Participant Details:
Name of Participant – Ratnesh Sharma
Name of Institution – Dr. RML National Law, University, Lucknow
Course – BA LLB
Title : Recent Competition law developments in Automobile Industry in India.
INTRODUCTION
According to the Organization International des Constructeurs d’ Automobiles (OICA), as the sixth largest passenger car and commercial vehicles producer, Indian automotive industry stands on a firm ground as one of the largest automotive markets in the world. With rapid increase in purchasing power of India’s consistently growing population, Indian automobile industry has become one of the most economically significant industries accounting for 22 percent of the country’s manufacturing gross domestic product (GDP).
Since the delicencing and economic liberalization in 1991, the industry has witnessed phenomenal changes, from progress in manufacturing technology to increased competition. In the last few years, due to large market share, the industry has seen a sudden growth, with more players competing, both domestic and foreign. There have also been a number of mergers in the motor vehicle sector (eg Tata’s acquisition of Jaguar and Land Rover, and Volkswagen’s acquisition of Skoda, Seat, Bentley, Lamborghini and Porsche).
With an increase in the competition the automobile sector has been the subject of frequent attention from the Competition Commission, in particular regarding issues arising out of the distribution of motor vehicles and cartel activity in relation to various car components due to the importance of automobile manufacturing industry in the country.
The automobile sector is subject to the general competition law in the same way as any other sector in relation to cartels, mergers and abuse of a dominant position. However, in relation to the after-markets for repair and maintenance services, particular competition concerns can arise as manufacturers may be able to seek to restrict consumers using independent suppliers for servicing and parts, rather than the manufacture-owned/approved dealerships.
Predatory pricing constitutes such a anti-competitive action where prices are set so low as to eliminate competing undertakings and, thereby, threaten the competitive process itself. In these circumstances, consumers may benefit in the short run from lower prices, but, in the longer term, weakened competition will lead to higher prices, reduced quality and less choice. Distinguishing predatory behaviour from legitimate competition is difficult. Since the main objective of the Competition Law is to create conditions where consumers benefit from effective competition, the distinction must be drawn between low prices, which result from predatory behavior and that which result from legitimate competitive behavior.
This essay tries to explore various issues involved with the Competition Law 2002, of India with respect to the automobile industry. Firstly, a recent case has been discussed where several automobile manufacturing countries were found to be involved in anti-competitive and monopolistic practices where the companies were found restricting the entry of independent repairers in the aftermarket sector, thereby creating a monopoly in the aftermarket and spare parts sector and ultimately limiting the consumers to switch to another alternative. Further facets of various other issues like distribution of motor vehicles and dealership agreements involved in the related matter are discussed in brief.
Shamsher Kataria vs. Honda Siel Cars India Ltd. & Ors
Under section 19 (1)(a) of the competition act, 2002 an information by one Shamsher Kataria was filed against Honda siel cars India Ltd, the Volkswagen India Pvt Ltd and Fiat India Automobiles Ltd, alleging anti-competitive practices on part of the companies whereby the genuine spare parts of automobiles manufactured by the opposite parties was not made freely available in open market.
The companies were alleged of:
- Controlling and regulating the operations of various authorized workshops and service stations which are in the business of selling automobile spare parts, besides, rendering after sale automobile maintenance services.
- Not making freely available the technological information, diagnostic tools and software programs required to maintain service and repair the technologically advanced automobiles manufactured by them to the independent repair workshops. The repair, maintenance and servicing of such automobiles could only be carried out at the workshops or service stations of the authorized dealers of these car companies.
- By placing restriction on the sale and supply of genuine spare parts, diagnostic tools/equipment, technical information required to maintain, service and repair the automobiles manufactured by them. The said car companies and their respective dealers, as a matter of policy, refuse to supply genuine spare parts and technological equipment for providing maintenance and repair services in the open market and in the hands of the independent repair workshops.
