modification of the restructuring plan — attracting a licensor in addition to the investor — became necessary as FSO failed to attract as an investor a major car manufacturer with which FSO could have developed a new model, as provided for in the initial restructuring plan. The investor — AvtoZAZ — has not developed models of its own which are competitive on the EU market.

After being modified in response to negotiations with the investor, the restructuring plan was again modified in response to negotiations with potential licensors.

In the November 2005 version of the restructuring plan, the Polish authorities indicated that a new FSO subsidiary, […], would be created.

In […] 2006, FSO and its shareholder UkrAvto signed a Memorandum of Understanding with GM DAT for the production of a new model at FSO.

In […] 2006, FSO and UkrAvto concluded a […] agreement with GM DAT for the production and […] of the […] model (Chevrolet Aveo). GM was looking for new production capacity for this model in […]. Under the terms of the contract, FSO can manufacture and assemble this model until […]. It can continue to sell in […] until […].

At the same time, FSO signed an agreement with GM DAT extending the existing licence agreement for the production of the Daewoo Lanos […]. Under the new agreement, FSO can produce this model until […] and sell it until […]. As sales of Lanos […] increased in 2005 and 2006, FSO intends to produce this old model in significant quantities until the production of the […] starts at the end of […].

In their recent submissions of information, the Polish authorities have indicated that FSO, contrary to what had been announced previously, plans to sell [from 130 000 to 170 000] cars over the long term, in particular after 2008. Part of this production would be sold in […] and most of the rest in […].

[…]

In its decision to launch the formal investigation procedure, the Commission concluded that several measures constituting restructuring aid had already been granted before accession in the last quarter of 2003 and in the first four months of 2004. These measures are therefore not covered by this investigation procedure, which concerns only the aid measures that were to be granted after accession. However, the aid granted before accession has to be taken into account in the compatibility assessment, in particular when assessing restriction of the aid to the minimum necessary.

The notified aid measures amount to USD 83 million (EUR 66 million) and PLN 62 million (EUR 16 million). At the exchange rate of 20 October 2006, the total aid measures therefore amount to EUR 82 million or PLN 318 million.

A large proportion of the aid measures are in the form of a write-off or deferral of the State’s existing claims on FSO. Since, to the Commission’s knowledge, FSO has not paid these claims, the company has already benefited from the suspension of payment of its liabilities. As a result, these measures can be deemed to have already been partially implemented.

The Commission concluded firstly that given the losses and the decline in sales which FSO had suffered in the previous years, it qualified as a firm in difficulty under section 2.1 of the guidelines.

Regarding restoration of viability, the Commission expressed doubts about certain aspects of the plan. One element of these doubts concerned the lack of clarity about the planned level of production. The Commission also remarked that it did not have at its disposal the updated restructuring plan, which, according to the Polish authorities, had been negotiated with the investor. Importantly, the Commission also stated that it had not received a market survey from the Polish authorities. It indicated that the survey would have to include an assessment of total production capacity and demand at Community level, and a conclusion as to whether there was excess capacity on the market.

Regarding the avoidance of undue distortion of competition, the Commission indicated that it could not take a final position because, firstly, the Polish authorities had not provided information on whether there was overcapacity on the market on which FSO operated. Secondly, Poland had not indicated whether FSO and/or the investor were planning any measures that could be considered compensatory measures, beyond the capacity reduction already included in the restructuring plan as a measure necessary to achieve viability.

Regarding the limitation of aid to the strict minimum necessary, the Commission requested more details on the measures considered to be own contributions and details about restructuring costs. The Commission also expressed doubts about whether the aid was limited to the minimum necessary because the conditionality of some of the aid measures seemed to indicate that they were not absolutely necessary.

Finally, the Commission noted that the agreement on debt restructuring concluded with public creditors on 22 September 2003 might contain aid granted before accession. Even if the compatibility of this potential aid cannot be assessed and it cannot be recovered, it must nevertheless be taken into account in the assessment of the new aid.

