United States v. Regal Beloit Corp. and A.O. Smith Corp.; Proposed Final Judgment and Competitive Impact Statement, 52972-52990 [2011-21590]

Agencies

• Antitrust Division
• Department of Justice

[Federal Register Volume 76, Number 164 (Wednesday, August 24, 2011)]
[Notices]
[Pages 52972-52990]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-21590]


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DEPARTMENT OF JUSTICE

Antitrust Division


United States v. Regal Beloit Corp. and A.O. Smith Corp.; 
Proposed Final Judgment and Competitive Impact Statement

    Notice is hereby given pursuant to the Antitrust Procedures and 
Penalties Act, 15 U.S.C. 16(b)-(h), that a proposed Final Judgment, 
Hold Separate Stipulation and Order, and Competitive Impact Statement 
have been filed with the United States District Court for the District 
of Columbia in United States v. Regal Beloit Corporation. and A.O. 
Smith Corporation., Civil Action No. 1:11-cv-01487. On August 17, 2011, 
the United States filed a Complaint alleging that the proposed 
acquisition by Regal Beloit Corporation (``RBC'') of the electric motor 
business of A.O. Smith Corporation (``AOS'') would violate Section 7 of 
the Clayton Act, 15 U.S.C. 18. The proposed Final Judgment, filed at 
the same time as the Complaint, requires RBC to divest assets relating 
to its electric motors for pool pumps and spa pumps, including certain 
tangible and intangible assets associated with these motors. The 
proposed Final Judgment requires that the pool pump and spa pump motor 
assets be sold to SNTech, Inc. The proposed Final Judgment also 
requires RBC to divest the assets AOS has been using in its effort to 
enter the market for draft inducers used in furnaces having a thermal 
efficiency of 90 percent or greater, including the tangible and 
intangible assets associated with AOS's efforts. The proposed Final 
Judgment requires that the draft inducer assets be sold to Revcor, Inc.
    Copies of the Complaint, proposed Final Judgment, and Competitive 
Impact Statement are available for inspection at the Department of 
Justice, Antitrust Division, Antitrust Documents Group, 450 Fifth 
Street, NW., Suite 1010, Washington, DC 20530 (telephone: (202) 514-
2481), on the Department of Justice's Web site at https://www.usdoj.gov/atr, and at the Office of the Clerk of the United States District Court 
for District of Columbia. Copies of these materials may be obtained 
from the Antitrust Division upon request and payment of the copying fee 
set by Department of Justice regulations.
    Public comment is invited within 60 days of the date of this 
notice. Such comments and responses thereto will be published in the 
Federal Register and filed with the Court. Comments should be directed 
to Maribeth Petrizzi, Chief, Litigation II Section, Antitrust Division, 
U.S. Department of Justice, 450 Fifth Street, NW., Suite 8700, 
Washington, DC 20530 (telephone: (202) 307-0924).

Patricia A. Brink,
Director of Civil Enforcement.

United States District Court for the District of Columbia

    United States of America, United States Department of Justice, 
Antitrust Division, 450 Fifth Street, NW., Suite 8700, Washington, 
DC 20530, Plaintiff, v. Regal Beloit Corporation, 200 State Street, 
Beloit, Wisconsin 53511, and A.O. Smith Corporation, 11270 West Park 
Place, Suite 170, Milwaukee, Wisconsin 53224, Defendants.

Case: 1:11-cv-01487.
Assigned To: Huvelle, Ellen S.
Assign. Date: 8/17/2011.
Description: Antitrust.

Complaint

    The United States of America (``United States''), acting under the 
direction of the Attorney General of the United States, brings this 
civil antitrust action against Defendants Regal Beloit Corporation 
(``RBC'') and A.O. Smith Corporation (``AOS'') to enjoin RBC's proposed 
acquisition of the electric motor business from AOS. The United States 
complains and alleges as follows:

I. Nature of the Action

    1. On December 12, 2010, RBC entered into an agreement to acquire 
the electric motor business from AOS. This business involves the 
manufacture and sale of numerous types of motors, among other related 
products. The transaction is valued at approximately $875 million and 
includes $700 million in cash and 2.83 million shares of RBC common 
stock, currently valued at approximately $175 million.
    2. RBC's proposed acquisition of the electric motor business from 
AOS likely would substantially lessen competition in the markets for 
electric motors for pool pumps and electric motors for spa pumps in the 
United States. RBC and AOS are two of the three leading

[[Page 52973]]

suppliers of these products in the United States. Combined, RBC and AOS 
would supply approximately 85 percent of the U.S. market for electric 
motors for pool pumps. In addition, combined, RBC and AOS would supply 
well over half of the U.S. market for electric motors for spa pumps. 
For some customers of electric motors for pool pumps and electric 
motors for spa pumps, AOS and RBC are the two best sources of supply.
    3. In addition, RBC's proposed acquisition of the electric motor 
business from AOS would eliminate the actual potential competition from 
AOS in the market for draft inducers used in high-efficiency furnaces 
in the United States. RBC is currently the only supplier of these draft 
inducers in the United States. AOS has the means and is likely to enter 
this market. AOS also is a uniquely well-positioned entrant. It is 
likely that AOS's entry into this market would produce procompetitive 
effects.
    4. The elimination of the competition between RBC and AOS likely 
would result in RBC's ability profitably to unilaterally raise prices 
of electric motors for pool pumps and electric motors for spa pumps to 
customers in the United States. The proposed acquisition also likely 
would reduce RBC's incentive to invest in innovations for these 
products.
    5. Further, the elimination of AOS as a potential competitor of 
draft inducers for high-efficiency furnaces in the United States likely 
would result in RBC's ability to continue its monopoly without the 
threat of a potential entrant.
    6. As a result, the proposed acquisition likely would substantially 
lessen competition in the development, manufacture, and sale of 
electric motors for pool pumps and electric motors for spa pumps in the 
United States, in violation of Section 7 of the Clayton Act, 15 U.S.C. 
18. The acquisition also would eliminate the potential competition 
between RBC and AOS for draft inducers for high-efficiency furnaces in 
the United States, in violation of Section 7 of the Clayton Act, 15 
U.S.C. 18.

II. The Defendants

    7. RBC is incorporated in Wisconsin and has its headquarters in 
Beloit, Wisconsin. RBC is a manufacturer of mechanical and electrical 
motion control and power generation products. In 2010, RBC had revenues 
of approximately $2.2 billion, primarily from its electric products.
    8. AOS is incorporated in Delaware and has its headquarters in 
Milwaukee, Wisconsin. AOS comprises two operating units: the water 
products business and the electric motor business. AOS is one of North 
America's largest manufacturers of electric motors for residential and 
commercial applications. In 2010, AOS had revenues of approximately 
$1.5 billion, with approximately $700 million of that amount from 
electric motors and related products.