The commission after forming an opinion upon the matter directed the Director General to conduct an investigation into the matter and submit an report. After conducting a brief investigation into the matter the Director General (DG) came to the conclusion that the conduct and practices of 14 car manufacturers were in violation of the provisions of section 3 and 4 of the Competition Act, 2002.
The Competition Commission of India noted down following Issues and finding arise in the case –
Issue 1 : Whether the Opposite Parties have violated the provisions of section 4 of the Act as has been alleged?
a) CCI observed that automobile manufacturers or the original equipment manufacturers (OEMs) uphold dominance in the aftermarket of spare parts, diagnostic tools and technical manuals and not in the primary market of sale of cars where it was initially alleged, Since it is not feasible for a consumer of a particular model of car manufactured by an OEM to switch to the spare parts manufactured by another OEM. Because of this, the liberty of the purchaser to switch to another primary product to avoid a price increase in the secondary market of spare parts or repair services is greatly narrowed down.
b) After a detailed analysis, CCI, concluded that each OEM is a 100% dominant entity in the aftermarket for its genuine spare parts and diagnostic tools and correspondingly in the aftermarket for the repair services its brand of automobiles, since the customer gets “locked-in” after buying a car of a particular brand and cannot switch to another one. Each OEM has a clear competitive advantage in the aftermarket for sale of spare parts/diagnostic tools and repair services for their respective brand of automobiles as access to spare parts and tools is restricted from independent repairers insuring denial of other options to the consumers, consequently reducing competition. Due to the technical compatibility between the products in the primary market and the secondary market, each OEM is shielded from any competitive constrains in the aftermarket from their competitors in the primary market.
Therefore, each OEM has clearly abused its dominant position by indulging in anti-competitive practices resulting in contravention of Section 4(2)(a)(i), 4(2)(a)(ii), 4(2)(c) and 4(2)(e) of the Competition Act, 2002.
Issue 2 : Whether the Opposite Parties have violated the provisions of section 3 of the Act as has been alleged?
a) After analyzing the structure of the Indian automobile repairs market CCI found that car makers, by regularly restricting independent repairers from accessing their own brand of spare parts and repair tools, ensured that their authorized dealer network remains only accessible service option for their customers. Such an anti-competitive and monopolistic practice in the repairs market allows each car maker to exploit its market power by charging exploitative high prices for spare parts and ancillary repair services (with a mark-up as high as 40 times).
b) The CCI also found that while car prices were being progressively reduced, car makers are cleverly recovering these lower margins by exorbitantly pricing spare parts and repair services exclusively.
c) Following thorough investigation, CCI also found that the conduct of the Car Companies was in violation of the provisions of section 3(4) of the Act with respect to its agreements with local Original Equipment Suppliers (OESs) and agreements with authorized dealers whereby it imposed absolute restrictive agreements and completely barred the aftermarket for supply of spare parts and other diagnostic tools for independent repairers.
d) It was concluded by the CCI that since most of clauses in agreements requiring authorized dealers to source spare parts solely from OEMs or their approved vendors is anti-competitive in nature and by hampering access of independent repairers to spare parts and diagnostic tools and by denying the independent repairers access to repair manuals, the agreements entered into between OEMs and authorized dealers have violated Section 3(4)(b), 3(4)(c) & (d)) of the Competition Act, 2002.
Final Order –
The commission held that OEMs have contravened the provisions of sections 3(4)(b), 3(4)(c), 3(4)(d), 4(2)(a)(i) and (ii), 4(2)(c) and 4(2)(e) of the Act and did not accept the concept of “unified system markets” in the context of Indian market conditions and rejected the contention that consumers engaged in whole-life cost analysis. CCI greatly agreed with the DG that the relevant market would be related to spares.
CCI held that to undertake a life-cost analysis, it was crucial that:
- Data for life-cost analysis is available with the producer, and
- At the time of purchase product in the primary market, consumers can compute cost likely to be incurred during the life-span of the product.
