CAR MAKERS VIOLATE FAIRPLAY OBLIGATIONS AND CCI FINES THEM WITH $420 MILLION FOR VERTICAL RESTRAINTS IMPOSED ON THEIR AUTHORIZED DEALERS – IMPACTING (Competitive) PRICING
CCI based its decision on Exclusive purchasing and non-compete obligations – Therefore, if a Honda consumer needs to repair or service his car, he will have to avail the services provided by Honda’s authorized dealers irrespective of the brand of car he owns. Therefore, the competitive constraints which a Honda car owner faces is in the aftermarket ( or secondary market of spare parts, after sales services w.r.t maintenance etc ) where he is locked in and is forced to avail the services and the spare parts specific to Honda branded cars.
READ NEWS –
IN CHINA –
BMW joined Daimler AG’s Mercedes-Benz and Volkswagen AG’s Audi in reducing prices of spare parts in China amid an antitrust investigation into the auto industry – http://www.bloomberg.com/news/2014-08-08/bmw-latest-to-slash-prices-in-china-amid-antitrust-probe.html
FINDINGS REGARDING THE AUTOMOBILE COMPANIES
- Apart from Maruti; most of the other OEMs (Original Equipment Manager) have some restrictions on the ability of their authorized dealers to sell spare parts to independent service providers.
- Certain agreements specifically restricted the sale of spare parts over the counter. These include the authorized dealer agreements of Fiat, Nissan, Skoda and Mahindra.
- Certain agreements between the OEMs and the authorized dealers do not contain specific terms restricting the sale of spare parts in the open market. However, during the course of its investigation it was discovered that in practice such authorized dealers either allow limited sale of spare parts for older phased out models or in some circumstances do not sell spare parts across the counter at all. These include the OEMs Ford, Honda, Maruti, Volkswagen, Hindustan Motors, Toyota and Tata Motors.
- Certain agreements between OEMs and authorized dealers allow such dealers to either sell spare parts directly to independent repairers (g. Mercedes) or allow it to be sold to actual customers of the OEM (e.g. BMW, General Motors).
- The OEMs like, Skoda, Mahindra, Nissan and Fiat which completely restrict the access to spare parts and diagnostic tools coupled with an absolute cancellation of warranty if cars are repaired by independent repairs, completely foreclose the market for independent repairers, create barriers to entry and deprive consumers of any choice in the aftermarket for spare parts and repairs. Further, the agreements also contained clauses requiring the authorized dealers to source spare parts only from OEMs or their approved vendors.
- The OEMs like, BMW, Ford, Honda, Maruti, Tata Motors, Volkswagen, Hindustan Motors and Toyota, have no clauses in their authorized dealer agreements which prohibit over the counter sales, however, the DG based upon its investigation and the submissions of the independent service providers have concluded that, in practice very limited sales actually take place subject to the discretion of the OEMs and their authorized dealers.
- General Motors and Mercedes-Benz are the only two OEMs that to a limited extent allow the sale of their genuine spare parts over the counter to actual owners of General Motor automobiles and to independent repairers, respectively. However, such OEMs do not allow the sale of diagnostic tools and repair manuals to independent repairers and further the warranty on such automobiles get invalidated if the owners use the services of independent service providers.
Therefore, even in cases of OEMs like General Motors and Mercedes-Benz, which allow over the counter sale of genuine spare parts, in effect foreclose the market for independent repairers and other service providers.
COMPETITION CONCERNS – A Viewpoint
Exclusive distribution agreements tend to reduce intra-brand competition while refusing access to the market at large.
Certain Branding agreements do not operate with the objective of restricting competition unless the supplier’s market position enables him to prevent other competitors from selling (as elaborated in EU Vertical Guidelines).
Vertical agreements are not considered anti-competitive by competition authorities and have some exemptions unless they fall in higher mrket share and /or have “ hard core” restrictions.
Important factors for competition analysis – level of entry barriers, buyer’s power and level of trade affected.
Unless the agreement is with a dominant player, anti-competitive foreclosure or adverse effect on competition is not possible.
The Competition Commission has directed to put in place an effective system to make the spare parts and diagnostic tools easily available through an efficient network. The Automobile Companies may develop and operate appropriate systems for training of independent repairer/garages, and also facilitate easy availability of diagnostic tools.
The Commission imposed a penalty of 2% of total turnover in India
COMPETITION IS AFFECTED WHEN THERE IS APPRECIABLE ADVERSE EFFECT ON COMPETITION (“AAEC”)
The analysis of the DG with respect to the AAEC on each of the secondary markets (market for supply of spare parts and market for service, repair and maintenance) are summarized below:
- The requirement on the authorized dealers to source spare parts only from the OEM or its authorized suppliers restricts the ability of the OESs to sell directly in the aftermarket. These restrictions therefore create entry barriers for the OES who could produce matching quality spare parts, eliminates direct access by OES to an OEM’s aftermarket and in the process foreclose competition in the supply of genuine spare parts.