III. Jurisdiction and Venue

    9. The United States brings this action under Section 15 of the 
Clayton Act, 15 U.S.C. 4 and 25, as amended, to prevent and restrain 
Defendants from violating Section 7 of the Clayton Act, 15 U.S.C. 18.
    10. Defendants develop, manufacture, and sell electric motors for 
pool pumps and electric motors for spa pumps and other products in the 
flow of interstate commerce. Defendants' activities in the development, 
manufacture, and sale of these products substantially affect interstate 
commerce. This Court has subject matter jurisdiction over this action 
pursuant to Section 15 of the Clayton Act, 15 U.S.C. 25, and 28 U.S.C. 
1331, 1337(a), and 1345.
    11. Defendants have consented to venue and personal jurisdiction in 
this judicial district. Venue is therefore proper in this District 
under Section 12 of the Clayton Act, 15 U.S.C. 22, and 28 U.S.C. 
1391(c).

IV. Electric Motors for Pool Pumps and Spa Pumps

A. Background

    12. Electric motors come in a broad range of sizes, horsepower 
ratings, and end-use segments. Standard frame sizes are determined by 
both common practice and the National Electrical Mechanical 
Association. While there is a great deal of overlap between motor size 
and horsepower, in general, as size increases, horsepower does as well.
    13. The smallest electric motors, which generally range in 
horsepower from 1/400 to one-half, are called subfractional motors. 
Slightly larger electric motors, which generally range in horsepower 
from one-half horsepower to five horsepower, are called fractional 
motors. In addition to variations in frame and horsepower sizes, 
electric motors are often customized for specific end-use applications. 
End-use categories include water pumps, with specific applications for 
pumping well water and wastewater, as well as for use in pools and 
spas; heating, ventilation, air conditioning, and refrigeration, with 
specific applications in air conditioning compressors, fans, furnaces, 
and blowers; and general commercial uses, with such diverse 
applications as garage door openers and exercise machines.
    14. For a number of years, manufacturers have been developing more 
efficient electric motors. One of the most innovative technologies 
being utilized and continually improved for higher energy efficiency is 
variable speed technology, which enables the motor to switch between 
several speeds, sometimes using integrated electronics and permanent 
magnet technology, thereby allowing the motor to run more efficiently.
    15. Motors sold for use in pool pumps and spa pumps must be 
uniquely engineered and assembled to meet the size and performance 
specifications of the individual pump. In addition to size and energy 
efficiency, specification variables include the capacity of the 
impeller, the speed, the current/voltage, whether the motor is operated 
continually or sporadically, and whether the pump has more than one 
speed of operation.
    16. In light of government regulations, energy costs, and 
environmental concerns, more energy-efficient motors, including 
variable speed motors, are increasingly demanded for pool and spa 
applications. For example, California recently enacted legislation 
pertaining to the energy efficiency of pool pumps and spa pumps. Even 
without such legislation, energy-efficient motors are becoming more 
popular because they use less electricity and, therefore, are less 
costly to operate. Energy-efficient pump motors also produce less noise 
than standard induction pump motors. Pool pumps are an excellent 
application for the innovative, more energy-efficient motors because 
pool pumps typically run for many hours a day, sometimes even 
continuously. Pool pumps are therefore expected to be a high growth 
area for more energy-efficient electric motors.
    17. All electric motors must pass Underwriters Laboratories 
(``UL'') certification. UL has established safety standards 
specifically for all electric motors for pool pumps and all electric 
motors for spa pumps. For example, electric motors for pool pumps and 
electric motors for spa pumps are the only pump motors that are 
required to have a ground bonding lug on the outside of the pump, 
assuring that the pump is electrically grounded.
    18. Electric motors for pool pumps and electric motors for spa 
pumps are purchased by manufacturers of pool pumps and spa pumps. 
Electric motors for pool pumps and electric motors for spa pumps are 
also sold as replacements or upgrades in the aftermarket through

[[Page 52974]]

the pump manufacturers and distributors.

B. Relevant Markets

1. Electric Motors for Pool Pumps
a. Product Market
    19. Electric motors for pool pumps have specific applications, for 
which other types of pumps cannot be employed. Motors for use in other 
types of pumps, such as sump pumps and spa pumps, cannot be used in 
pool pumps because each pump is specifically designed for a particular 
application and the motor is then specifically designed for each pump 
type. The motors for the different types of pumps also have different 
performance characteristics. A customer who requires a motor for a pool 
pump cannot substitute a motor for a spa pump, sump pump, or jetted tub 
pump, or any other kind of motor.
    20. A small but significant increase in the price of electric 
motors for pool pumps would not cause customers of those motors to 
substitute a different kind of motor or other product or reduce 
purchases of electric motors for pool pumps in volumes sufficient to 
make such a price increase unprofitable. Accordingly, the development, 
manufacture, and sale of electric motors for pool pumps is a line of 
commerce and relevant market within the meaning of Section 7 of the 
Clayton Act.
b. Geographic Market
    21. Although electric motors for pool pumps may be manufactured 
outside the United States, U.S. purchasers can use only those motors 
designed for use in the United States. These motors must be customized 
for the demands of U.S. purchasers and must comply with distinct U.S. 
technical specifications, such as UL certification.
    22. Manufacturers of electric motors for pool pumps typically 
deliver the motors to their customers' locations. Most customers that 
purchase motors for pool pumps for use in the United States are located 
in the United States.
    23. Major U.S. customers of electric motors for pool pumps consider 
only those manufacturers with a substantial U.S. presence, including 
sales, technical, and support personnel. U.S. customers prefer 
localized experience, inventory, technical support, and warranty 
assistance, as well as detailed knowledge of the U.S. market and 
products designed to meet U.S. requirements.
    24. A small but significant increase in the price of electric 
motors for pool pumps intended for use in the United States would not 
cause a sufficient number of U.S. customers to turn to manufacturers of 
those motors that do not have a substantial presence in the United 
States so as to make such a price increase unprofitable. Accordingly, 
the United States is a relevant geographic market within the meaning of 
Section 7 of the Clayton Act.
2. Electric Motors for Spa Pumps
a. Product Market
    25. Electric motors for spa pumps have specific applications, for 
which other types of pumps cannot be employed. Motors for use in other 
types of pumps, such as sump pumps and pool pumps, cannot be used in 
spa pumps because each pump is specifically designed for a particular 
application and the motor is then specifically designed for each pump 
type. The motors for the different types of pumps also have different 
performance characteristics. A customer who requires a motor for a spa 
pump cannot substitute a motor for a pool pump, sump pump, or jetted 
tub pump, or any other kind of motor.
    26. A small but significant increase in the price of electric 
motors for spa pumps would not cause customers of those motors to 
substitute a different kind of motor or other product or reduce 
purchases of electric motors for spa pumps in volumes sufficient to 
make such a price increase unprofitable. Accordingly, the development, 
manufacture, and sale of electric motors for spa pumps is a line of 
commerce and relevant market within the meaning of Section 7 of the 
Clayton Act.
b. Geographic Market
    27. Electric motors for spa pumps may be manufactured outside the 
United States; however, these motors must be customized for use in the 
United States and must comply with distinct U.S. technical 
specifications, such as UL certification.
    28. Manufacturers of electric motors for spa pumps typically 
deliver the motors to their customers' locations. Most customers that 
purchase motors for spa pumps for use in the United States are located 
in the United States.
    29. Most U.S. customers of electric motors for spa pumps prefer 
manufacturers with a substantial U.S. presence, including sales, 
technical, and support personnel. U.S. customers prefer localized 
experience, inventory, technical support, and warranty assistance, as 
well as detailed knowledge of the U.S. market and products designed to 
meet U.S. requirements.
    30. A small but significant increase in the price of electric 
motors for spa pumps intended for use in the United States would not 
cause a sufficient number of U.S. customers to turn to manufacturers of 
these motors that do not have a substantial presence in the United 
States so as to make such a price increase unprofitable. Accordingly, 
the United States is a relevant geographic market within the meaning of 
Section 7 of the Clayton Act.

