Ceramic bricks market: conclusions of the first ever accelerated sector inquiry

Accelerated sector inquiry – a newly established GVH procedure

The accelerated sector inquiry is a brand-new procedure established by Government Decree 406/2021 (VII. 8.) on the Different Application of Act LVII of 1996 on the Prohibition of Unfair Market Practices and Restriction of Competition (“Government Decree”) in force during the COVID-19 emergency situation in Hungary. The Government Decree authorizes GVH to identify and address market problems, if (i) there are reasonable grounds to suspect that competition within the sector is distorted or restricted and (ii) urgent intervention is needed. 

The ceramic brick market inquiry is part of a complex, multi-element construction sector investigation, which consists of inquiries on the abuse of dominant power in the gravel and cement market and merger control regarding a concentration of businesses dealing with construction works. 

The GVH concluded an all-level value chain investigation, held hearings with various market players, conducted on-site investigations across the country and contacted several businesses to request submission of data. The results of the inquiry were published in a report (the “Report”) in Hungarian.

Conclusions of the sector inquiry

As a conclusion of the sector inquiry, the GVH is proposing the following in its Report:

• the state should support the increase of production capacity (e.g. by way of non-repayable grants),
• consumers should always compare prices before purchasing construction materials,
• joint purchasing organizations may be an example to followed by small and medium sized companies in other markets as well, 
• GVH supports other authorities in their work to enable customers to get credible information on the price of construction materials.

Market characteristics identified by the GVH

1. Ceramic bricks
   
   The GVH has found that the producer price increase in the ceramic brick industry was significantly lower compared to the spiking prices of materials in the entire construction sector in 2021. A reason for this may be that the vast majority of ceramic bricks are produced in Hungary; therefore, the production is less exposed to global trends. However, according to the Report, customers experienced shortage of goods and unusual raise of costs due to reduced production and increasing freight, packaging, logistics charges and labour costs. 
   
   The Report refers to the European Commission’s definition on the brick market, but the GVH slightly deters from these categories, and names the reasonable substitutes of bricks, namely: aerated concrete products (Ytong), lime bricks (Silka), cortical wall, Durisol, and plasterboard as building materials; and prefabricated houses or the use of proconcept construction system as functional substitutes. 
   
   
2. Ceramic brick manufacturer market
   
   The Report states that the ceramic brick manufacturer market is concentrated and that there are two market-leading companies with German background and significant market shares (Wienerberger Téglaipari Zrt. and Leier Hungária Kft.) and few businesses with considerably lower production volumes. 
   The Report cites a former decision of the European Commission that there are no significant barriers of entry into the brick market, but the GVH states that contrary to the fact that Hungary is rich in clay, increasing the production of ceramic bricks requires significant capital investment with a return to be expected only over a long period of time. This deters smaller manufacturers from upscaling their activities.
   
   
3. Wholesalers and retailers
   
   According to the Report, classic wholesalers have virtually disappeared in Hungary as consumers purchase construction materials from over a thousand local retailer companies. 
   
   As retailer companies have a significantly weaker bargaining power, approximately 84% of retailers are part of a joint purchasing cooperation/consortium or retailer network to achieve more favourable conditions. Manufacturers also prefer contracting with joint purchasing organizations, because (i) less transactions mean lower transaction costs, (ii) sales expansion is more viable and (iii) a joint purchasing organization can better ensure security of payment and compliance with contractual obligations compared to single companies. 
   
   Joint purchasing organizations also have side effects as they are likely to concentrate their orders for a particular type of product from one manufacturer due to volume discount resulting in a narrower choice for consumers. Volume discount, however, is not always realised by consumers. Net consumer prices may also depend on other factors such as the quantity purchased, the time, place, payment method and financing requirements, mode of transport and other specific factors (e.g. whether cranage is required), therefore comparing prices may be challenging.
   
   
4. End-users: construction companies and residential developers
   
   End-users of ceramic bricks are residential developers and construction companies. A common experience is that end-users request bids from various retailers. In case of big projects, retailers usually share details of the investment with the manufacturer to offer a customized bid to the constructors.

GVH suggestions to stakeholders

It is recommended to brick manufacturers to monitor whether the state will introduce public incentives (grants, tenders, state aids) in the upcoming months to increase production capacities as proposed by the GVH. Retailers may reconsider their business strategies and practices regarding being part of a joint purchasing organization or not, and whether their contracts’ terms and conditions can be customized to reflect their best interest, meanwhile competition law and other statutory law requirements must also be fulfilled. Construction companies are encouraged to request more bids from retailers before making a purchase in order to be able to compare prices.

Please find the press release here in English and here in Hungarian. The ceramic bricks sector inquiry report is available here (only in Hungarian).

For more information, please contact Dániel Arányi or Rebeka Szopkó.