- AAEC on competition in violation of competition policy in the market of spare parts of each OEM on account of the restrictions pursuant to agreements which are in the nature of exclusive supply agreements, refusal to deal and exclusive distribution agreements.
- During the warranty period the consumers of all OEMs are required to get their car repaired using the OEMs authorized dealer network failing which the consumers lose their warranty over the car. They lose their warranty is they get the car repaired from independent repairers. Even in the post warranty period consumer choice remains limited and independent repairers remain excluded from the automobile aftermarket.
- The requirement of seeking permission from the OEMs before a dealer can deal in the cars of other OEMs create a major entry barrier for the dealers to enter into business of other brands of cars. Thus, the vertical agreements entered into between the OEMs and their authorized dealers cause AAEC.
LEVELS OF MARKET – where Anti-Competitive activity found
- The Primary Market: consisting of the manufacturing and the sale of the passenger vehicles.
- The Secondary Market which is essentially the “Aftermarket” relating supply of spare parts, including the diagnostic tools, technical manuals, catalogues etc. for the aftermarket usage; and after sale services, including servicing of vehicles, maintenance and repair services.
CCI found that these markets were indivisible ‘system’ of products consisting of a durable primary product and a complimentary secondary product.
CCI saw whether a consumer could switch to the spare parts produced by another OEM (Original Equipment Manager) and concluded that –
Most of the spare parts other than a few generic spare parts like tyres, batteries were manufactured specifically for the respective models of the cars. Moreover, even within the models of the same OEMs interchangeability of spare parts was limited. Hence substitutability of spare parts across OEMs is drastically diminished.
Due to high switching costs and the fact that post registration the residual value of a new car is lower than the price of a pre- registration new car, the owner of a car may only shift to another product in the primary market after incurring substantial financial loss. Thus, a purchaser of a product in the primary market is to a great extent locked in with the primary product and the feasibility of switching to another primary product to avoid a price increase in the secondary market of spare parts or repair services is limited.
ARGUMENTS OF PARTIES ( CAR MANUFACTURERS)
- As per the OEMs that complementary products (like a car and its spare parts) cannot function without the use of the other and the consumers of cars, buy the primary product and the secondary products at the same time (purchasing as a system), i.e., a ‘systems market’.
- The OEMs said that for durable products like cars, a ‘systems market’ for complementary products is appropriate since customers, typically engage in ‘whole-life costing’, i.e., compute life-cycle cost of a car at the time of purchasing the car and the customers anticipate the future costs of ownership of the primary product by taking into account probable expenditure on aftermarket products
- Further, the OEMs have submitted that for durable products like cars, where ‘reputation effects’ mean that setting a supra-competitive price for the secondary product would significantly harm a OEM’s profits on future sales of the primary product, it would not be economically prudent for the OEMs to set such supra-competitive prices for spare-parts and repair services in the aftermarket and hamper their reputation in the robust primary market for the sale of cars
- Hence, a unified market consisting of both the primary product as well as its aftermarket may be considered as one unified systems market.
The Commission does not accept the “unified systems market” in this case specifically, and in the Indian market conditions in general. The kind of parameters which have been defined even in other jurisdictions and literature for accepting the systems market approach do not normally exist in the Indian market, including in regard to availability of relevant information (e.g. life-cycle cost) to the consumers, his ability/inability to take a rational/analytical decision based on complex data which may or may not be available, the reputational impact of anti-competitive conduct in the aftermarket on the firm’s product in the primary market etc. – the relevant geographical market would be India.
DOMINANCE OF THE OEMS IN THE MARKET FOR THE SUPPLY OF SPARE PARTS
- The DG report, after analyzing the practices of each OEM, concluded that, each OEM is a monopolistic enterprise/dominant player in the relevant market of supply of spare parts (including those manufactured in-house, sourced from overseas or obtained from local OESs i.e. original equipment suppliers) diagnostic tools, technical manuals, software, etc required to repair and maintain their respective brand of automobile.
- DG identified that for the OEMs which manufacture all its spare parts in-house, there are no alternate sources available.
- Each OEM is the only source of such spare parts in the aftermarket.
- The DG also identified that the OEMs which source their spare parts from OESs restrict the ability of the OESs through restrictive agreements/contracts to sell spare parts in the open market.
- The over-seas suppliers of spare parts also in-fact does not sell such spare parts in the open market. The DG further noted that due to the fact that the overseas suppliers are not selling the spare parts to entities apart from the respective OEM, each OEM becomes the only source of supply of these spare parts for aftermarket requirement and acquires a position of dominance.
- Additionally, the dealers are required to source the spare parts only from the OEMs or their authorized vendors.
- Further, in India there is no concept of certification of matching quality and in the absence of such mechanism of quality confirmation for spare parts manufactured by alternate sources, the consumers have no means of ascertaining the compatibility of spare parts sourced from other sources.
