The investment project aims at setting up a new production facility for the manufacturing of electric cars with a car body made of carbon fibre reinforced plastic materials. The manufacturing of the following two new models is planned: the model ‘i3’, also called Mega City Vehicle (hereinafter ‘i3’ or ‘MCV’), and the luxury sport car model ‘i8’. According to the beneficiary, they represent completely innovative products which have not been manufactured in the past and they will be assembled in the Leipzig plant. The engines and batteries for both the i3 and i8 will be produced in the Landshut plant of the BMW Group, whereas the intermediate products for the carbon fibre body of both the i3 and i8 models will be produced in the Wackersdorf plant of the same group (and from there on delivered partly to Leipzig and partly to Landshut where these intermediary products are to be further reworked).

At the date of the opening decision, both models were planned to be introduced on the market at the end of 2013. The works on the investment for the i3 model started in December 2009 and the investment was completed in 2013. The works on the investment for the i8 model started in April 2011 and it will be completed later in 2014.

Germany argues that the relevant product market should be defined as the conventional car market and the relevant geographic market as the global worldwide market. As hybrid cars do already today, electric cars will compete in the future with conventional cars, and electric and conventional cars will be considered by the consumers as substitutable products.

Despite admitted differences in range between the i3 model and comparable conventional cars (the i3 needs recharging long before fuel tanks are empty), both the i3 and comparable conventional cars serve the same purpose, as they have the same passenger room and attain the same speed. Demand side substitutability is even stronger for the i8 model, which attains the same range as conventional or hybrid cars. The price difference between electric and conventional cars can be reduced through subsidies for the buyer.

According to Germany, customers do not differentiate between hybrid, electric or conventional cars because they are aware of the environmental consequences of the production of electricity which is used to propel electric cars and because they have uniform expectations regarding environmental protection standards and other parameters for all types of car.

The relevant geographic market for electric cars is the worldwide market, as trade flows are expected to develop in all directions. China, Japan and the USA (as well as some EU countries) which subsidise the use of electric cars and partially apply mandatory quotas for the share of alternative cars within the overall car market, represent a significant portion of the world market. In addition, the framework conditions for world trade in electric cars are the same or more favourable than those applied to conventional cars.

Applicability of footnote 65

Germany considers that if the Commission should decide to define electric cars as a separate product market, footnote 65 of the RAG should be applied.

Germany accepts that despite the innovative car body construction that distinguishes the i3/i8 models from competing products, the beneficiary is neither the first, nor the only producer of electric vehicles. It also agrees that some producers manufacturing electric vehicles already exist and that others will enter the electric car market by 2013/2014.

Germany suggests, however, that even if therefore footnote 65 were not directly applicable, it could be applied by analogy to the present case, given the philosophy and reasoning behind the existence of this footnote.

According to Germany, the rationale that led to the introduction of footnote 65 into the RAG is that the initially significant market shares of innovators and the resulting short term distortion of competition are outweighed by the advantages that a true innovation provides for competitiveness and for the competitive conditions in the relevant market. The application of the tests laid down in paragraph 68 of the RAG presupposes the existence of a market. New markets cannot meet this condition; an in-depth assessment in application of paragraph 68 would punish the first mover and impede the establishment of a functioning market.

Germany considers that the statistically high initial market share and capacity created by an early mover on a market where only a small number of models are offered and where serial production started only recently does not allow the application of the paragraph 68 tests in a meaningful way. In Germany’s view, the investment at stake is neither conducive to the creation of a market dominating position, nor does it lead to the creation of overcapacities in a declining market.

Market share is below 25 % even in the electric car market (both global and EEA)

Germany argues that even if the Commission would find that (1) electric cars do not form part of the conventional car market and (2) footnote 65 of the RAG is not applicable, the beneficiary’s market share in the electric car market (whether or not it is further segmented) is below 25 %.

Germany states that although it is difficult to apply the traditional segmentation of the conventional car market to the electric car market in view of the differences in prices and lengths of car, this is how forecasts of electric car market shares are established. This is why Germany tried to assign the i3 model to a combined C and D segment, as the car’s price puts it into the D segment and its length into C. It must also be borne in mind that electric car customers come from all segments of the conventional car market, therefore a strict segmentation of the electric car market is not meaningful.