C. Anticompetitive Effects of the Proposed Acquisition

1. Electric Motors for Pool Pumps
    31. AOS, RBC, and one other company are the only significant 
competitors that sell electric motors for pool pumps in the United 
States. Currently, AOS and RBC sell approximately 76 and nine percent, 
respectively, of electric motors for pool pumps in the United States. 
The third competitor accounts for most of the remaining sales in this 
market.
    32. RBC's proposed acquisition of the electric motor business from 
AOS likely would substantially lessen competition in the U.S. market 
for electric motors for pool pumps. If the acquisition is not enjoined, 
the combined firm would supply approximately 85 percent of the electric 
motors for pool pumps in the United States. The Herfindahl-Hirschman 
Index (``HHI'') (explained in Appendix A) is a measure of market 
concentration. Mergers resulting in highly concentrated markets (with 
an HHI in excess of 2,500) that cause an increase in the HHI of more 
than 200 points are presumed to be likely to enhance market power under 
the Horizontal Merger Guidelines issued by the U.S. Department of 
Justice and the Federal Trade Commission. Following RBC's acquisition 
of the electric motor business of AOS, the HHI would increase from 
approximately 6,000 points to more than 7,500 points.
    33. AOS's and RBC's bidding behavior often has been constrained by 
the possibility of losing sales of electric motors for pool pumps to 
the other. For many customers of electric motors for pool pumps, AOS 
and RBC are the two best sources.
    34. Customers have benefited from the competition between AOS and 
RBC for sales of electric motors for pool pumps by receiving lower 
prices. In addition, AOS and RBC have competed vigorously by providing 
innovations that have resulted in higher-quality and more energy-
efficient motors. For example, AOS and RBC have competed for the 
development and sale of more energy-efficient motors for pool pumps. 
The third competitor is behind AOS and RBC in developing this energy-
efficient

[[Page 52975]]

technology. Further, AOS and RBC compete based on the level of service 
they provide to their customers. The combination of AOS and RBC would 
eliminate this competition and its future benefits to customers. Post-
acquisition, RBC likely would have the incentive and gain the ability 
to profitably increase prices, reduce quality, reduce innovation, and 
provide less customer service.
    35. The response of the only other significant competitor in the 
United States for electric motors for pool pumps would not be 
sufficient to constrain a unilateral exercise of market power by RBC 
post-acquisition. RBC would be aware that many customers strongly 
prefer it as a supplier, allowing it profitably to raise prices above 
pre-acquisition levels.
    36. The proposed acquisition, therefore, likely would substantially 
lessen competition in the United States for the development, 
manufacture, and sale of electric motors for pool pumps. This likely 
would lead to higher prices, lower quality, less customer service, and 
less innovation in violation of Section 7 of the Clayton Act.
2. Electric Motors for Spa Pumps
    37. AOS, RBC, and one other company are the only significant 
competitors that sell electric motors for spa pumps in the United 
States. Currently, AOS and RBC each sell a substantial portion of the 
electric motors for spa pumps in the United States. The third 
competitor accounts for most of the remaining sales in this market.
    38. RBC's proposed acquisition of the electric motor business from 
AOS likely would substantially lessen competition in the U.S. market 
for electric motors for spa pumps. If the acquisition is not enjoined, 
the combined firm would supply well over half of the electric motors 
for spa pumps in the United States.
    39. AOS's and RBC's bidding behavior often has been constrained by 
the possibility of losing sales of electric motors for spa pumps to the 
other. For many customers of motors for spa pumps, AOS and RBC are the 
two best sources.
    40. Customers have benefited from the competition between AOS and 
RBC for sales of electric motors for spa pumps by receiving lower 
prices. In addition, AOS and RBC have competed vigorously by providing 
innovations that have resulted in higher-quality motors. The 
combination of AOS and RBC would eliminate this competition and its 
future benefits to customers. Post-acquisition, RBC likely would have 
the incentive and gain the ability to profitably increase prices, 
reduce quality, reduce innovation, and provide less customer service.
    41. The response of the only other significant competitor in the 
United States for electric motors for spa pumps would not be sufficient 
to constrain a unilateral exercise of market power by RBC post-
acquisition. RBC would be aware that many customers strongly prefer it 
as a supplier, allowing it profitably to raise prices above pre-
acquisition levels.
    42. The proposed acquisition, therefore, likely would substantially 
lessen competition in the United States for the development, 
manufacture, and sale of electric motors for spa pumps. This likely 
would lead to higher prices, lower quality, less customer service, and 
less innovation in violation of Section 7 of the Clayton Act.

D. Difficulty of Entry

    43. Sufficient, timely entry of additional competitors into the 
markets for electric motors for pool pumps and electric motors for spa 
pumps in the United States is unlikely. Therefore, entry or the threat 
of entry into this market will not prevent the harm to competition 
caused by the elimination of AOS as a supplier of these products.
    44. Firms attempting to enter into the U.S. market for the 
development, manufacture, and sale of electric motors for pool pumps 
and electric motors for spa pumps face several barriers to entry. 
First, establishing a reputation for successful performance and gaining 
customer confidence are important and may require many years and 
substantial sunk costs. Because end users rely on these motors to 
perform a critical function in their pool pumps and spa pumps, they are 
reluctant to purchase a product from a supplier not already known for 
its expertise in electric motors for pool pumps and electric motors for 
spa pumps, or at least in fractional electric motors.
    45. Second, entry into the markets for electric motors for pool 
pumps and electric motors for spa pumps could take years. A new 
supplier must demonstrate to potential customers that its motors can 
meet the customers' particular design specifications as well as their 
rigorous quality and performance standards. Because each customer may 
have many different specifications for the motors, the period for 
qualification can take up to twelve months with no guarantee of 
success. This period does not include the time necessary to obtain UL 
certification, which may take up to six months. Further, because 
customer specifications are unique, qualification with one customer 
does not guarantee qualification with another.
    46. Third, the technology and expertise involved in developing and 
producing electric motors for pool pumps and electric motors for spa 
pumps is another barrier to entry. A new supplier would need to 
construct production lines capable of manufacturing motors for pool 
pumps and motors for spa pumps that meet the standards of potential 
customers. In addition, the technical know-how necessary to design and 
successfully manufacture such motors is difficult to obtain. Even 
incumbent manufacturers of fractional electric motors, with all their 
expertise and technical know-how, require substantial time and expense 
for engineering, tooling, and testing a new motor before it can be 
sold. A new entrant must also be committed to investing in research and 
development to meet the customers' ongoing desire for innovation, 
including more energy-efficient motors.
    47. Finally, U.S. customers prefer suppliers that have a 
substantial U.S. presence, which can require a significant investment 
in time and money. Given the low volumes of motors needed by 
manufacturers of pool pumps and spa pumps, new entrants are unlikely to 
invest in establishing the personnel, inventory, and distribution 
presence required to compete effectively in the United States.
    48. As a result of these barriers, entry into the markets for 
electric motors for pool pumps and electric motors for spa pumps in the 
United States would not be timely, likely, or sufficient to defeat the 
substantial lessening of competition that likely would result from 
RBC's acquisition of AOS's electric motor business.