The Polish authorities do not contest that the measures listed in Table 4 constitute State aid, as concluded in the opening decision.

Besides the measures listed in Table 4, in the decision to open the procedure the Commission expressed doubts that the agreement with public creditors of 22 September 2003 on debt restructuring could contain aid granted before accession. Indeed, the Commission noted that the financial institutions accepted a partial write-off of their claims against FSO only on the condition that the depreciation resulting from this waiver was accepted by the Polish tax authority as a cost reducing taxable income. The Commission therefore indicated that the State may have granted a more substantial concession than the private parties to the agreement. The Polish authorities provided a copy of the agreement of 22 September 2003. The Commission observed that the conversion of debt into FSO shares accepted by the State Treasury was carried out in parallel with and on the same terms as the conversion of debt by DMC, which is a private sector company. In addition, the amount so converted by DMC is much larger than the amount converted by the State Treasury. In these circumstances, the Commission concluded that this operation respected the market economy creditor principle and did not constitute State aid.

Even though doubts on this subject were not expressed in the decision to launch the procedure, because the transaction took place afterwards, the Commission checked whether the sale of the State’s stake in FSO to AvtoZAZ for the […] price of PLN 100 on 30 June 2005 contained aid to the purchaser, and, indirectly, to FSO. The Commission has analysed the valuation report drawn up by KPMG. The consulting firm observes that the company has been registering heavy losses and that demand for its products has been low. Therefore, the discounted cash flows method cannot be applied properly. Only the cost method and liquidation method can be applied. Both methods conclude that FSO’s value is […]. PriceWaterhouseCoopers (‘PWC’) agrees to a large extent with the conclusions of KPMG. The Commission has not found any manifest errors in these reports and has concluded that the events that took place between the date of valuation by KPMG and the date of the transaction did not result in the price of the shares becoming […]. The Commission therefore considers that this transaction does not include an element of aid.

In conclusion, only the measures listed in Table 4 constitute aid covered by the current decision.

In the decision to launch the procedure, the Commission concluded that the measures listed in Table 4 had not been granted before the accession of Poland to the EU on 1 May 2004. However, the Commission observed that in the contract for the sale of FSO shares concluded on 30 June 2005 between the government and AvtoZAZ, the State aid chapter (Article 9) provides that ‘The relevant organs of the public administration intend, provided they receive a decision from the European Commission recognising the planned State aid as consistent with the common market, to grant the Company […] State aid for restructuring. This assistance shall be granted on the terms set out in FSO’s restructuring plan, which is currently under review at the European Commission under case number C 3/2005. […] The Buyer declares that the award of State aid to the Company referred to in clause 1 above was one of the conditions of its decision to invest by purchasing Company Shares. […] The declarations of the relevant organs of the public administration on the intent to grant State aid to the Company, referred to in clause 1 above, are included in Attachment No 6 to this contract’. The Commission concludes from the foregoing that on 30 June 2005 there was a legally binding commitment from the State to grant the notified aid subject to approval by the Commission.

The Commission has noted that on 30 June 2005 and on earlier dates, it was far from certain that FSO could regain viability. This is confirmed by the aforementioned KPMG and PWC valuation reports. In particular, the Commission notes that the company had no licensor for the production of a new model. The company did not know what it would produce in the future. The contract for the […] was only signed in 2006. The then existing licence agreement with GM DAT for the production of the Lanos expires […]. The level of production of the Lanos was low and insufficient to cover costs. In conclusion, the aid was unconditionally promised at a time when the risk of bankruptcy was high.

As regards the precise amount of aid included in the State guarantee covering the investment loan to […], the Polish authorities have not submitted a calculation of a risk factor by which the guarantee could be weighted. Up to October 2006, the Polish authorities always emphasised that this guarantee was necessary as the company was unable to obtain financing from the market due to the bad experience and the losses suffered by the banks in connection with earlier loans to FSO. In addition, the Commission has noted that, as indicated above, the commitment to grant the guarantee was entered into at a time when the risk of bankruptcy was high. In these circumstances, the Commission considers that the aid included in the State guarantee may be up to 100 % of the amount of the guarantee. However, on the basis of the later assessment of the compatibility of the aid, the Commission does not need to quantify the precise amount of aid included in this guarantee.

