Introduction
The Commission pays particular attention to the incentive effect of aid to large projects that are undertaken by international companies which, by definition, are mobile and can choose from many different locations where to establish their operations. Not only must the aid recipient prove, on the basis of credible evidence, that without the aid the investment would not be undertaken or would be sited at a different location, but no aid is allowed above the minimum necessary to make the investment sufficiently profitable. Moreover, the incentive effect of the aid must be shown with contemporaneous evidence, disregarding any factors that may affect the project after the investment decision is taken.
A case in point is Commission decision 2024/2057 of February 2023, which was published in the Official Journal only on 1 August 2024. It brought to an end a five-year saga on a large investment project [LIP] in Hungary.1 The decision concerned state aid to support investment by Samsung SDI for the extension of the capacity of its existing establishment in Göd in central Hungary. The existing plant produces battery cells for electric vehicles [EVs]. Göd is located in an area eligible for regional aid under Article 107(3)(c) TFEU, with a standard regional aid ceiling of 35%.
Samsung SDI set up its EV battery planned in Göd in 2016. No state aid was granted for the initial investment in the existing plant. The investment for the extension of the existing plant is referred to in this article as the “project”.
Hungary notified the aid measure in May 2018. In October 2019, the Commission initiated the formal investigation procedure because it had doubts regarding the substantive incentive effect of the aid and the credibility of the location in China of the alternative investment scenario.
The project
The purpose of the project was to increase the production capacity of the existing plant and to implement new process innovations. This required investment in new facilities and new equipment and machinery. The process innovations would decrease the time and costs for manufacturing battery cells. The project was expected to create 1200 new jobs.
Work on the project started on 1 December 2017, after Samsung SDI had submitted the relevant aid application to the Hungarian authorities on 13 September 2017, but before Hungary notified the Commission and, of course, long before the Commission eventually authorised state aid for the project.
Eligible costs
The total eligible investment costs for the project amounted to about EUR 1.2 billion in nominal value, or EUR 1.187 billion in present value. According to footnote 15 of the decision, “the present values in this decision are calculated on the basis of a discounting rate of 1.09% applicable at the time of the notification. Present values are discounted to the year 2018, which is the year of the notification.”
Form of aid, amount of aid and aid intensity
The aid was in the form of a non-refundable cash grant. The notified amount of aid was about EUR 110 million in nominal value or EUR 108 million in present value. Interestingly, “(30) Hungary awarded the aid, subject only to the Commission’s approval, on 27 December 2021.”
Given that the total eligible costs were EUR 1.2 billion (nominal value) or EUR 1.187 billion (discounted value), the application of the 35% standard rate of regional aid to the scaling-down formula led to a maximum permissible regional aid of EUR 155.616 million, in discounted value, which was equivalent to a maximum aid intensity of 13.11%. However, the proposed aid of EUR 108 million, in discounted value, for eligible expenditure of EUR 1187 million, in discounted value, corresponded to an aid intensity of 9.11% which was considerably below the ceiling of 13.11%.
Compatibility assessment
As there was no disagreement between Hungary and the Commission on the presence of aid, the Commission confirmed within a single paragraph that the measure in question constituted state aid.
The assessment was carried out on the basis of the previous regional guidelines, which allowed for aid to large enterprises in Article 107(3)(c) areas for initial investment and also for “process innovation”. Process innovation has been dropped from the current Regional Aid Guidelines [RAG]. At any rate, the Commission confirmed the project would implement a new process innovation.
The point of contention between Hungary and the Commission was whether the aid had an incentive effect and whether the location of an alternative project would indeed be in China.
Incentive effect
The incentive effect of regional investment aid is determined on the basis of either the “scenario 1” or “scenario 2” methodology. In the case of scenario 1, the NPV of the project is negative without the aid in any location. In the case of scenario 2, the NPV of the project is negative or positive but lower than the NPV of the same project in another location. Most LIPs are assessed according to scenario 2. This was indeed the case for the project in Göd.