V. Draft Inducers for High-Efficiency Furnaces

A. Background

    49. Gas-fired furnaces require the movement of air and the 
expulsion of hot combustion gases. Blowers move the air through ducts 
and circulate it around a building. Furnace draft inducers are 
specialized blowers, which perform an important safety function by 
extracting harmful combustion gases such as carbon monoxide, and 
venting those gases outside. Furnace draft inducers must meet federal 
regulatory standards for safety and energy efficiency.
    50. Furnace draft inducers consist of a housing containing a blower 
wheel and a motor. Furnace draft inducers are distinguished from 
circulation blowers by the shape of the housing, the need for safety 
devices to ensure gas is extracted,

[[Page 52976]]

and the design of the motor mounting on the blower assembly, among 
other design features. The shapes of the housing and fan blades are 
among the more difficult design aspects of furnace draft inducers.
    51. Furnaces are classified according to their thermal efficiency, 
which is the percentage of energy that is used to heat the air and that 
is not lost with the vented combustion gases. Draft inducers are 
designed for the specific thermal efficiency of each furnace. Less 
efficient furnaces, typically referred to as 80 percent thermal 
efficiency or 80+, use draft inducers that employ an older technology 
that has been utilized for forty years. More modern furnaces with 
higher thermal efficiency, typically referred to as 90 percent thermal 
efficiency or 90+, use draft inducers based on newer, more advanced 
technology.
    52. Draft inducers for furnaces with 80 percent thermal efficiency 
(hereafter referred to as ``80+ draft inducers'') are used in non-
condensing furnaces. Non-condensing furnaces do not need the draft 
inducer to drain condensation. 80+ draft inducers are generally simpler 
and easier to design than draft inducers for furnaces with a 90 percent 
or greater thermal efficiency (hereafter referred to as ``90+ draft 
inducers'') because they have a single inlet, a sheet metal housing 
that is easily available, and a narrow, forward-curved wheel.
    53. 90+ draft inducers are used in condensing furnaces. Condensing 
furnaces take so much heat out of the combusted gases (that is, turn so 
much of the combustion energy into heat that is circulated) that 
condensation forms in the draft inducer. This necessitates a draft 
inducer with a plastic housing that is made from polycarbonate 
material, rather than metal, which can corrode, and a drain for the 
condensation. 90+ draft inducers also contain a more technically 
complicated ``swirl fan'' and backward-curved wheel, which is inclined 
for greater efficiency and noise reduction. 90+ draft inducers are 
priced significantly higher than 80+ draft inducers.
    54. Currently, sales of 90+ draft inducers represent the majority 
of the draft inducer sales in the United States. Usage of 90+ draft 
inducers is likely to increase as federal regulations requiring the use 
of more energy-efficient products likely will lead to the removal of 
furnaces with 80 percent thermal efficiency from the market.

B. Relevant Markets

1. Product Market
    55. 90+ draft inducers have specific applications, for which other 
products cannot be employed. Every furnace needs a draft inducer, and 
no product other than a draft inducer can extract the harmful 
combustion gases from the furnace and safely vent them. In addition, 
80+ draft inducers, or other draft inducers designed for less efficient 
furnaces, cannot be substituted for a 90+ draft inducer. Draft inducers 
for less efficient furnaces will not work with a furnace with 90 
percent thermal efficiency.
    56. Draft inducers are also used to vent hazardous gases created in 
other gas appliances. Although performing a similar function as furnace 
draft inducers, the frame shape, wheel design, motor, and other design 
features of a draft inducer intended for another appliance are 
sufficiently distinct that they cannot be used in a furnace.
    57. A small but significant increase in the price of 90+ draft 
inducers would not cause customers of 90+ draft inducers to substitute 
a lower-efficiency draft inducer, such as an 80+ draft inducer, or 
another product or to reduce purchases of 90+ draft inducers in volumes 
sufficient to make such a price increase unprofitable. Accordingly, the 
development, manufacture, and sale of 90+ draft inducers is a line of 
commerce and relevant market within the meaning of Section 7 of the 
Clayton Act.
2. Geographic Market
    58. 90+ draft inducers sold in the United States must be customized 
for the demands of U.S. purchasers and must comply with distinct U.S. 
technical specifications and certification requirements.
    59. Manufacturers of 90+ draft inducers typically deliver the 
products to their customers' locations. 90+ draft inducers are used 
only in the United States and Canada. Customers that purchase 90+ draft 
inducers for use in the United States are located in the United States.
    60. Major U.S. customers of 90+ draft inducers consider only those 
manufacturers with a significant understanding of heating systems in 
the United States. Those manufacturers all have a substantial presence 
in the United States, including sales, technical, and support 
personnel. U.S. customers also prefer localized experience, inventory, 
and technical support, as well as detailed knowledge of the U.S. 
market.
    61. A small but significant increase in the price of 90+ draft 
inducers would not cause a sufficient number of customers in the United 
States to turn to manufacturers of 90+ draft inducers without a 
presence in the United States so as to make such a price increase 
unprofitable. Accordingly, the United States is a relevant geographic 
market within the meaning of Section 7 of the Clayton Act.