The Commission notes that the Polish authorities, in their letter of 17 October 2006, suggested that the company would be able to obtain loans from the market at that time. As a result, Poland asked for the aid included in the guarantee to be quantified on the basis of the reduction in the interest rate obtained thanks to the guarantee. The Commission cannot accede to this request. The State committed itself to grant the guarantee (and the other aid measures), and the aid amount has to be assessed with reference to the time of the irreversible commitment by the State to grant the support measures, and no later. All loans offered by the market after this date are ‘contaminated’ by the aid which the State has undertaken to grant. The market took account of the direct positive impact (and indirect impact, such as the finding of an investor, which was made possible thanks to the promise of the aid) of the aid on the company. As a result, the price of the financing offered later cannot be used as a basis to assess the quantity of aid in the measures contractually promised previously. In addition, the information provided by the Polish authorities on the willingness of the banks to grant loans is not conclusive and does not prove that any bank would actually be ready to lend the amount in question to FSO without State support. The Polish authorities confirmed […] in their letter of 17 November 2006.

As regards the aid by means of deferrals of tax and social security liabilities owed by FSO, these deferrals are equivalent to loans to the company. As indicated, these deferrals of payment were granted when the risk of bankruptcy was high. In these circumstances, the Commission concludes that the amount of aid in such deferrals could amount to the full deferred amount. However, on the basis of the later assessment of the compatibility of the aid, the Commission does not need to quantify the precise amount of aid included in these deferrals.

Therefore, the maximum aid amount granted after accession to be assessed in this decision is USD 83 million (EUR 66 million) plus PLN 62 million (EUR 16 million). At the exchange rate of 20 October 2006, the maximum aid amount is therefore EUR 82 million or PLN 318 million.

Regarding the amount of aid contained in the measures granted before accession, the Commission observes that some of the measures also involved deferrals of tax and social security debts. On the basis of the same reasoning as previously set out, the Commission has concluded that the maximum aid amount granted before accession is the total of the nominal value of the measures, namely PLN 201 million (EUR 51 million). The Commission does not need to quantify precisely the aid amount included in these measures.

As indicated in the decision to initiate the procedure, the Commission considers that FSO is in difficulty and eligible for restructuring aid. As confirmed by the information submitted by the Polish authorities, without the aid the company would not have been able to attract a new shareholder and a licensor, which was indispensable for its survival. In addition, without a State guarantee, banks would still even today not give FSO an investment loan, which is indispensable for production of a new model and, consequently, for the firm’s survival.

The Commission has also to verify whether […], which could be the beneficiary of the guaranteed investment loan, is eligible or not. The Polish authorities have assured the Commission that […] — or whatever other name it receives — would be a subsidiary of FSO and would appear in the consolidated financial statement of the FSO group. On the basis of the information provided by Poland, it can be concluded that the creation of […] would not constitute the creation of a new firm in the sense of the guidelines. Being a core part of an economic unit in difficulty, […] is eligible for restructuring aid.

The guidelines indicate that ‘the restructuring plan, the duration of which must be as short as possible, must restore the long-term viability of the firm within a reasonable timescale and on the basis of realistic assumptions as to future operating conditions. […] The improvement in viability must derive mainly from internal measures […].’

The Commission notes that the restructuring plan aims at fulfilling the latter condition.