Doubts on strategic considerations affecting the credibility of the Chinese alternative location
When the Commission had initiated the formal investigation procedure, it “(119) raised doubts as to the credibility of the Chinese counterfactual, since it could not exclude that the investment would in any event have taken place in Hungary for a series of circumstances. Those circumstances were: (i) the hostile economic environment in China towards South Korean EV battery producers, (ii) the risk of forced transfer of technology, (iii) the unlikeliness of Samsung SDI having carried out Investment 1 in Göd without considering a ramp-up investment at a later stage, (iv) the advantages of a European location, such as the quickly expanding European market and the proximity to European customers”.
After receiving additional information and explanations from Hungary and Samsung and having examined contemporaneous internal documents of Samsung, the Commission concluded that “(124) the strategic considerations identified above were not decisive, and/or not taken into account (as such or as being of an overriding significance) in the decision on the location of the investment project. Accordingly, Samsung SDI Group could in general realistically envisage such an investment in China.”
Differences between the investment in Göd and the alternative investment in China
A comparison of the NPV of the factual project and of the alternative, counterfactual project, requires that actual and hypothetical revenue and costs be taken into account. The Commission had doubts as to the claims concerning both the factual and the counterfactual data.
i) Differences in costs of machinery and local sourcing in China (Xi’an) and Göd
“(130) The Commission concludes that the 100% local sourcing policy both in Göd and in Xi’an was not credible and realistic at the time of the location decision. Therefore, the full local sourcing could not reasonably be part of Samsung SDI NPV comparisons. Consequently, the claimed investment costs differential between Hungary and China of EUR 237,5 million (in present value) – where the costs of machinery and equipment in Hungary were about [40-45]% higher than in China – cannot be justified.”
“(131) Considering that the Commission does not deny that the beneficiary took account of local sourcing in its NPV assessment, and that local sourcing is a relevant factor to be assessed, but only concludes that the assumption of a full local sourcing was not credible and unrealistic, it will assess the extent to which local sourcing could have been regarded as credible and realistic at the time of the location decision.”
Table 1 of the decision, which is reproduced below, summarises the adjustments made by the Commission.
“(154) The Commission therefore reflected the above changes in the NPV calculations provided by Hungary and Samsung SDI, keeping all other elements of the NPV on which the Commission had expressed no doubts unchanged. Notably, the Commission maintains the cost assumptions submitted by Hungary in the initial NPV calculations as regards the costs of sourcing machinery and equipment in South Korea ([…], i.e. it accepts that, apart from the additional costs summarised in Table 1, the costs of machinery and equipment were almost on par between South Korea and Hungary). As a consequence of the changes referred to in the preceding recitals, the NPV gap between the two locations is reduced from EUR 173 million to EUR 89,6 million (in present values).”
ii) Public support for the alternative location in China
Samsung also claimed that the investment in China would receive public funding making it more attractive to undertake the project there. Taking into account subsidies is not allowed by the RAG when the alternative location is in the EEA. Since the alternative location was in China, the Commission also examined the impact of non-EU (i.e. Chinese) subsidies – a very rare aspect of its assessment of LIPs.
It is important to note that the Commission made a distinction between whether Chinese authorities actually offered subsidies and when the offer was made.
The Commission, first, reiterated that “(158) a counterfactual scenario is credible if it is genuine and relates to the decision-making factors prevalent at the time of the location decision. In the present case, independently of whether the Chinese local authorities had indeed provided a subsidy offer for the investment in Xi’an, the Commission considers that evidence contemporaneous with the decision-making does not support Hungary’s claim that such an offer was factored into that decision-making process at the time when the beneficiary adopted its decision on the location of the investment.”
“(159) The Commission noted, however, that the grant offer from the Chinese authorities had never actually been included in the NPV comparisons between the alternative investment scenarios.”
“(160) The Commission notes that neither the potential subsidy from China nor aid from Hungary were included in the NPV calculations in the first comparison step of the decision-making process of the beneficiary. … Consequently, Hungary and Samsung SDI have not provided evidence to show that such offer from the Chinese authorities was considered in the location decision.”