Therefore, besides imposing the penalty, in order to provide corrective measures to make the automobile market more competitive and to put an end to the present anti-competitive conduct of the car companies, CCI directed the car manufacturers to comply with the following directions:
i) To immediately cease and desist from indulging in anti-competitive conduct which has been found to be in contravention of the provisions of the Act.
ii) To put in place effective systems to ensure easy availability of the aftermarket spare parts and diagnostic tools.
iii) To allow Original Equipment Suppliers (OESs) to sell spare parts in the open market without any restriction, including on prices.
iv) Not to place any restrictions or obstructions on the operation of independent repairers/garages.
v) The companies may develop and operate appropriate systems for training of independent repairer/garages, and also facilitate easy availability of diagnostic tools to them.
vi) The companies may also work for standardization of an growing number of parts in such a manner that they could be used across different brands, like tyres, batteries etc. at present, which would result in reduction of prices and also give more choice to consumers as well as independent repairers/service providers, thereby putting an end to the anti-competitive practices.
vii) In case of the consumer availing services from any independent repairer any blanket condition regarding cancellation of warranties would not be imposed upon him.
viii) Any information regarding the aftermarket spare parts, their Maximum Retail Prices, arrangements for availability over the counter, and details of matching quality alternatives, maintenance costs, provisions regarding and any such other information which may be relevant for full exercise of consumer choice and facilitate fair competition in the market is to be made available in the public domain.
These correction remedies will :
- Enable the consumers to have access to aftermarket spare parts and to have freedom of choice between independent repairers and authorized dealers and
- Enable the independent repairers to participate in the aftermarket and provide services in a competitive manner.
Further in terms with Section 27 (b) of the Competition Act 2002, the CCI has imposed a penalty of INR 2544.65 Crores which is 2% of the average turnover of three years on fourteen Original Equipment Manufacturers (OEMs) in India including Honda Siel, Volkswagen India, Fiat India, BMW India, Skoda India, Ford India, General Motors, Tata Motors etc. for violations of Sections 3 and 4 of the Act.
Observation : This decision passed by the Competition Commission of India is a landmark decision in the history of competition law in India, as this is for the first time wherein, CCI has held each car company as dominant in its respective after sales market and penalized the major car companies for entering into vertical agreements and for abusing their dominance in the market. The Compliance of this order is a challenging task for the automobile industry. The order also sends a message to the business world to do assessment of their market behaviors and their agreements. Sophisticated industries similar to the auto manufacturing sector (e.g. computer industry, electronic equipment industry and other industries where after sale services and use of defective parts is sensitive due to model specific technology and standard) need to assess their aftermarket conducts.
The above mentioned case briefly discusses how several automobile companies used the “aftermarket” section of its business for its own monopolistic benefits. The far-stretched implications of this decision would have a brief effect over the companies and it would definitely make an assurance that in near future companies would consider taking steps to ensure that sufficient information regarding a product is available in the public domain and allowing customers to undertake the task of whole-life costing. In near future, the risk of allegation of unfair pricing is expected to be reduced if companies maintain comprehensive records of the production costs of their products as well as legitimate commercial reasons for the leveling up of the prices. Companies are also likely to consider establishing an alternate means of supply of spare parts and tools in the aftermarket, thereby allowing independent repairers to be a part of the aftermarket.
Further in this essay two essential aspects of automobile industry, namely distribution of motor vehicles and dealership agreements are discussed where unfair competitive practices have been seen and are possible.
Distribution of motor vehicles
Automobile manufacturers have a liberty to choose for its utilization either an exclusive distribution network or a selective distribution network for their products. Broadly speaking, allocating dealers exclusive territories for business provides them with a wider, but not total control, over sales between territories. A territory where a particular dealer runs his business no other person is allocated dealership in that particular region.
However, dealers may sell to intermediaries without the manufacturer’s permission. Selective dealerships give the manufacturer control over which dealers sell their cars (i.e. dealers can be required to meet specified criteria before they are admitted to the manufacturer’s dealership network, e.g. having an after-sales service in place, employing staff with special prerequisite knowledge). Selective distribution is and has been a predominant form of distribution in the motor vehicle sector.