On the operational side, the company has implemented a far-reaching restructuring plan, which concerned FSO S.A. as well as the subsidiaries. Some of the problems identified at FSO were an excessive number of divisions and management levels, as well as an inappropriate organisational structure. FSO decided to reduce the number of divisions and to merge some of them, to reduce the number of management levels and management positions. It has also modified the function distribution map by concentrating some functions and eliminating superfluous ones. More generally, as the level and structure of employment did not correspond to current operations and production volumes, the company substantially reduced its workforce, as shown in Table 2. The company has restructured its service subsidiaries, component production subsidiaries and sales subsidiaries.

On the financial side, the company was riddled with debts, which it could not reimburse because of the major losses it had suffered since 2000. However, as illustrated in Table 3, the firm negotiated with its creditors, who agreed either to convert their claims into shares or to waive a majority of them.

The foregoing description illustrates that, as required by the guidelines, the company has already taken important internal measures on the operating and financial sides to restore its competitiveness. The restructuring period will however only be completed when FSO has made the all the investments necessary for the production of the new model and has restored a production volume that generates a reasonable profit. Consequently, on the basis of current planning, the restructuring period should be considered as ending in the course of […].

In addition to the internal restructuring, which makes FSO a more efficient manufacturer, the company also benefits from having had a new shareholder — AvtoZAZ — since 2005. This gives FSO privileged access to the distribution network of UkrAvto to sell its products.

The Commission notes that the restructuring plan is not free of risks and uncertainties. Firstly, FSO will have to successfully bid on a regular basis for licence agreements in order to have a model to produce. Secondly, it will be dependent on the commercial success of the one or two vehicles produced, which cannot be guaranteed. Thirdly, it will have to generate a sufficient profit margin from production of the models concerned. Given the intensity of competition on the automobile market, reflected in the low level of profit made by the manufacturers of vehicles for the mass market, achieving profitability will require constant improvements in efficiency and cost control. All these risks are inherent in the restructuring plan and, should they materialise, cannot be considered ‘unforeseeable circumstances’ within the meaning of paragraph 48 of the guidelines.

However, in view of the operational and financial restructuring already achieved, the support of the new shareholder, and the […] agreement signed with GM DAT in […] 2006 for production of the […], the Commission considers that there is a sufficient probability that the restructuring plan will allow FSO to restore its long-term viability.

As already mentioned, the EU automobile industry is suffering from overcapacities and car manufacturers regularly announce workforce reductions. In this context, the exit of firms from the market is a normal outcome of the operation of market mechanisms. The aid currently examined thwarts the operation of these mechanisms and shifts the burden of adjustment to other manufacturers. These competitors have to face one more competitor than they would have to if the State had not intervened to rescue FSO from bankruptcy. In order to assess the size of the distortion created by this aid, it is therefore necessary to determine on which markets FSO operates and who its competitors are.

The Commission concludes from the foregoing analysis that the aid keeping FSO alive on a market suffering from overcapacity will negatively affect FSO’s competitors: production plants bidding for construction of the same model, production plants producing competing models and car manufacturers producing competing models. Therefore, the Commission considers that measures are necessary to limit the distortion created by the aid. In deciding on the level of these measures, the Commission takes into account the mitigating factors that the company is located in an assisted area and that X1its market share is limited.

In the course of the procedure, the Polish authorities have proposed various compensatory measures. Firstly, the Polish authorities have said that FSO has reduced its sales network by reducing the number of sales outlets. However, the Commission observes that, as sales in Poland have declined sharply and some outlets have overdue liabilities vis-à-vis FSO or have gone bankrupt, this rationalisation was necessary for viability reasons and to reduce sales costs. In addition, some of these outlets were not controlled by FSO and it was the decision of the owners not to sell FSO cars anymore and to sell other brands. This measure is therefore not an additional effort of FSO and does not restrict the presence of the company on the markets beyond what is justified by the need to restore viability. It cannot therefore be accepted as a compensatory measure.

The Polish authorities have also suggested that FSO ‘voluntarily’ limit the number of countries to which it exports its products. However, the Commission notes that FSO will not produce its own models but will produce under a licence agreement. Such a contract limits the countries in which the products can be sold. Therefore, such a limitation is inherent to the business plan and not a concession from FSO, which has no control over it. In addition, the sales forecasts for these countries were not underpinned by sufficient information.