Germany considers that the electric car market will very likely develop dynamically both in the EEA as well as globally: the proportion of electric cars within the overall car market, as well as the number of producers will increase strongly within a few years. Even if the beneficiary would reach a market share exceeding 25 % in some electric car segments, this would be an unrealistic scenario, or would only be a ‘snap-shot’.

Germany proposes that the rationale behind footnote 65 be followed also in respect of this aspect and that the tests laid down in paragraph 68 of the RAG should not be applied: The transitory high market share of an innovator should be viewed in the light of the dynamic development of the market, including the likelihood of new entries into the market. A different view would hinder innovation and undermine competition and competitiveness. Therefore, Germany proposes that a situation where the 25 % market share threshold is exceeded in the electric car market for a transitory period, which, as such, is already unrealistic, should not be viewed as a factor indicating that the 25 % market share threshold in paragraph 68(a) of the RAG is exceeded.

Regarding the reliability of the data on market shares, Germany points out that no separate segmentation of the electric car market has been established and that the only estimation of market figures that exists for 2015 is the study of Deutsche Bank dating from 2008. This study estimates that the part of electric cars within the overall car market will be 1 % in 2015; Germany used this figure for its estimation of the beneficiary’s market share on the combined electric C-D segment. Germany also assumes that most electric cars are likely to be offered in the A to C segments, and that therefore the proportion of electric cars in the A to C overall car segment will be higher (i.e. about 2,5 % — although this could not be supported by independent studies). This alone would prove that the Commission’s estimation of the BMW Group’s market share is too high and not plausible. Furthermore, it notes that consultancies such as Deutsche Bank and Boston Consulting Group predict that by 2020 the proportion of electric cars in the overall car market will reach 3 %, which will again lead to a reduction of the BMW Group’s market share. Finally, Germany argues that in case an electric car segmentation system is established which allocates models clearly to a segment, it is to be expected that the BMW Group’s market share in a saturated market will become comparable to its existing market share in the conventional car market, i.e. between [0-8 %] and [1-9 %].

1. (a)

   Since the market share thresholds are not exceeded, there is no reason to carry out the in-depth assessment of the measure.

2. (b)

   In a formal investigation, the focus is exclusively on the elimination of serious doubts regarding the compatibility of the measure that arose during the preliminary phase, and not on the assessment of the compatibility criteria which have already been examined during the preliminary phase and did not raise any doubts at that stage. The Commission did not express any doubts in the decision to open the formal investigation regarding the compliance of the measure with the standard compatibility criteria of the RAG, including its incentive effect and proportionality; the formal investigation was only opened because the Commission could not conclusively exclude that the market share threshold in paragraph 68(a) of the RAG was exceeded.

3. (c)
   The Commission should adopt a ‘conditional’ decision26 authorising the aid — without in-depth assessment — pursuant to the footnote to paragraph 56 of the IDAC, subject to the annual submission by the beneficiary of data on the development of its share in a market segmented in the traditional way.
4. (d)

   In view of the important positive effects of the aid (new, environmentally friendly technology and innovation, creation of a significant volume of employment), the Commission should either not apply the IDAC, or at least take account of the ‘proportionality requirement’: paragraph 9 of the IDAC states that the detailed assessment of a measure should be proportionate to the potential distortion which may be caused by the aid. Germany argues that no noteworthy distortion of competition can be expected. The beneficiary advances competition by taking upon itself a pioneering role through an innovative and high risk investment.

5. (e)
   Germany also claims that the judgment of the General Court of 10 July 2012 in Case T-304/0827 requires the Commission to exercise its wide discretion under the EC Treaty to ascertain whether the expected benefits of the aid in terms of regional development outweigh distortions of competition and the impact of the subsidised project on trade between Member States.
6. (f)
   Germany refers to the footnote to paragraph 56 of IDAC28, and takes the view that the Commission’s authority not to approve aid on the basis of IDAC is limited to the portion of the notified aid amount that exceeds the threshold for notification.

According to paragraph 18 of the IDAC, only ‘measures for which the Member State considered other policy options, and for which the advantages of using a selective instrument such as State aid for a specific company are established, are considered to constitute an appropriate instrument’.