- The DG’s investigation has revealed that most of the cars across brands require specialized diagnostic tools, technical manual etc. for being serviced, repaired and maintained. The OEMs either source such specialized technical equipment from their overseas parent company or such tools are manufactured by SPX. The DG’s investigation has shown that these diagnostic tools are not being sold directly into the aftermarket by the manufacturer of these tools on account of restrictions in agreement or arrangements between the OEMs and such equipment manufacturers.
- Therefore, given the circumstances, the DG finds each OEM to be the only viable source of supply of these specialized tools, technical manuals, fault codes, etc., for their particular brand of automobiles.
Therefore, the DG has concluded that each OEM is in a dominant position in the supply of its spare parts for its own brand of cars.
ABUSE Of DOMINANCE
- During the course of its investigation, it was found that due the restrictions placed by the OPs on OESs and authorized dealers, spare parts, diagnostic tools etc. are not available in the open market particularly to the independent repairers and in the absence of availability of genuine spare parts, diagnostic tools, technical manuals etc. in the open market the ability of the independent repairers to undertake repairs and service of the vehicle of such brands of cars.
- Further, for spare parts which are available in the open market, there is usually non-parity of terms at which the spare parts are available to the independent repairers vis-à-vis authorized dealers which adversely affects the ability of the former to compete effectively.
- The essential facilities doctrine is applicable to the restrictive practices of the OEMs. By not making technologies regarding sophisticated diagnostic tools, technical manuals for proper diagnosis, service and repair available to the independent repairers, the OEMs have put such repairers at a distinctly disadvantageous position and jeopardized their ability to undertake repairs of the automobiles manufactured by the OEMs.
- The imposition of unfair condition and denial of market access to independent repairers have been found in such conduct of OEMs.
- The DG also opined that OEMs use their dominant position in market for the supply of its spare parts to protect their position in the market for repair and maintenance services which amounts to violation of the Act.
CONSUMERS INTEREST PREJUDICED
- In the opinion of the DG, once the primary product has been purchased, consumer choice is confined to those aftermarket products or services compatible with that primary product. Hence, consumers are to a greater or lesser extent ‘locked’ into certain aftermarket suppliers.
- The DG further states that on account of the restrictions, the users of the cars are not in a position to choose between the independent repairers and the authorized dealers for their aftermarket requirements which amounts to imposition of unfair condition.
- The DG’s investigation also shows that each OEM has substantially escalated the price of spare parts, for their respective brands of automobiles, from the price at which such spare parts have been sourced to the price at which such spare parts are available to the customers. OEMs are imposing unfair prices in the sale of spare parts.
- Consumers are forced to avail the services of the authorized dealers of the Car Manufacturers for repairing and maintaining their automobiles since the genuine spare parts, diagnostic tools and the technological information required to service their cars are not made available to independent repair workshops.
- DG observed that the average markup in the price of spare parts is approximately 100% in case of most OEMs while the upper limit of such markup is approximately 5000%.
- An examination of the agreements/letters of intent entered into between the OEMs and the OESs finds that most of such agreements/letters of intent have clauses which restrict the ability of the OESs to supply spare parts directly to third parties or in the aftermarket without the prior written consent of the OEMs. Such restrictive clauses typically appear in such agreements/letters of intent, where the OESs are manufacturing the spare parts using the proprietary drawings/designs and other intellectual property rights of the OEMs.
- Such agreements between the OEMs and the OESs are, therefore, having features of exclusive distribution agreement and refusal to deal.
- Large number of OEMs particularly those having foreign affiliations are sourcing large number of spare parts from overseas suppliers
- In most cases the overseas suppliers are a group company or a parent company of the OEMs or has some linkages with the OEMs which indicates the possibility of an unwritten arrangement between the OEMs and the overseas suppliers for ensuring that ONLY such entities supply the spare parts to the OEMs or its authorized vendors.
- The OEMs have claimed the exemptions on account of their intellectual property stating that the restrictions imposed upon the OESs are reasonable since considerable investments have been made in research and development facilities for developing the products.
However, the DG could not verify the claim of such OEMs that they were in possession of a legally valid intellectual property right. The DG also noted that the intellectual property rights claimed by the OEMs were territorial in nature and the particular right is vested upon the holder of such intellectual property rights only in a given jurisdiction.
- In certain cases, the agreements between the OEMs and their dealers specifically restricted the sale of spare parts over the counter which were in the nature of exclusive distribution agreements and such practices also amounted to refusal to deal.
- The DG gathered that there existed some kind of unwritten understanding or arrangement between such dealers and the respective OEMs pursuant to which the dealers in fact did not sell spare parts in the open market to prevent consumers from shifting to the independent repairers.
- The dealer agreements between the OEMs and their authorized dealers contain restrictions on dealing in competing brands of cars without seeking their consent in writing.
 market comprising complementary or secondary products and services which are purchased after another product i.e. the primary product which they relate to