The Polish authorities have proposed dismantling some equipment on FOS’s production lines. However, this equipment has to be replaced anyway to produce a new model.

1. 1.
   Annual production of passenger cars, including all kinds of assembly kits, will be limited to 150 000 units until the end of February 201123, […].
2. 2.
   Annual sales of passenger cars in the EU24 will be limited to 107 000 units until the end of February 201125.
3. 3.

   These two conditions apply to FSO, to all its present and future subsidiaries, and to any company controlled by the FSO shareholders to the extent that it operates assets (e.g. plants, production lines) currently belonging to FSO or its subsidiaries.

By setting the production ceiling (duration, level) so that the restrictive effect is limited to two – at the maximum three – years and two months, the Commission has taken into account the status of the region where the company is located X1and its limited market share.

In the decision to launch the investigation procedure, the Commission expressed doubts as to whether all the aid was necessary. In particular, the Commission observed that the granting of certain measures had been made conditional on finding an investor. The aid therefore seemed to constitute a way to attract an investor rather than being strictly limited to what the company really needed to survive. The investigation procedure has allayed these doubts. Indeed, the Commission finds that without the support of an investor and a licensor the company on its own could not have survived. FSO had no model of its own to produce, nor did it have the capability to develop a completely new one. Furthermore, the lack of interest manifested by the 29 biggest car manufacturers following the approaches made by FSO in February 2004 shows that the firm was in a very difficult situation and that even with the aid it did not represent a manifestly viable and profitable firm. On the basis of the foregoing, the Commission concludes that the fact that part of the aid was made conditional on finding an investor does not mean that this aid was in excess of the minimum necessary to restore FSO to viability.

In order to assess whether the aid is limited to the minimum necessary, the Commission has analysed which parties have supported and will support the restructuring costs. These are mainly made up of the costs of restructuring the company’s liabilities. For a smaller amount, the company also needed a guarantee to get the investment loan to finance the modernisation of the production line necessary to produce the new model.

Besides the contribution just described, Poland has indicated that over recent years AvtoZAZ has pre-financed its orders to FSO, which have represented nearly the entire production of the Polish firm. This pre-financing permitted FSO, which had no liquidity available, to finance the production (of the cars ordered e.g. buying inputs). The pre-financed orders have made it possible for the company to operate over the last few years. This kind of pre-financing is not common practice in the car industry, especially for a firm in difficulty. It can then be concluded that AvtoZAZ, through this exceptional pre-financing to FSO, has contributed to financing the company during its restructuring period. This private contribution is a sign that the market believes in the viability of the firm. According to the information submitted by the Polish authorities, the amount of advance payments from AvtoZAZ amounted at some points in time to USD [10-50] million […].

As indicated, at the exchange rate of 20 October 2006, the maximum aid amount to be granted after accession is EUR 82 million or PLN 318 million. In assessing whether the aid is limited to the minimum necessary, the Commission has also to take into account the aid granted before Poland’s accession in the framework of the same restructuring. As indicated before, the Commission considers the maximum aid amount granted in the quarters before accession to be PLN 201 million (EUR 51 million). The maximum total restructuring aid therefore amounts to PLN 519 million (EUR 133 million). It may be concluded from the above that the private sector contribution covers more than 85 % of the restructuring costs, and the aid less than 15 %. Even if the (aid-free) conversion of debt by the State were considered a restructuring cost, the private sector contribution amounts to more than three quarters of the restructuring costs. The Commission considers the contribution from the private creditors to be substantial.

On the basis of the foregoing, the Commission concludes that the aid is limited to the minimum necessary.

On the basis of the information provided by the Polish authorities, the Commission concludes that the company has not received restructuring aid in the last ten years. During the current restructuring, the first aid measures were granted in the last quarter of 2003. This condition is therefore respected.