As there are many reasons for a company to locate in a certain region, even without any aid being granted, paragraph 19 et seq. of the IDAC require the Commission to verify in detail that the aid is necessary to provide an incentive effect for the investment. The objective of this detailed assessment is to determine whether the aid actually contributes to changing the behaviour of the beneficiary, so that it undertakes (additional) investment in the assisted region concerned.

The IDAC states that the incentive effect can be proven in two possible scenarios: in the absence of aid, no investment would take place at all, since the investment would not be profitable for the company at any location (scenario 1), in the absence of aid, the investment would take place in another location of the EU (scenario 2).

The Member State thus needs to provide clear evidence that the aid effectively had an impact on the investment decision or the location choice. The Commission has to establish that the proposed counter-factual scenarios are realistic.

The IDAC places the burden of proof regarding the existence of incentive effect on the Member State. Paragraphs 24 and 25 of the IDAC indicate that the Member State could give proof of the incentive effect of the aid by providing company documents that show that 1) the investment would not be profitable without the aid and no other location was envisaged for the investment, or 2) that a comparison has been made between the costs and benefits of locating the investment in the assisted region and choosing an alternative location. The Member State is invited to rely on financial reports, internal business plans and documents that elaborate on various investment scenarios.

Without providing documentary evidence that such analysis took place before the investment decision, Germany first tentatively argued that the incentive effect should be assessed in the context of scenario 1 within the meaning of paragraph 22 of the IDAC. The Member State must prove that the aid provides an incentive for the beneficiary to adopt a positive investment decision because the investment, which without the aid would not be profitable for the company at any location, can take place in the assisted region. The information submitted by Germany shows that the required State aid amount will increase the internal rate of return of the project only by 1 %, (lifting the IRR from [0-8]% to [1-9]%), which would be significantly below both the internal ROCE target of 25 %, or the beneficiary’s weighted average cost of capital (WACC) of 12 %.

It is obvious that the marginal increase in the internal rate of return which, even with the aid, is far below the company’s benchmark, does not permit a conclusion that the aid provided an incentive effect to carry out the investment.

It is also clear that the decision to invest into the manufacturing of electric cars was based on the beneficiary’s longer term strategic objective of developing innovative key technologies for the purpose of meeting the mobility standards of the future, and to make them suitable for use in industrial mass production. This objective is also demonstrated by the fact that, in 2009, the beneficiary and its owners entered into a strategic alliance with SGL Carbon, a company engaged in the production of carbon fibre material.

The fact that the incentive effect was not proven in a scenario 1 context, however, does not mean that the incentive effect cannot be proven in a scenario 2 context.

Indeed, the German authorities later argued that the aid to the beneficiary falls under scenario 2, and presented the Munich location as an alternative location to Leipzig.

An assessment of the incentive effect in a scenario 2 situation aims at proving that the aid measure provided an incentive for the beneficiary to locate the investment in the target region rather than in another region, because the aid compensates for the net handicaps and costs linked to the location in the assisted region.

Another element which was taken into account by the company while deciding on the location of the investment was the long-term strategic possibility to extend the production capacity in the future. Leipzig offered the possibility to double the production capacity from [10 000-50 000] items per year to [50 000-90 000] items per year, whereas such extension was not considered feasible in Munich. According to the documents submitted by Germany, this strategic factor was not quantified in monetary terms by the company.

The documents also show that the availability of State aid in the amount of EUR 50 million was analysed in preparation of the decision on the investment/location.

The Commission is of the opinion that Germany successfully proved, on the basis of these genuine, contemporary documents, that the availability of State aid triggered the decision to locate the investment into the production of the i3 model in Leipzig rather than in Munich.

In a scenario 2 situation, paragraph 33 of the IDAC states that the aid measure is ‘considered to be proportionate if it equals the difference between the net costs of the beneficiary company to invest in the assisted region and the net costs to invest in the alternative region(s)’.

