Is market power a problem for conformity assessment?

Testing, Inspection and Certification (TIC)

The Testing, Inspection and Certification (TIC) sector consists of Conformity Assessment Bodies (CAB) who provide services ranging from auditing and inspection to testing, verification, quality assurance and certification. The specificity of the functions of the TIC sector is that it is independent of the person or entity providing the object, and of user interests in the object. We therefore also speak of third-party conformity assessment.

The rules that apply to the operation of organisations that conduct testing, inspection and certification are in standards, especially the ISO/IEC 17000 series for conformity assessment. Here, conformity assessment is defined as processes that are used to demonstrate that a product, service, system, body or person meets specified requirements. It assures the customer that purchased products or services do meet the promised characteristics in terms of quality and safety. Thus, conformity assessment creates confidence, protects consumers and promotes trade.

The ISO/IEC 17000 standard defines the core terms of the TIC sector as follows:

  1. Testing is the determination of the characteristics of a product or commodity, and the evaluation thereof against the requirements of standards. The output of a laboratory test is a report or certificate.
  2. Inspection is the examination of product design, product, process or installation and determination of its conformity with specific requirements or, based on professional judgement, with general requirements. Inspection of the process may include inspection of facilities, technology or methodology.
  3. Certification is a third-party attestation related to products, processes, systems or persons that requirements have been met.

Conformity assessment includes accreditation, which serves to demonstrate that the testing, inspection and certification bodies are competent, independent and impartial. As checker of checkers, the accreditation bodies are not part of the TIC sector.

What is the TIC sector? An animated explainer video:

The TIC sector is a service provider in the international trade system. The International Standard Organization (ISO) and the International Electrotechnical Commission (IEC) work to develop requirements for harmonised conformity assessment practices internationally. The TIC Sector supports governments to protect their consumers from faulty non-compliant products, exporters to overcome regulatory market barriers and industry to meet quality and performance requirements of markets with cost-efficient solutions.

Growing TIC-Market

The global market volume of the TIC sector is estimated at around 200 billion US-dollar.[2] Over the decades, the market grew steadily at a rate of between 4 and 5%. Market researchers assume that the TIC sector will exceed a turnover of 250 billion US-dollar in 2025.[3] The TIC market is benefiting from the rise in disposable income, rapid urbanisation and the spread of outsourcing in developing countries. Other growth drivers are increasing in product recalls, the growth in illegal trade and piracy practices, and increasingly stringent government security and environmental regulations.

The leading players in the TIC market include SGS (Switzerland), Bureau Veritas (France), DEKRA (Germany), Intertek (UK), and TÜV Süd (Germany). In total, this Big Five account for around 20% of the global TIC sector, and the top 50 companies in the TIC sector represent more than 50% of the total market.[2] In short, a relatively small number of transnational companies dominate the market.

CompanyActivitiesAnnual RevenueEmployees worldwide
SGSTesting, Inspection, Certification$ 6,8 billion97,000
Bureau Veritas GroupTesting, Inspection, Certification$ 4.8 billion74,000
DEKRAInspection of vehicles and technical systems$ 3 billion43,084
INTERTEKInspection, product testing and certification$ 2,8 billion44,720
TÜV SÜDInspection and product certification services$ 2.4 billion24,000
Source: Own elaboration based on company data from 2018 on company Websites – (Retrieves on 11/08/2019)

All providers of conformity assessment services benefit from a growing market, but the large ones have competitive advantages. They benefit from well-known brand names, efficiency, R&D capacities and international presence. However, the market leaders are growing not organically alone, but are systematically buying up smaller specialised competitors. Entering in new, emerging countries is frequently achieved through mergers or acquisitions of local service providers.[2]

At the same time, market growth is driven by the privatisation of testing, inspection and certification services. [3] Traditionally, government organisations have often provided these services; however, the increasing pressure on government agencies to reduce operating costs is leading to increasing privatisation of TIC services.

Workable competition

How do we assess the increasing concentration of global conformity assessment? From a competition policy perspective, the TIC market is moving towards a “wide” oligopoly, i.e. a manageable but sufficiently large number of suppliers dominates the market.

Economists can see an optimal intensity of competition in this market constellation because it offers particularly favourable conditions for a dynamic competition between the suppliers. Large, well-funded companies are, in fact, necessary to explore new application fields for conformity assessment and to be able to cope with the risks associated with the introduction of new products and processes. In contrast to the “narrow” oligopoly, the number of companies in the “wide” oligopoly is still sufficiently large to limit the possibilities and inclinations to engage in restrictive conduct. [4]

At the same time, it can also be observed that “…despite the continuous consolidation activity of larger TIC players, the industry is still remarkably fragmented in its long tail. In Germany, for example, the market comprises thousands of accredited labs, the large majority of which belong to companies with less than a hundred employees. A significant share of testing labs is operated in-house, by governmental institutions or corporations, supporting a sizable share of captive activities in the global TIC market.” [2]

TIC-Sector in developing countries

What is the situation in developing countries? TIC-companies offer their services globally, and large TIC-companies have operations in developing and emerging countries for approximately two decades. Nevertheless, in many developing countries, the market is still small and not very attractive for larger TIC-companies.