It has become an increasingly popular alternative for the manufacturers to have stake in some or all of their own dealerships. Since the dealership agreements are then between companies in the same pool, no competition law issues arise and the manufacturer has the opportunity to dictate pricing and other terms of resale by the dealer accordingly. Mercedes is a prime example of a company that has a number of owned dealerships. Although permitted under competition law, multi-brand dealerships remain relatively rare phenomena with most dealers choosing to specialize on selling just one or two brands or brands of a same parent company. In some cases dealers choose to operate out of two adjacent premises with one brand in each location.
Restrictions in dealership agreements are relatively limited given the need to comply with competition law; however, selective distribution regimes sets out strict criteria which must be met in order to be appointed as exclusive dealerships will restrict active marketing outside the specified territory. The dealer may be required to use manufacturer-authorized parts for warranty work.
Exempting dealership agreements
For any relationship to be considered vertical, each of the parties to the agreement must be at a different level in the production or distribution process, for the purpose of their agreement. The various levels that an enterprise can be at include the supplier level, the manufacturers, wholesalers, distributors, dealers and retailers to name a few. For example, an agreement between a car manufacturer and the dealer of those cars is a vertical agreement between undertakings. Additionally, two enterprises may also be considered to be at different levels when the supplier’s product is absorbed into a new product that is generated by the buyer (manufacturer). In continuance with the same example, the supplier of vehicle paint will also be in a vertical relationship with the car manufacturer as the manufacturer will be buying the paint from the supplier and integrating it into another product.
Section 3(1) of the Competition Act of India, 2002 states that undertakings (or persons) or associations of undertakings (or persons) are prohibited from entering into agreements in respect of the production, supply, distribution, storage, acquisition, control etc of goods or services, which cause or are likely to cause an Appreciable Adverse Effect on Competition (AAEC) in India. While section 3(3) of the Act states that certain horizontal agreements are presumed to have an AAEC, section 3(4) of the Act implies that all vertical agreements will be evaluated on a case-by-case basis as there will be no presumption of AAEC for them. This approach is similar to that in the European Union (EU) with its Block Exemption Regulations (BER). However, in contrast to the EU, which considers Resale Price Maintenance (RPM) to be a hardcore restriction that is excluded from the BER, the Indian Act makes RPM subject to the AAEC test and does not automatically condemn them. In this regard, the Indian Act is more in-line with recent developments on handling RPM, in the US for example, than the European model.
The Chinese Anti-Monopoly Law (“AML”) that came into force on 1 August 2008 explicitly prohibits certain vertical agreements under art 14, such as:
1. Fixing the price for resale to a third party;
2. Fixing the minimum price for resale to a third party; and
3. Other monopoly agreements confirmed by Anti-monopoly Enforcement Authority under the State Council.
As is evident, the AML primarily prohibits agreements that relate to RPM and minimum resale pricing. Although article 14 only lists two types of vertical agreements, the abuse of dominance provision, under article 17 covers other vertical restraints such as tied selling and price discrimination. Also, the catch-all clause in 14 (3) allows the authority to designate other types of agreements as being prohibited under art 14. Recently the National Development and Reform Commission, China’s top pricing regulator, levied fine against 10 Japanese auto-part makers for price fixing and price manipulation, following investigations under its anti-monopoly law.
A third approach can be seen in the Singapore Competition Act (CA) which draws from its UK (United Kingdom) counterpart. The relevant section on anti-competitive agreements in the CA is s 34 and it prohibits agreements, decisions by associations of undertakings and concerted practices that have as their object or effect the prevention, restriction or distortion of competition within Singapore. The language of this section is wide enough to capture vertical agreements and, therefore, there is no separate section for the same.
Conclusion
The automobile industry in India is currently seeing a time of progress both economically and policy wise. With a growing number of players in the market, and existing giants, it becomes an imperative responsibility of the competition authorities of a country to ensure that activities promoting anti-competitive and monopolistic behavior should be checked on a regular basis so that the market remains a level-playing field, providing both consumers as well as manufacturers with a healthy and competitive place for business.