C. Anticompetitive Effects of the Proposed Acquisition

    62. For the past several years, RBC has been the only firm selling 
90+ draft inducers in the United States. Furnace manufacturers have 
attempted to find alternative sources for 90+ draft inducers. For at 
least one year, AOS has been attempting to enter the U.S. market for 
90+ draft inducers. AOS has the means to enter this market and has 
advantages over other manufacturers that make it a particularly strong 
and likely entrant.
    63. While AOS is not currently manufacturing and selling 90+ draft 
inducers, it is one of the few manufacturers in the United States that 
likely would have the ability to enter the 90+ draft inducer market. 
RBC and AOS are the only manufacturers of water heater draft inducers 
in the United States. While water heater draft inducers are distinct 
from 90+ draft inducers, AOS's technology, experience, and know-how 
relating to the development of water heater draft inducers provided AOS 
with some technical knowledge necessary to begin developing a 90+ draft 
inducer that would not infringe numerous RBC patents relating to the 
90+ draft inducer. Until the announcement of RBC's proposed acquisition 
of the electric motor business of AOS, AOS engaged in 90+ draft inducer 
development projects with three furnace manufacturers and had sent 
samples of its product to one of these manufacturers. These furnace 
manufacturers viewed AOS as presenting the only opportunity to develop 
an alternative to RBC for 90+ draft inducers. Accordingly, AOS was the 
firm best positioned to challenge RBC's dominance in the 90+ draft 
inducer market in the United States.
    64. One company that sells 80+ draft inducers to U.S. customers is 
attempting to develop a 90+ draft inducer. However, its efforts have 
been unsuccessful and most furnace manufacturers do not consider this 
company to be close to success in developing a 90+ draft inducer.
    65. AOS's entry into the U.S. market for 90+ draft inducers likely 
would have benefited customers with lower prices, more innovation, and 
more favorable terms of service. AOS may have become

[[Page 52977]]

an alternative to RBC for the supply of 90+ draft inducers. RBC's 
acquisition of the electric motor business of AOS would prevent AOS's 
entry and, therefore, substantially lessen competition in the market 
for 90+ draft inducers, in violation of Section 7 of the Clayton Act, 
15 U.S.C. 18.

D. Difficulty of Entry

    66. Sufficient, timely entry of additional competitors into the 
market for 90+ draft inducers in the United States is unlikely. 
Therefore, entry or the threat of entry into this market is not likely 
to prevent the harm to competition caused by the elimination of AOS as 
a potential supplier of 90+ draft inducers.
    67. Firms attempting to enter the U.S. market for the development, 
manufacture, and sale of 90+ draft inducers face several barriers to 
entry. First, a new supplier of 90+ draft inducers must be certified as 
a supplier by the furnace manufacturer and must work with that 
manufacturer to customize the draft inducer specifically for the 
manufacturer's furnace. This is a rigorous and lengthy process, often 
involving many redesigns of the product, and can take two years or 
longer. This process involves, among other things, reaching an 
agreement by the furnace manufacturer and the draft inducer supplier on 
the specifications for the draft inducer, the design of the draft 
inducer and each subcomponent to meet these specifications, and the 
laboratory and field testing of the subcomponents and the assembled 90+ 
draft inducer.
    68. Second, draft inducer suppliers must have an established 
reputation for the reliability of their products and the capacity to 
timely supply them in sufficient quantities. Because draft inducers 
perform a critical function in the furnace, furnace manufacturers are 
reluctant to purchase a product from a supplier that is not already 
known for its expertise in the product area.
    69. Third, a firm attempting to develop a 90+ draft inducer must 
have the technology and know-how to design a draft inducer that avoids 
infringing on the numerous RBC patents relating to 90+ draft inducers. 
Those few motor or blower manufacturers in the heating industry that 
have reputations for quality products and the capacity to supply 
motors, blowers, and other heating system components have experienced 
difficulties in their attempts to develop a 90+ draft inducer that 
would be competitive in price, quality, and the capacity to supply 
them.
    70. As a result of these barriers, entry into the market for 90+ 
draft inducers in the United States would not be timely, likely, or 
sufficient to defeat the substantial lessening of competition that 
would result from RBC's acquisition of AOS's electric motor business.

VI. Violations Alleged

    71. RBC's proposed acquisition of the electric motor business from 
AOS likely would substantially lessen competition in the development, 
manufacture, and sale of electric motors for pool pumps, electric 
motors for spa pumps, and 90+ draft inducers in the United States in 
violation of Section 7 of the Clayton Act, 15 U.S.C. 18.
    72. Unless enjoined, the proposed acquisition likely would have the 
following anticompetitive effects, among others:
    (a) Actual and potential competition between RBC and AOS in the 
markets for the development, manufacture, and sale of electric motors 
for pool pumps and electric motors for spa pumps in the United States 
would be eliminated;
    (b) Competition in the markets for the development, manufacture, 
and sale of electric motors for pool pumps and electric motors for spa 
pumps in the United States likely would be substantially lessened;
    (c) For electric motors for pool pumps and electric motors for spa 
pumps in the United States, prices likely would increase and quality, 
customer service, and innovation likely would decrease;
    (d) Potential competition between RBC and AOS in the market for 90+ 
draft inducers in the United States would be eliminated; and
    (e) Prices for 90+ draft inducers in the United States likely would 
remain higher than they would be in a market with more than one 
competitor.

VII. Requested Relief

    73. The United States requests that this Court:
    (a) Adjudge and decree that RBC's acquisition of the electric motor 
business from AOS would be unlawful and violate Section 7 of the 
Clayton Act, 15 U.S.C. 18;
    (b) Preliminarily and permanently enjoin and restrain Defendants 
and all persons acting on their behalf from consummating the proposed 
acquisition of the AOS electric motor business by RBC, or from entering 
into or carrying out any other contract, agreement, plan, or 
understanding, the effect of which would be to combine RBC with the 
electric motor business of AOS;
    (c) Award the United States its costs for this action; and
    (d) Award the United States such other and further relief as the 
Court deems just and proper.

For Plaintiff United States of America:

Sharis A. Pozen (DC Bar 435204),
Acting Assistant Attorney General.

Patricia A. Brink,
Director of Civil Enforcement.

Maribeth Petrizzi (D.C. Bar 435204),
 Chief, Litigation II Section.

Dorothy B. Fountain (D.C. Bar 439469),
Assistant Chief, Litigation II Section.

Christine A. Hill (D.C. Bar 461048),
James K. Foster,
Milosz Gudzowski,
John Lynch,
Leslie D. Peritz,
Blake Rushforth,
Angela Ting,
Robert W. Wilder,

Attorneys, United States Department of Justice, Antitrust Division, 
450 Fifth Street, NW., Suite 8700, Washington, DC 20530, (202) 305-
2738.

Dated: August 17, 2011.

Appendix A

Definition of HHI

    The term ``HHI'' means the Herfindahl-Hirschman Index, a commonly 
accepted measure of market concentration. The HHI is calculated by 
squaring the market share of each firm competing in the market and then 
summing the resulting numbers. For example, for a market consisting of 
four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 
(30\2\ + 30\2\ + 20\2\ + 20\2\ = 2,600). The HHI takes into account the 
relative size distribution of the firms in a market. It approaches zero 
when a market is occupied by a large number of firms of relatively 
equal size and reaches its maximum of 10,000 points when a market is 
controlled by a single firm. The HHI increases both as the number of 
firms in the market decreases and as the disparity in size between 
those firms increases.
    Markets in which the HHI is between 1,500 and 2,500 points are 
considered to be moderately concentrated and markets in which the HHI 
is in excess of 2,500 points are considered to be highly concentrated. 
See Horizontal Merger Guidelines Sec.  5.3 (issued by the U.S. 
Department of Justice and the Federal Trade Commission on Aug. 19, 
2010). Transactions that increase the HHI by more than 200 points in 
highly concentrated markets will be presumed likely to enhance market 
power. Id.

