The Competition Commission of India, through a ruling passed in what is considered a landmark case, imposed a fine of INR 2544 crores on 14 car manufacturers (OEMs) for violating Section 3(4) & 4 of the Competition Act of 2002.
The informant in the case filed a petition against companies such as BMW India, Ford India, General Motors India, Hindustan Motors, Mahindra & Mahindra, Maruti Suzuki, Mercedes-Benz India, Nissan Motor India, Skoda Auto India, Tata Motors, Toyota, Honda India, Volkswagen India and Fiat India for restricting the sale and supply of spare parts in open market; thereby wrongfully monopolizing the trade practice. The informant also alleged that apart from the spare parts, “the technological information, diagnostic tools and software programs required to maintain, service and repair” the technically advanced automobiles manufactured by all abovementioned companies were denied to the independent repair workshops. The restriction of sale and supply of spare parts in the open markets is not a localised phenomenon and OEMs as a matter of policy refuse to divulge such know-how or spare parts to the open market or the independent repairers. There is also an allegation made with respect to the impact of cost borne by a person who wants to get his/her car repaired. For the same purpose, an independent workshop would cost almost 30% lesser than the OPs but due to the restriction on supply and sale, people left without an option. In order to support his allegation, the informant furnished proof which verified that the independent repairers could not service the vehicles due to a lack of access to genuine spare parts and essential technological information. According to the information filed, such practices were not only illegal and arbitrary, they were also in direct violation of S. 3(3) (a), 3(3) (b) and 3(4) (d) of the Act. Similarly, the violation of S. 4(2) (a), 4(2) (b) and 4(2) (c) entailed denying of access to repair and maintenance markets to the independent service workshops.
The CCI made abundant use of international case laws, such as British Horseracing Board v. Victor Chandler International [2005] EWHC 1074 (Ch), in order to determine the relevant market. In order to ascertain whether a price is unfair, it becomes essential to take into consideration not only all the market conditions but also the eventual impact on the end consumer. During the course of their investigation by the DG of CCI, it was observed that noting the cost of the primary product is essential in adjudging whether the primary and secondary products form part of one systems market or two separate markets. While a primary market consists of manufacturing and sale of passenger vehicles, a secondary market is the aftermarket that comprises of complementary and secondary products that relate to the primary product purchased. In general, if it is feasible to switch one primary product to another competing primary product, the product is part of what is called the systems market. Therefore the bone of contention before the CCI was to decide whether the relevant market in this case was a systems market or whether the secondary spare parts and secondary services market were distinct from the primary market. , It was held that systems market is not followed in the automobile industry. The analysis which lead to this conclusion is discussed subsequently by the author.
According to the report, the companies have used a system called the ‘customer lock in’ system where the customer is dependent on one particular supplier for the products they receive and are not able to switch to another supplier without incurring substantial switching costs for switching from one OEM to another. Here in this case the companies have made their spare parts and services market exclusive to very few suppliers hence restricting the car owners / customers to use those particular services. The companies have maintained that the consumer can switch to another primary product without switching costs if the consumer buys it from the second hand market and this would establish that there would be no locked in effect by the automobile industry. The flaw in this argument is that it does not consider that the price of the automobile decreases after registration and the consumer will inevitably incur switching costs. Therefore the Commission dismissed this argument by the automobile industry.
The OEMs have contended that the primary product as well as the secondary spare product and services form one complete system market based on life cost and there is no division between the two. But the system market based on life cost analysis involves two assumptions- one the customer knows the price and value of the secondary products and two the customer is capable of making a rational decision after analysing his or her utility after buying the product. In the present case the Commission has found that many companies never revealed the prices of the secondary products and even if few did, the Commission has ruled that the consumer would not be in a position to analyse the utility of the product at the time when he buys owing to the complex nature of the product. Therefore the Commission ruled out the argument of systems market based on life cost made by the car companies. The companies further submitted that it would not constitute relevant product market as per section 2(t) of the Competition Act 2002 which defines relevant product market as products and services that are interchangeable or substitutable. They substantiated their argument by saying that the different automobile products are different from each other and are not interchangeable with each other. But since a combination of goods are demanded simultaneously and interchangeably to complete the service provided to the primary product, the Competition Commission ruled that it would constitute a relevant market under section 2(t) of the Competition Act. The companies also submitted that it would be harmful for their reputation if they charge exorbitant prices in the secondary prices so it would be moot to ponder over this issue. But the Competition Commission has found that despite their reputation, the companies have hiked their secondary market prices by 5000%. Therefore in conclusion there exists separate primary product market, a secondary spare parts market and a secondary service market each distinct from each other and each of which is relevant according to the CCI
Subsequently the CCI went on to check for abuse of dominance of the OEMs in the secondary markets. It held that due to high technical specificity of the automobiles, the spare parts of one automobile is not interchangeable with another. Therefore the companies are effectively restricting any competition by other car manufacturing companies. Secondly in addition to making automobiles highly technical, the manufacturing companies were found to have restricted the distribution of the spare parts to very exclusive dealers in the service market. By denying other independent dealers, it there by became the only supplier of spare parts and services in the secondary market. Section 19 (4) of the Competition Act provides for the factors based on which the dominant position of the company according to section 4 are decided on. One of it is the market share of the company. Due to the technicality of the primary product purchased and the exclusivity of the dealers of the spare parts and the services in the secondary markets, the car manufacturing company holds a huge market share. Therefore the CCI concluded that the OEMs held a dominant position in the secondary market.
Additionally the companies were found discriminating against the independent suppliers in the secondary market by not allowing them to sell their products in the market. This acts as an entry barrier which is also another factor mentioned in section 19. Furthermore the companies have issued conditions on warranties which dissuade the consumers to go to independent dealers for servicing their cars. All the above factors strengthen the case that the OEMs have been able to abuse their dominant position in the market. The justification provided by the companies for placing such restrictions is that the independent service providers might not have adequate technical and mechanical skill to service the automobiles and the presence of several counterfeit spare parts in the market might not synchronise with the automobile’s working and might end up damaging it permanently. But the CCI has ruled that the companies must not use such arguments and take away the choice given to the consumer between an authorised seller and an independent service provided. Therefore these restrictions are not justified and are anticompetitive in nature.
In conclusion the OEM’s have separate markets for manufacturing and selling cars, spare parts and service. They have a huge market share in those secondary markets because they are the only suppliers to those markets owing to the automobile design. In addition to this they have imposed entry barriers by restricting supply to exclusive dealers in the secondary market. By imposing entry barriers, restricting exclusive dealers for selling the spare parts to the independent service providers and by dissuading the consumers from going to independent service providers using conditions on warranties, the OEM’s have indulged in anti-competitive practices. Therefore the OEMs have abused their position of dominance in secondary market and hence the Competition Commission of India has imposed a huge fine on the car companies that have indulged in those practices.
According to what was upheld by the CCI, the final decision of choosing whether to go for an authorized dealer or an independent repairer in order to purchase spare parts lies with the consumer and hence, creation of a collective and cooperative forum between these bodies would benefit in curbing the usage of forged spare parts and providing all car owners with effective repair mechanisms.
Besides bringing huge profits to the car owners, this ruling will highlight similar practices carried out by other companies across different sectors, such as the electronic companies like Apple and Sony after their sales. Even though this ruling might bring to the CCI a number of such complaints, this judgment must be commended for duly benefitting the car owners as well as looking upon the violations of essential statutory provisions. This decision acts as deterrent for other industries and might help reduce anti-competitive behaviour in future.
This post has been authored by Saasha Malpani and Nandana T., students at the West Bengal National University of Juridical Sciences.
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