The investment started on 26 June 2014, and is envisaged to be largely completed by December 2018. Full production is planned for the end of 2018.

According to the investment and aid contract signed between Portugal and VW Group and the submission of Portugal of 28 July 2014, the investment involves eligible expenditure of EUR 672,9 million for equipment and infrastructure (building) works which will be incurred between 2014 and 2019. About a quarter of that expenditure will be for vendor tooling, i.e. capital assets financed by Autoeuropa which will not be used in the Palmela establishment of Autoeuropa, but will be made available by Autoeuropa to its suppliers, for use in the establishments of the suppliers for the production of parts and components for VW Group. These assets, although they will form an integral part of the productive stock of the suppliers, will remain the property of VW Group.

The national legal basis for awarding the aid is the Decree-Law no 287/2007, of August 17, as amended by Decree Law no 65/2009, of March 20 which approves the national framework of incentives for business investment and the Ordinance no 1464/2007, of November 15, as amended by Ordinance 1103/2010, of October 25 which creates and regulates the aid scheme ‘Sistema de Incentivos a Inovação’.

The aid was awarded, subject to Commission approval, by an aid and investment contract signed on 30 April 2014. Works on the investment started on 26 June 2014, i.e. after signature of the contract.

The aid is granted in form of a partially reimbursable grant. The investment contract refers to a reimbursable grant of EUR 52,49 million (in nominal value) for investment expenditure (including vendor tooling) of EUR 672,95 million which is partially transformed into an outright grant if Autoeuropa meets certain contractually agreed realisation parameters. The notification indicates that more recent cost planning by VW Group led to a slightly lower amount of expected investment expenditure (EUR 623,9 million). Taking account of that lower amount, the notified aid amount and the notified aid intensity, in prices of 2014, are EUR 36,15 million and 6,03 % respectively. Portugal commits that neither the notified aid amount, nor the notified aid intensity will be exceeded, if the realised eligible expenditure deviates from the planned amount of eligible expenditure, as taken into account in the notification and the calculation of the maximum aid amount.

Portugal confirms that an own contribution free of any public support of at least 25 % of the eligible expenditure will be borne by Autoeuropa/Volkswagen from its own resources.

Autoeuropa/Volkswagen commits to maintain the investment during a minimum period of 5 years after its completion.

The Commission noted that the notified eligible expenditure included costs for vendor tooling, as to the eligibility of which the Commission raised doubts and was thus unable to confirm that the notified maximum aid amount, which is calculated with regard to the total notified investment expenditure, does not exceed the maximum amount that can be allowed.

Furthermore the Commission noted that Autoeuropa received investment aid for another investment project carried out on the same site. Start of works on the other investment project was less than 3 years before the start of works on the present investment project. The investment project intended to innovate and optimise the production processes, by performing investments in three areas of activity: (i) in the information technology area, by implementing programs and the most technologically advanced systems; (ii) in the area of interior and exterior painting of motor vehicles, by automating the method of applying paint; and (iii) in the area of stamping dies, responsible for the execution of moulds for stamping parts. At the time of the opening decision, Portugal did not clarify the extent to which these improvements would be relevant and would still be used in the event that platform-based manufacturing would cease and be replaced by MQB manufacturing technology.

Paragraph 70 of the RAG 2007-13 provides that for the purposes of carrying out the tests under paragraph 68, markets should normally be defined at EEA level. For the purpose of the assessment of the present case, the Commission considered that the relevant geographic market for the products concerned is at least EEA-wide. The Portuguese authorities and Autoeuropa accepted that the Commission applies this geographic market definition for the purposes of this notification.

During the preliminary investigation, the analysis under paragraph 68 (a) of the RAG 2007-13 came to the result that the applicable 25 % market share threshold is exceeded in the individual A and B segments and in the combined A0, A and B segments (according to POLK) in the EEA in all the years concerned.

As the result of the paragraph 68(a)-test required already to proceed to the in-depth assessment of the aid, the Commission considered that it was not necessary to carry out the paragraph 68(b) test.