United States District Court for the District of Columbia

    United States of America, Plaintiff, v. Regal Beloit 
Corporation, and A.O. Smith Corporation, Defendants.

Case: 1:11-cv-01487.

[[Page 52978]]

Assigned To: Huvelle, Ellen S.
Assign. Date: 8/17/2011.
Description: Antitrust.

Competitive Impact Statement

    Plaintiff United States of America (``United States''), pursuant to 
Section 2(b) of the Antitrust Procedures and Penalties Act (``APPA'' or 
``Tunney Act''), 15 U.S.C. 16(b)-(h), files this Competitive Impact 
Statement relating to the proposed Final Judgment submitted for entry 
in this civil antitrust proceeding.

I. Nature and Purpose of the Proceeding

    Defendants Regal Beloit Corporation (``RBC'') and A.O. Smith 
Corporation (``AOS'') entered into an Asset and Stock Purchase 
Agreement, dated December 12, 2010. Pursuant to this agreement, RBC 
proposes to acquire AOS's electric motor business, which involves the 
manufacture and sale of numerous types of motors, among other related 
products. The transaction is valued at approximately $875 million.
    The United States filed a civil antitrust Complaint on August 17, 
2011, seeking to enjoin the proposed acquisition, alleging that it 
likely would substantially lessen competition in three separate product 
markets--electric motors for pool pumps, electric motors for spa pumps, 
and draft inducers for furnaces having a thermal efficiency of 90 
percent or higher (hereafter referred to as ``90+ draft inducers'')--in 
violation of Section 7 of the Clayton Act, 15 U.S.C. 18. For most U.S. 
customers, RBC and AOS are two of the three leading suppliers of 
electric motors for pool pumps and electric motors for spa pumps in the 
United States. The loss of competition from the acquisition likely 
would result in RBC's ability unilaterally to raise prices of electric 
motors for pool pumps and electric motors for spa pumps and would 
reduce RBC's incentive to invest in innovations for those products. In 
addition, RBC is the only supplier of 90+ draft inducers in the United 
States, and AOS is the only company likely to enter this market. The 
elimination of actual potential competition between RBC and AOS likely 
would result in RBC's ability to continue its monopoly without the 
threat of a potential entrant.
    At the same time the Complaint was filed, the United States filed a 
Hold Separate Stipulation and Order (``Hold Separate'') and proposed 
Final Judgment, which are designed to eliminate the anticompetitive 
effects that would result from RBC's acquisition of AOS's electric 
motor business. Under the proposed Final Judgment, which is explained 
more fully below, RBC is required to divest assets relating to its 
electric motors for pool pumps and electric motors for spa pumps, as 
well as the assets AOS has been using in its effort to enter the market 
for 90+ draft inducers. Under the terms of the Hold Separate, RBC will 
keep its own assets entirely separate from the assets it acquires from 
AOS until the required divestitures take place. Pursuant to the Hold 
Separate, RBC and AOS also must take certain steps to ensure that the 
assets being divested continue to be operated in a competitively and 
economically viable manner and that competition for the products being 
divested is maintained during the pendency of the divestiture.
    The United States and Defendants have stipulated that the proposed 
Final Judgment may be entered after compliance with the APPA. Entry of 
the proposed Final Judgment would terminate this action, except that 
the Court would retain jurisdiction to construe, modify, or enforce the 
provisions of the Final Judgment and to punish violations thereof.

II. Description of the Events Giving Rise to the Alleged Violations

A. The Defendants

    RBC is incorporated in Wisconsin and has its headquarters in 
Beloit, Wisconsin. RBC is a manufacturer of mechanical and electrical 
motion control and power generation products. In 2010, RBC had revenues 
of approximately $2.2 billion, primarily from its electric products.
    AOS is incorporated in Delaware and has its headquarters in 
Milwaukee, Wisconsin. AOS comprises two operating units: The water 
products business and the electric motor business. AOS is one of North 
America's largest manufacturers of electric motors for residential and 
commercial applications. In 2010, AOS had revenues of approximately 
$1.5 billion, with approximately $700 million of that amount from 
electric motors and related products.

B. Anticompetitive Effects in the U.S. Markets for Electric Motors for 
Pool Pumps and Electric Motors for Spa Pumps

(1) Electric Motors for Pool Pumps and Spa Pumps
    Electric motors come in a broad range of sizes, horsepower ratings, 
and end-use segments. Standard frame sizes are determined by both 
common practice and the National Electrical Mechanical Association. 
While there is a great deal of overlap between motor size and 
horsepower, in general, as size increases, horsepower does as well. The 
smallest electric motors, which generally range in horsepower from 1/
400 to one-half, are called subfractional motors. Slightly larger 
electric motors, which generally range in horsepower from one-half 
horsepower to five horsepower, are called fractional motors. In 
addition to variations in frame and horsepower sizes, electric motors 
are often customized for specific end-use applications. End-use 
categories include water pumps, with specific applications for pumping 
well water and wastewater, as well as for use in pools and spas; 
heating, ventilation, air conditioning, and refrigeration, with 
specific applications in air conditioning compressors, fans, furnaces, 
and blowers; and general commercial uses, with such diverse 
applications as garage door openers and exercise machines.
    For a number of years, manufacturers have been developing more 
efficient electric motors. One of the most innovative technologies 
being utilized and continually improved for higher energy efficiency is 
variable speed technology, which enables the motor to switch between 
several speeds, sometimes using integrated electronics and permanent 
magnet technology, thereby allowing the motor to run more efficiently.
    Motors sold for use in pool pumps and spa pumps must be uniquely 
engineered and assembled to meet the size and performance 
specifications of the individual pump. In addition to size and energy 
efficiency, specification variables include the capacity of the 
impeller, the speed, the current/voltage, whether the motor is operated 
continually or sporadically, and whether the pump has more than one 
speed of operation.
    In light of government regulations, energy costs, and environmental 
concerns, more energy-efficient motors, including variable speed 
motors, are increasingly demanded for pool and spa applications. For 
example, California recently enacted legislation pertaining to the 
energy efficiency of pool pumps and spa pumps. Even without such 
legislation, energy-efficient motors are becoming more popular because 
they use less electricity and, therefore, are less costly to operate. 
Energy-efficient pump motors also produce less noise than standard 
induction pump motors. Pool pumps are an excellent application for the 
innovative, more energy-efficient motors because pool pumps typically 
run for many hours a day, sometimes even continuously. Pool pumps are 
therefore expected to be a high growth