As explained above, in the documents dating from December 2009, Germany demonstrated that the cost difference between the two locations (i.e. Leipzig and Munich) amounted to EUR 17 million, as was identified at the time when the investment/location decision was taken and calculated over a […]-year life cycle. This cost difference was calculated by the company on the basis of product investment costs, structural investment, planning and start-up costs, production costs, costs of supply, fixed costs, ‘inbound/outbound’ costs, such as logistics costs and international tariffs for shipments. The Commission therefore considers that Germany proved that aid of EUR 17 million is the minimum amount necessary to change the location decision of the aid beneficiary, and thus proportionate to the regional development objective pursued by the aid. The Commission considers, in this context, that the strategic extension possibility which is not available in Munich should not be taken into account for the proportionality test of the notified aid, since it becomes relevant only in the very long-term, beyond the 7-year life cycle of the investment project at hand.

Germany justifies this amount by arguing that the proportionality of the aid does not need to be demonstrated on the basis of the same documents which proved the incentive effect. According to Germany, the Commission should also take into consideration other cost information, relating to costs incurred in the assisted region after the decision about the investment location had been made.

The Commission rejects the argument of the German authorities that proportionality should not be decided exclusively on the basis of documents reflecting the situation at the time of the relevant location/investment decision for the following reasons.

It is true that paragraph 35 of the IDAC, which describes the types of documents suitable to prove proportionality, does not literally require that proportionality is demonstrated on the basis of the same [emphasis added] documents as the ones on the basis of which the incentive effect is proven, but on the basis of documents such as [emphasis added] the ones described in paragraph 26 of IDAC. However, the wording of paragraph 35 cannot be interpreted as allowing the incentive effect and proportionality of the aid to be proven on the basis of documents containing wholly different figures regarding the net handicaps and costs linked to locating the investment in the assisted region. In particular, it does not allow the use of documents detailing costs that emerged several years after the relevant investment/location decision was taken.

It is also true that there is no explicit provision in the IDAC specifying the point in time which should be considered for the assessment of proportionality. Similarly, there is no such explicit provision relating to the precise point in time that must be taken into account for the assessment of incentive effect. However, it is obvious that the relevant figures for determining the incentive effect of the aid over the investment/location decision must be available and relied upon before that decision is made. This is why paragraph 26 of the IDAC, which describes the types of documents suitable for proving incentive effect, refers to ‘documents (…) submitted to an investment committee [emphasis added] (…) that elaborate on various investment scenarios (…)’. It is exactly this type of documents, which were submitted to the board of the beneficiary and contained the various investment scenarios and the relevant figures for each of them that the Commission examined in this case. Those documents demonstrate that the disadvantages linked to the location of the investment in Leipzig were estimated at EUR 17 million before the decision to select that location was made.

Further, the inherent logic of a scenario 2 analysis is that from an ex ante perspective, i.e. before the decision about the investment location is made, the extra costs that would be incurred by investing at the target location where, in the absence of the aid, the investment would not take place, have to be compensated by State aid. The principle of proportionality, however, also implies that aid in excess of what is necessary to trigger the decision to locate the investment in the assisted area must be considered superfluous, because it constitutes free money to the beneficiary which serves no purpose that would be compatible with the State aid rules.

Paragraph 33 of the IDAC provides explicitly that for the aid to be proportionate, it must equal the difference between the net costs at the alternative locations. Therefore, the Commission is of the view that the aid can only be considered proportionate if it does not exceed the amount that was necessary to trigger the decision by the aid beneficiary to carry out an investment at a particular location.

Contrary to what was argued by Germany, the Commission services consultation paper of 2007 on the Common principles for an economic assessment of the compatibility of State aid under Article 87.3, published some years ago by DG Competition, does not mandate a different solution. Paragraph 41 of the consultation paper, which in any event is not binding on the Commission, rather supports an approach which focuses on avoiding that aid in excess of the necessary amount is granted for an investment project. It clearly states that in cases that fall under the detailed assessment of existing guidelines, it has to be verified whether the aid intensity is too high and the same result could not be obtained with less aid. If it is proven, like in the current case, that there was only a difference of EUR 17 million between the investment costs in Leipzig and in Munich when the decision to invest in Leipzig was made, (i.e. when the investment was triggered) then aid in excess of that amount is superfluous also under the consultation paper invoked by Germany.