Before the signing of the investment contract in April 2014, VW Group and Autoeuropa developed an investment plan regarding vendor tooling that took into account these eligibility criteria and ensured that the amount of EUR 136,3 million included only vendor tooling expenditure meeting the above conditions. The Portuguese authorities have set up a control mechanism to monitor compliance with the above conditions.

Portugal signed on 8 October 2013 an investment contract with Autoeuropa regarding three different projects, each of them representing an initial investment targeted at the expansion of the existing establishment which Portugal does not consider to form a single investment project within the meaning of paragraph 60 of the RAG 2007-13 with the notified investment project.

Portugal provided the information necessary to carry out an in-depth assessment.

The financial support in the form of a reimbursable grant will be given by the Portuguese authorities and is financed through the general budget of the State. The support is thus given by a Member State and through State resources within the meaning of Article 107(1) of the TFEU.

As the aid is granted to a single company, Autoeuropa, the measure is selective.

The financial support will be given for an investment in the car sector, which is subject to intensive trade between Member States, and will partially replace supplies of intermediate goods from other Member States. Therefore, the measure affects trade between Member States.

The favouring of Autoeuropa and its production by the Portuguese authorities means that competition is distorted or threatened to be distorted.

Consequently, the Commission considers that the notified measure constitutes State aid to Autoeuropa within the meaning of Article 107(1) TFEU.

By granting the aid subject to Commission approval and notifying the aid measure before putting it into effect, the Portuguese authorities have respected their obligations under Article 108(3) TFEU, since the notification of individual aid above a certain amount is required by the GBER 2008. In fact, the aid for the investment project is individually notifiable within the meaning of paragraph 68 of the RAG 2007-13 and the GBER 2008, as the envisaged aid amount of EUR 36,15 million in present value exceeds the individual notification threshold of EUR 11,25 million applicable in the region concerned under the regional aid map applicable from 2007 to June of 2014.

The objective of the aid is to promote regional development. As the aid and investment contract was signed in April 2014, only subject to Commission approval, the Commission considers that pursuant to paragraph 188 of the RAG 2014-20, the aid was awarded before July 2014 and thus has to be assessed on the basis of the RAG 2007-13, and in particular its provisions regarding regional investment aid for large investment projects laid down in paragraph 68.

• first, it has to confirm that the measure is compatible with the general provisions of the RAG,

• second, it has to verify whether or not it can exclude without doubt that the ‘market share test’ and ‘capacity increase/market performance tests’ under paragraph 68(a) and (b) of the RAG 2007-13 require an in-depth assessment,

• third, depending on the outcome of the assessment in the second step, it may have to conduct an in-depth assessment.

• the aid is granted for a project in Palmela which is an area eligible for regional aid pursuant to the Portuguese regional aid map applicable from 2007 to June of 2014,

• there is no indication that the VW Group in general, or Autoeuropa in particular, would be a firm in difficulty within the meaning of the Community guidelines on State aid for rescuing and restructuring firms in difficulty applicable at the time of the notification. Therefore, the aid beneficiary is eligible for regional aid in accordance with paragraph 9 of the RAG 2007-13,

• the project comprises an initial investment within the meaning of paragraph 34 of the RAG 2007-13. Initial investment is defined in paragraph 34 of the RAG 2007-13 as an investment in tangible and intangible assets relating to (i) the setting up of a new establishment; (ii) the extension of an existing establishment; (iii) diversification of the output into new additional products; and (iv) a fundamental change in the overall production process of an existing establishment. The introduction of the new production technology qualifies as fundamental change of the production process of an existing establishment. In addition, it allows to diversify the output of the establishment,

• in conformity with paragraph 40 of the RAG 2007-13, Autoeuropa is obliged to maintain the investment in the region for a minimum of 5 years after completion of the project,

• the beneficiary provides, in conformity with paragraph 39 of the RAG 2007-13, a financial contribution of at least 25 % of the eligible costs in a form which is free of any public support,

• the formal incentive effect requirements, laid down in paragraph 38 of the RAG 2007-13, are respected22,

• the eligible expenditure of the project is limited to new tangible assets (equipment and buildings only), and is thus in line with the provisions of paragraphs 50 and 54 of the RAG 2007-13.