[[Page 52979]]

area for more energy-efficient electric motors.
    All electric motors must pass Underwriters Laboratories (``UL'') 
certification. UL has established safety standards specifically for all 
electric motors for pool pumps and all electric motors for spa pumps. 
For example, electric motors for pool pumps and motors for spa pumps 
are the only pump motors that are required to have a ground bonding lug 
on the outside of the pump, assuring that the pump is electrically 
grounded.
    Electric motors for pool pumps and motors for spa pumps are 
purchased by manufacturers of pool pumps and spa pumps. Electric motors 
for pool pumps and motors for spa pumps are also sold as replacements 
or upgrades in the aftermarket through the pump manufacturers and 
distributors.
(2) The U.S. Market for Electric Motors for Pool Pumps
    Electric motors for pool pumps have specific applications, for 
which other types of pumps cannot be employed. Motors for use in other 
types of pumps, such as sump pumps and spa pumps, cannot be used in 
pool pumps because each pump is specifically designed for a particular 
application and the motor is then specifically designed for each pump 
type. The motors for the different types of pumps also have different 
performance characteristics. A customer who requires a motor for a pool 
pump cannot substitute a motor for a spa pump, sump pump, or jetted tub 
pump, or any other kind of motor.
    A small but significant increase in the price of electric motors 
for pool pumps would not cause customers of those motors to substitute 
a different kind of motor or other product or reduce purchases of 
electric motors for pool pumps in volumes sufficient to make such a 
price increase unprofitable. Accordingly, the development, manufacture, 
and sale of electric motors for pool pumps is a line of commerce and 
relevant market within the meaning of Section 7 of the Clayton Act.
    Although electric motors for pool pumps may be manufactured outside 
the United States, U.S. purchasers can use only those motors designed 
for use in the United States. These motors must be customized for the 
demands of U.S. purchasers and must comply with distinct U.S. technical 
specifications, such as UL certification. Manufacturers of electric 
motors for pool pumps typically deliver the motors to their customers' 
locations. Most customers that purchase motors for pool pumps for use 
in the United States are located in the United States. Major U.S. 
customers of electric motors for pool pumps consider only those 
manufacturers with a substantial U.S. presence, including sales, 
technical, and support personnel. U.S. customers prefer localized 
experience, inventory, technical support, and warranty assistance, as 
well as detailed knowledge of the U.S. market and products designed to 
meet U.S. requirements.
    A small but significant increase in the price of electric motors 
for pool pumps intended for use in the United States would not cause a 
sufficient number of U.S. customers to turn to manufacturers of those 
motors that do not have a substantial presence in the United States so 
as to make such a price increase unprofitable. Accordingly, the United 
States is a relevant geographic market within the meaning of Section 7 
of the Clayton Act.
(3) The U.S. Market for Electric Motors for Spa Pumps
    Electric motors for spa pumps also have specific applications, for 
which other types of pumps cannot be employed. Motors for use in other 
types of pumps, such as sump pumps and pool pumps, cannot be used in 
spa pumps because each pump is specifically designed for a particular 
application and the motor is then specifically designed for each pump 
type. The motors for the different types of pumps also have different 
performance characteristics. A customer who requires a motor for a spa 
pump cannot substitute a motor for a pool pump, sump pump, or jetted 
tub pump, or any other kind of motor.
    A small but significant increase in the price of electric motors 
for spa pumps would not cause customers of those motors to substitute a 
different kind of motor or other product or reduce purchases of 
electric motors for spa pumps in volumes sufficient to make such a 
price increase unprofitable. Accordingly, the development, manufacture, 
and sale of electric motors for spa pumps is a line of commerce and 
relevant market within the meaning of Section 7 of the Clayton Act.
    Electric motors for spa pumps may be manufactured outside the 
United States; however, these motors must be customized for use in the 
United States and must comply with distinct U.S. technical 
specifications, such as UL certification. Manufacturers of electric 
motors for spa pumps typically deliver the motors to their customers' 
locations. Most customers that purchase motors for spa pumps for use in 
the United States are located in the United States. Most U.S. customers 
of electric motors for spa pumps prefer manufacturers with a 
substantial U.S. presence, including sales, technical, and support 
personnel. U.S. customers prefer localized experience, inventory, 
technical support, and warranty assistance, as well as detailed 
knowledge of the U.S. market and products designed to meet U.S. 
requirements.
    A small but significant increase in the price of electric motors 
for spa pumps intended for use in the United States would not cause a 
sufficient number of U.S. customers to turn to manufacturers of these 
motors that do not have a substantial presence in the United States so 
as to make such a price increase unprofitable. Accordingly, the United 
States is a relevant geographic market within the meaning of Section 7 
of the Clayton Act.
(4) Anticompetitive Effects
(a) Electric Motors for Pool Pumps
    AOS, RBC, and one other company are the only significant 
competitors that sell electric motors for pool pumps in the United 
States. Currently, AOS and RBC sell approximately 76 and nine percent, 
respectively, of electric motors for pool pumps in the United States. 
The third competitor accounts for most of the remaining sales in this 
market. RBC's proposed acquisition of the electric motor business from 
AOS likely would substantially lessen competition in the U.S. market 
for electric motors for pool pumps. If the acquisition is not enjoined, 
the combined firm would supply approximately 85 percent of the electric 
motors for pool pumps in the United States. The Herfindahl-Hirschman 
Index (``HHI'') is a measure of market concentration. Mergers resulting 
in highly concentrated markets (with an HHI in excess of 2,500) that 
cause an increase in the HHI of more than 200 points are presumed to be 
likely to enhance market power under the Horizontal Merger Guidelines 
issued by the U.S. Department of Justice and the Federal Trade 
Commission. Following RBC's acquisition of the electric motor business 
of AOS, the HHI would increase from approximately 6,000 points to more 
than 7,500 points.
    AOS's and RBC's bidding behavior often has been constrained by the 
possibility of losing sales of electric motors for pool pumps to the 
other. For many customers of electric motors for pool pumps, AOS and 
RBC are the two best sources. Customers have benefited from the 
competition between AOS and RBC for sales of electric motors for pool 
pumps by receiving lower prices. In addition, AOS and RBC have competed 
vigorously by providing innovations