“(161) By contrast, as it transpires from Samsung SDI’s internal company documents, the aid offer from the Hungarian authorities was considered in steps 4 and 5 of the decision-making process, i.e. was included in the final comparison (an internal document from 26 October 2017) and was presented as a key factor justifying the investment decision in Göd (on 27 November 2017)”.
“(162) In conclusion, the Commission considers that Hungary and Samsung SDI have not demonstrated that the grant offer from the Chinese authorities, if any, had been regarded as a prevalent factor by the decision-makers and taken into account at the time of the location decision. Therefore, the aid offer by the local Chinese authorities cannot be considered as a credible and realistic element of the counterfactual scenario.”
iii) Corporate income tax (CIT) in China of 15% instead of 25%
Samsung claimed that its profits in China it would be taxed at a rate of 15% instead of the standard rate of 25%. The Commission rejected that claim as no credible evidence had been submitted to it.
iv) Probabilistic calculations of the NPV gap between the two locations
The probabilistic calculation of the NPV takes into account the probability of various future events materialising. In effect, potential events that may affect the outcome of the investment are weighted by the probability of their occurrence.
Although the Commission decision rejected the probabilistic calculations submitted by Samsung on the grounds that there was no contemporaneous evidence to support them, it did not reject that such an approach could be used in principle.
The Commission concluded as follows its assessment of the presence of an incentive effect: “(173) Hungary has proven that the aid measure had formal and substantive incentive effects. However, with regard to the latter, the Commission considers that Hungary has not demonstrated that the assumption that in either of the locations considered, a 100 % local sourcing rate would be achieved, was credible and realistic at the time of the location decision. In the Commission’s view, only a lower share of local sourcing in both scenarios can be considered as credible and realistic, in light of the elements available to Samsung SDI Group’s decision-makers at the time when they chose the location for the investment. The Commission also concludes that Hungary has not established either that aid from the Chinese authorities or the possibility of the investment benefitting from a reduced CIT rate, even if these elements could be considered credible, were taken into account by Samsung SDI Group when taking the location decision. In light of these elements, the Commission concludes that Investment 2 in Göd would incur a cost disadvantage in comparison to an investment in the alternative location in China, and hence the aid measure can be considered to operate as an incentive, in that, in the absence of the aid measure, it would not have been sufficiently profitable for the beneficiary to make that investment in Göd. However, the aid measure can only be considered to have an incentive effect to the extent that the aid amount does not exceed the disadvantage of the Göd location in terms of NPV, compared to the counterfactual location, examined in the context in which the beneficiary decided on the location of the investment. The Commission has established that such NPV gap cannot be credibly quantified at EUR 173 million, as claimed by Hungary in its notification, but has found it credible up to the amount of EUR 89,6 million. Any aid above that amount would lack incentive effect for the part exceeding that cost disadvantage.”
Proportionality
Given that the investment gap was only EUR 89.6 million and given that the notified scaled-down amount of aid of EUR 108 million was below the maximum regional rate of 35%, the Commission found that if the aid would not exceed EUR 89.6 million it would satisfy the principle of proportionality.
Avoidance of manifest undue negative effects on competition and trade
First, the Commission considered that there was no manifest negative effect on trade because the adjusted aid intensity ceiling was not exceeded [point 119 of the previous RAG]. Second, the aid did not create overcapacity in a market in absolute decline [point 120 of the previous RAG]. Third, there was no counter-cohesion effect as the aid for the Göd region did not induce Samsung not to locate its project in a less prosperous region in the EEA [point 121 of the previous RAG]. Other potential greenfield sites were excluded because of longer construction times. Fourth, there was no manifest negative effect from possible closure of activities elsewhere and in particular Austria where Samsung also produced batteries [point 122 of the previous RAG].
Conclusion
The Commission approved the aid measure on condition that the notified amount of EUR 108 million was reduced to EUR 89.6 million.