Regarding the additional costs which arose in connection with the extension of the investment that took place after the initial investment decision was taken in December 2009, the Commission would like to express the following concerns regarding the new pieces of information which were submitted by Germany in September 2012, in the context of the formal investigation.

The Commission takes the view that no incentive effect or proportionality can be proven regarding the portion of the aid that covers investment costs which had not been included in the notification.

The Commission is thus unable to confirm the proportionality of regional investment aid in the amount of EUR 45 257 273 (in discounted value). It concludes that the portion of the notified aid amount in excess of the EUR 17 million, (i.e. EUR 28 257 273) constitutes resources put at the disposal of the beneficiary which does not serve the achievement of any of the objectives enumerated in Article 107(3) of the Treaty. Moreover, it considers that the grant of this additional aid amount of EUR 28 257 273 would have negative, i.e. highly distortive effects on competition, as it might, in particular, discourage competitors to invest in similar products, thus contributing to the crowding out of private investment in the relevant market.

The Commission was able to confirm the incentive effect of the aid and the proportionality of the aid in the amount of EUR 17 million. If the aid is limited to this amount, it has no negative effects on competition.

Regional aid has an effect on trade between Member States, since it encourages undertakings to locate investment in assisted areas of certain Member States rather than in alternative locations in other Member States. However, the investment project in Leipzig did not distract investment from another assisted area in a different Member State, nor from an equally disadvantaged area within Germany. The site in […] was excluded as an alternative location due to qualitative and strategic considerations at an earlier planning stage. Therefore, the aid does not run counter to the cohesion objectives enshrined in the Treaty. Besides, since the investment does not involve the relocation of an existing plant into Leipzig, paragraph 54 of the IDAC does not apply to the notified aid.

Having established that the aid provides an incentive for carrying out the investment in the region concerned and is proportionate to pursue that objective if limited to the amount of EUR 17 million, it is necessary to balance the positive effects of the aid with its negative effects.

The assessment confirmed that the aid measure amounting to EUR 17 million has attracted an investment project to a disadvantaged region which is eligible for regional aid pursuant to Article 107(3)(c) TFEU. The investment offers an important contribution to regional development by creating 800 direct jobs. Since the decision to locate the investment in Leipzig does not affect a region with the same or a higher aid intensity ceiling, the aid measure does not run counter to cohesion objectives. The Commission considers that attracting an investment to a poorer region is more beneficial for cohesion within the Union than if the same investment would have been carried out in a more developed region.

In view of the above, the Commission finds that the positive effects of the aid in the amount of EUR 17 million outweigh the negative effects on trade between Member States and any negative social and economic effects in the alternative location, which is a more developed and advantaged region.

In accordance with paragraph 68 of the RAG, and in light of the in-depth assessment conducted on the basis of the IDAC, the Commission considers that Germany successfully demonstrated the positive contribution of the aid in the amount of EUR 17 million to regional development. The Commission concludes that the aid limited to the amount of EUR 17 million is necessary to provide an incentive effect for the investment in Leipzig and that the benefits of the aid measure outweigh the resulting distortion of competition and effect on trade between Member States.

The Commission rejects the argument put forward by Germany, according to which the Commission’s authority to examine the compatibility of the aid measure in question under the IDAC is limited to the portion of the requested aid amount which is above the notification threshold laid down in Article 6(2) of the GBER.

The Commission must recall its obligation to verify, on the basis of a more detailed assessment carried out pursuant to the IDAC, the incentive effect and proportionality of aid measures to which that in-depth assessment is applicable, i.e. notifiable regional aid granted to large investment projects that meet the relevant conditions laid down in the RAG.

As regards the possibility for Germany to grant aid to BMW AG up to the level of the notification threshold laid down in Article 6(2) of the GBER, which in this case would be EUR 22,5 million, it is important to note that the wording of the footnote to paragraph 56 of the IDAC merely states that the Member State retains that possibility. It does not follow from the footnote invoked by Germany that the Commission itself is obliged to authorise the grant of regional aid up to the amount which is exempted from notification under a block exempted scheme.

The Commission is therefore entitled to assess the incentive effect and the proportionality of the entire amount of the aid notified by Germany, and to find that the aid is compatible with the internal market only if it is limited to EUR 17 million.