[[Page 52980]]

that have resulted in higher-quality and more energy-efficient motors. 
For example, AOS and RBC have competed for the development and sale of 
more energy-efficient motors for pool pumps. The third competitor is 
behind AOS and RBC in developing this energy-efficient technology. 
Further, AOS and RBC compete based on the level of service they provide 
to their customers. The combination of AOS and RBC would eliminate this 
competition and its future benefits to customers. Post-acquisition, RBC 
likely would have the incentive and gain the ability to profitably 
increase prices, reduce quality, reduce innovation, and provide less 
customer service.
    The response of the only other significant competitor in the United 
States for electric motors for pool pumps would not be sufficient to 
constrain a unilateral exercise of market power by RBC post-
acquisition. RBC would be aware that many customers strongly prefer it 
as a supplier, allowing it profitably to raise prices above pre-
acquisition levels.
    The proposed acquisition, therefore, likely would substantially 
lessen competition in the United States for the development, 
manufacture, and sale of electric motors for pool pumps. This likely 
would lead to higher prices, lower quality, less customer service, and 
less innovation in violation of Section 7 of the Clayton Act.
(b) Electric Motors for Spa Pumps
    AOS, RBC, and one other company are the only significant 
competitors that sell electric motors for spa pumps in the United 
States. Currently, AOS and RBC each sell a substantial portion of the 
electric motors for spa pumps in the United States. The third 
competitor accounts for most of the remaining sales in this market. 
RBC's proposed acquisition of the electric motor business from AOS 
likely would substantially lessen competition in the U.S. market for 
electric motors for spa pumps. If the acquisition is not enjoined, the 
combined firm would supply well over half of the electric motors for 
spa pumps in the United States.
    AOS's and RBC's bidding behavior often has been constrained by the 
possibility of losing sales of electric motors for spa pumps to the 
other. For many customers of motors for spa pumps, AOS and RBC are the 
two best sources. Customers have benefited from the competition between 
AOS and RBC for sales of electric motors for spa pumps by receiving 
lower prices. In addition, AOS and RBC have competed vigorously by 
providing innovations that have resulted in higher-quality motors. The 
combination of AOS and RBC would eliminate this competition and its 
future benefits to customers. Post-acquisition, RBC likely would have 
the incentive and gain the ability to profitably increase prices, 
reduce quality, reduce innovation, and provide less customer service.
    The response of the only other significant competitor in the United 
States for electric motors for spa pumps would not be sufficient to 
constrain a unilateral exercise of market power by RBC post-
acquisition. RBC would be aware that many customers strongly prefer it 
as a supplier, allowing it profitably to raise prices above pre-
acquisition levels.
    The proposed acquisition, therefore, likely would substantially 
lessen competition in the United States for the development, 
manufacture, and sale of electric motors for spa pumps. This likely 
would lead to higher prices, lower quality, less customer service, and 
less innovation in violation of Section 7 of the Clayton Act.
(5) Entry
    Sufficient, timely entry of additional competitors into the markets 
for electric motors for pool pumps and electric motors for spa pumps in 
the United States is unlikely. Therefore, entry or the threat of entry 
into this market will not prevent the harm to competition caused by the 
elimination of AOS as a supplier of these products.
    Firms attempting to enter into the U.S. market for the development, 
manufacture, and sale of electric motors for pool pumps and electric 
motors for spa pumps face several barriers to entry. First, 
establishing a reputation for successful performance and gaining 
customer confidence are important and may require many years and 
substantial sunk costs. Because end users rely on these motors to 
perform a critical function in their pool pumps and spa pumps, they are 
reluctant to purchase a product from a supplier not already known for 
its expertise in electric motors for pool pumps and electric motors for 
spa pumps, or at least in fractional electric motors.
    Second, entry into the markets for electric motors for pool pumps 
and electric motors for spa pumps could take years. A new supplier must 
demonstrate to potential customers that its motors can meet the 
customers' particular design specifications as well as their rigorous 
quality and performance standards. Because each customer may have many 
different specifications for the motors, the period for qualification 
can take up to twelve months with no guarantee of success. This period 
does not include the time necessary to obtain UL certification, which 
may take up to six months. Further, because customer specifications are 
unique, qualification with one customer does not guarantee 
qualification with another.
    Third, the technology and expertise involved in developing and 
producing electric motors for pool pumps and electric motors for spa 
pumps is another barrier to entry. A new supplier would need to 
construct production lines capable of manufacturing motors for pool 
pumps and motors for spa pumps that meet the standards of potential 
customers. In addition, the technical know-how necessary to design and 
successfully manufacture such motors is difficult to obtain. Even 
incumbent manufacturers of fractional electric motors, with all their 
expertise and technical know-how, require substantial time and expense 
for engineering, tooling, and testing a new motor before it can be 
sold. A new entrant must also be committed to investing in research and 
development to meet the customers' ongoing desire for innovation, 
including more energy-efficient motors.
    Finally, U.S. customers prefer suppliers that have a substantial 
U.S. presence, which can require a significant investment in time and 
money. Given the low volumes of motors needed by manufacturers of pool 
pumps and spa pumps, new entrants are unlikely to invest in 
establishing the personnel, inventory, and distribution presence 
required to compete effectively in the United States.
    As a result of these barriers, entry into the markets for electric 
motors for pool pumps and electric motors for spa pumps in the United 
States would not be timely, likely, or sufficient to defeat the 
substantial lessening of competition that likely would result from 
RBC's acquisition of AOS's electric motor business.

C. Anticompetitive Effects of the Acquisition in the U.S. Market for 
90+ Draft Inducers

(1) 90+ Draft Inducers
    Gas-fired furnaces require the movement of air and the expulsion of 
hot combustion gases. Blowers move the air through ducts and circulate 
it around a building. Furnace draft inducers are specialized blowers, 
which perform an important safety function by extracting harmful 
combustion gases such as carbon monoxide, and venting those gases 
outside. Furnace draft inducers must meet Federal regulatory standards 
for safety and energy efficiency.

[[Page 52981]]

    Furnace draft inducers consist of a housing containing a blower 
wheel and a motor. Furnace draft inducers are distinguished from 
circulation blowers by the shape of the housing, the need for safety 
devices to ensure gas is extracted, and the design of the motor 
mounting on the blower assembly, among other design features. The 
shapes of the housing and fan blades are among the more difficult 
design aspects of furnace draft inducers.
    Furnaces are classified according to their thermal efficiency, 
which is the percentage of energy that is used to heat the air and that 
is not lost with the vented combustion gases. Draft inducers are 
designed for the specific thermal efficiency of each furnace. Less 
efficient furnaces, typically referred to as 80 percent thermal 
efficiency or 80+, use draft inducers that employ an older technology 
that has been utilized for forty years. More modern furnaces with 
higher thermal efficiency, typically referred to as 90 percent thermal 
efficiency or 90+, use draft inducers based on newer, more advanced 
technology.
    Draft inducers for furnaces with 80 percent thermal efficiency 
(hereafter referred to as ``80+ draft inducers'') are used in non-
condensing furnaces. Non-condensing furnaces do not need the draft 
inducer to drain condensation. 80+ draft inducers are generally simpler 
and easier to design than 90+ draft inducers because they have a single 
inlet, a sheet metal housing that is easily available, and a narrow, 
forward-curved wheel.
    90+ draft inducers are used in condensing furnaces. Condensing 
furnaces take so much heat out of the combusted gases (that is, turn so 
much of the combustion energy into heat that is circulated) that 
condensation forms in the draft inducer. This necessitates a draft 
inducer with a plastic housing that is made from polycarbonate 
material, rather than metal, which can corrode, and a drain for the 
condensation. 90+ draft inducers also contain a more technically 
complicated ``swirl fan'' and backward-curved wheel, which is inclined 
for greater efficiency and noise reduction. 90+ draft inducers are 
priced significantly higher than 80+ draft inducers. Curre