However, the Commission raised doubts in the opening decision with regard to the eligibility of costs for vendor tooling. Therefore, and as it was unable to form a definitive view on whether the notified project and an earlier investment project carried out on the same site formed a single investment project in the meaning of paragraph 60 of the RAG 2007-13, the Commission was unable to establish whether the notified aid intensity exceeded the maximum allowable, and hence raised doubts also regarding the respect of the applicable regional aid ceiling.

In recital 45 of its opening decision the Commission considered that for the purposes of paragraph 68 of the RAG 2007-13, the products concerned by the investment project are passenger cars belonging to the market segments A0, A, and B according to the segmentation by POLK.

The Commission left the precise definition of the relevant product market open and considered all plausible alternative market definitions, including in particular the narrowest segmentation for which data is available.

This case practice is based on the view that competitors in all market segments, including the smallest possible segment, deserve protection from players with market dominance.

It is also grounded in competition relevant economic considerations. More specifically, this approach is based on the theory that demand side substitutability between two products exists if they are considered to be substitutes by consumers in view of their characteristics, price and intended use. Through its practice of examining market shares also in the smallest possible car market segment for which information is available, the Commission follows exactly this logic: i.e. it considers that substitutability in view of price, characteristics and intended use is the strongest between products belonging to the same segment. In this sense, the application of the narrowest possible market segment as one plausible market reflects the logic of point 28 of the Horizontal Merger Guidelines which states that ‘Products may be differentiated within a relevant market such that some products are closer substitutes than others. The higher the degree of substitutability between the merging firms’ products, the more likely it is that the merging firms will raise prices significantly. […] The merging firms' incentive to raise prices is more likely to be constrained when rival firms produce close substitutes to the products of the merging firms than when they offer less close substitutes'.

This is also why conventional cars are traditionally divided into segments, and why the automotive industry assigns models to the various well known segments. This is the consideration that has driven the Commission's practice in defining the relevant market in automotive cases also in terms of the individual segments and this is the reason why Member States presented the relevant market related arguments in this as well as in other cases in the past in terms of individual segments.

Since Autoeuropa will produce cars belonging to A0 and […] segments according to POLK, and could also produce cars belonging to the B segment according to POLK, the Commission considered that these individual segments and for SUVs also the SUV-B segment according to Global Insight, as well as the combined segment (A0 to B) according to POLK should all be considered as relevant plausible markets for this case.

In light of the above, and as during the formal investigation the Commission did not receive any additional information showing that it should modify its conclusions from the opening decision, the Commission maintains its assessment as regards the product and geographic market definitions.

The in-depth assessment is conducted on the basis of the IDAC.

Having established that the aid provides an incentive for carrying out the investment in the region concerned and is proportionate, it is necessary to balance the positive effects of the aid with its negative effects.

The assessment confirmed that the aid measure has an incentive effect attracting an investment which offers an important contribution to the regional development of a disadvantaged region which is eligible for regional aid pursuant to Article 107(3)(c) TFEU, without depriving from the investment any region with the same or a higher aid intensity ceiling (no anti-cohesion effect). The Commission considers that attracting an investment to a poorer region is more beneficial for cohesion within the Union than if the same investment had been located in a more developed region. As stated in paragraph 53 of the IDAC, the Commission considers that ‘the positive effects of regional aid which merely compensate for the difference in net costs relative to a more developed alternative investment location […] will normally be considered, under the balancing test, to outweigh any negative effects in the alternative location for new investment’.

In view of the above, the Commission finds that, given that the aid is proportional to the difference in net costs for carrying out the investment in the selected location, as compared to a more developed alternative location, the positive effects of the aid, in terms of its objective and appropriateness, as demonstrated above, outweigh the negative effects in the alternative location.

In accordance with paragraph 68 of the RAG 2007-13, and in light of the in-depth assessment conducted on the basis of the IDAC, the Commission concludes that the aid is necessary to provide an incentive effect for the investment and that the benefits of the aid measure outweigh the resulting distortion of competition and effect on trade between Member States.