When these countries want to participate stronger in global trade and also protect their population from inferior and hazardous products, the state may need to support the provision of appropriate conformality assessment services. This can be done by establishing its testing, inspection and certification facilities, or by supporting local entrepreneurs in the TIC sector. International development cooperation is usually active in this area.

The situation changes when the demand for TIC services increases significantly, and the local market becomes attractive for international TIC providers as well. In this situation, leading private conformity assessment bodies are often taken over, and state providers are hardly able to cope with the increasing competitive pressure. The role of the public sector needs to be readjusted. Services that previously had to be subsidised can now be provided by providers in a cost-covering and profitable manner. The state could use the freed-up resources to build up offers in areas that are strategic for future development. At the same time, the state can also call on private providers for laboratory tests and market surveillance.

In developing countries, the market power of large TIC companies should not be a significant problem. However, decision-makers should pay more attention to the structural change in a growing TIC market. The public entities and the conformity assessment companies could collaborate strategically in the framework of a National Quality System. Therefore, we recommend involving the TIC companies and their associations stronger in coordination mechanisms – like a national quality council. Also, international development cooperation could address and support better the whole system of public and private service provides. The result of this strategic collaboration would be a workable competition in which the efficiency and innovativeness of the private TIC companies are combined with the engagement of the state.

References

[1] ISO (2010). Building trust – The Conformity Assessment Toolbox. Geneva

[2] Bindner, S. and V. Schott (2019). A steeper ascent Growth in the testing, inspection and certification (TIC) industry. Munich, EY-Parthenon

[3] Markets and Markets (2019), Testing, Inspection, and Certification Market by Service (Testing, Inspection, Certification), Sourcing Type (In-House and Outsourced), Application (Consumer Goods and Retail, Construction and Infrastructure), and Geography – Global Forecast to 2024, Market-Report 

[4] Patel, K. K. and H. Schweitzer (2013). The historical foundations of EU competition law, Oxford University Press; Clark, J. M. (1961). “Competition as a dynamic process.”, The Brookings Institution, Washington DC. And Kantzenbach, E. (1966). Die Funktionsfähigkeit des Wettbewerbs (The workable competition), Vandenhoeck u. Ruprecht, Göttingen

Featured photo by National Cancer Institute on Unsplash

This entry was posted in Conformity assessment, National Quality System, Quality Infrastructure and tagged , , , , , , by Dr. Ulrich Harmes-Liedtke. Bookmark the permalink.

About Dr. Ulrich Harmes-Liedtke

Dr Ulrich Harmes-Liedtke is a global expert in the field of international economic development cooperation. With more than 25 years of consulting experience, he is active in all phases of a project and program development (preparation, implementation, monitoring, and evaluation) and collaborates with various implementing organizations and development banks (German Development Cooperation - GIZ and PTB -, Inter-American Development Bank, European Union and United Nations). He has consulting experience in Africa, Asia, Europe, Latin America and the Caribbean. Dr.Harmes-Liedtke is an experienced trainer and process consultant. He works with groups and teams to reflect on their situation and to then formulate change projects to improve their reality. He enables dialogue, facilitates and designs workshops, processes, and sense-making processes. He is certified in facilitation, mediation, and communication techniques which allow him to deal with sensitive, diverse, and even conflict situations. He supports systemic economic development in various roles: • As an expert and trainer in international trade, national quality policies, industrial policy, clusters, and global value chains • As a process consultant in designing and leading diagnostic processes that result in change, adaptation, and improvement • As a facilitator of dialogue, workshops, training, and sense-making processes • As a transdisciplinary researcher in the field of systemic economic development Born 1965, Ph.D. in political science and economics (Bremen 1999), MA in economics (Diplom-Volkswirt) (Hamburg 1991). German nationality.

2 thoughts on “Is market power a problem for conformity assessment?

  1. Hello Ulrich,
    Sorry for rather late reply on your interesting article above.
    I fully agree that the private TIC sector should be seen as a part of a country’s National Quality Infrastructure (in developed countries the balance is almost entirely on the private side – whereas in (small) developing countries we still see the public institutions playing the major role).
    My concern is related to the (small) developing countries where products from MSME’s constitute a very high contribution to the BNP, and where they often see it as an insurmountable obstacle to make use of the necessary (for export) services from the CA institutions (testing, inspection, certification). Second to that, they may eventually be convinced to be taken over by a multinational company (who is in close cooperation with some of the “oligopoly” of TIC services) and the small producer/manufacturer is mostly left behind without fair conditions for their further activities.
    I fully support the idea of establishing a “National Quality Council” (related to establishing a National Quality Policy) where all stakeholders (incl. representatives for the MSMEs) must ensure sustainable ways of running the NQI.
    Kind regards,
    Lorens

    Liked by 1 person

  2. Lorens, thank you for your comment.

    Your remark on conformity assessment requirements as trade barriers for micro and small enterprises is an important issue. Economists refer to this as a market failure, as SMEs lack the critical mass to recover the costs of testing and certification.

    This issue would be an interesting topic for another blog post.

    Liked by 1 person

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