India: CCI Penalizes 14 Car Makers For Market Abuse And Vertical Restraints

On 25.08.2014, in a landmark ruling, Competition Commission of India (CCI) has imposed a fine totalling INR 2544 crore rupees (USD 420 million) on 14 car manufacturers (OEMs) for restricting the sale and supply of genuine spare parts in open market thereby violating Section 3(4) & Section 4 of the Competition Act, 2002. The companies fined by CCI are 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. CCI is yet to pass final order against Hyundai India, Mahindra Reva and Premier.

Facts of the Case

The Information has been filed by Mr. Shamsher Kataria against Honda India, Volkswagen India and Fiat India for violating Section 3 and 4 by restricting the supply of genuine spare parts in the open market. The Informant alleged that:

  • OEMs are not providing technological information, diagnostic tools and software programs required to maintain, service and repair the technologically advanced automobiles to the independent repair.
  • Restrictive practice carried out by OEMs in conjunction with their respective authorized dealers, amounts to denial of market access to independent repair workshops.
  • OEMs and their authorized dealers charges arbitrary and high prices to the consumers for spare parts and maintenance services.
  • OEMs are restricting independent original equipment suppliers (OES) from selling the parts/components in the open market.

Informant also stated that the competition authorities of various countries including Europe and USA have already dealt with similar cases and implemented corrective measures in the auto sector. Informant therefore requested CCI to take appropriate actions against the above named companies and any other contravening vehicle manufacturers.

Investigation by Director General

On 24.02.2011, CCI after forming an opinion that a prima facie case exits, referred the case to Director General (DG) for detailed investigation. In the preliminary stage of investigation, DG observed that the case involves the larger issue related to prevalent anti-competitive conduct of the players in the Indian automobile sector and its implications on the consumers at large and therefore requested CCI for a direction to initiate investigations against all car manufacturers in India. On 26.04.2011, CCI extended the scope of investigation by allowing DG to investigate other 14 OEMs.

During the investigation, DG sought detailed information from various OES, authorize dealers, multi brand service providers, independent repairers, SPX India Limited (which supplies the specialized diagnostic tools for aftermarket servicing and repairing requirements to a large number of the OEMs), and various auto industry associations. After conducting the detailed investigation, DG observed that all the 14 car makers contravened Section 3(4) and Section 4 dealing with vertical restrains and abuse of dominant position, respectively. DG also held that the denial to access diagnostic tools and spare parts amounts to denial of access to an 'essential facility'.

Findings of the CCI

In addition to the substantive issues, few OEMs raised objections regarding jurisdiction of CCI/DG to enlarge the scope of investigation to include all OEMs.

Issue of Jurisdiction

CCI held that the plea taken by OEMs are wholly misconceived. Citing the Sail Judgementi, CCI observed that it is not required to confine the scope of inquiry to the parties whose names figure in the information. The purpose of filing information before the CCI is only to set the ball rolling as per the provisions of the Act. CCI is mandated by law to examine the issues in a holistic and not in a piecemeal manner. Further, CCI also gave reference to additional information filed by the Informant and the prayer clause of the first Information which requested the CCI to hold an enquiry into the anti-competitive practices of the Honda, Volkswagen & Fiat and all motor vehicle manufacturers found to be engaging in similar activities. CCI held that the directions was with respect to alleged anti-competitive conduct by the said industry in general and not specifically qua the car manufacturers named in the information.

Determination of the Relevant Market

CCI rejected the theory of 'system markets' raised by OEMs. In determining the correct relevant market, CCI relied heavily on the international case laws and the evidence gathered by the DG during the course of investigation. CCI observed that:

  • One of the criteria in deciding whether the primary and secondary products form part of one systems market or two separate markets is the cost of the primary product. If the owner of the primary product can easily switch to another competing primary product, the primary product and secondary product may be clubbed to form a systems market. CCI held that this is not so the case in automobile sector, hence, the 'sale of cars' and 'sale of spare – parts' and 'repair and maintenance services' do not form part of a systems market.
  • The primary basis for determination of the existence of a 'systems market'ii do not exist in the present case since, the customers do not engage in whole life costing; or reputation effects do not deter the car makers from setting supra competitive price for the secondary product. CCI concluded that the automobile primary market and the aftermarket for spare parts and repair services does not consist of a unified systems market since: (a) the consumers in the primary market (manufacture and sale of cars) do not undertake whole life cost analysis when buying the automobile in the primary market and (b) in-spite of reputational factors each car maker has in practice substantially hiked up the price of the spare parts (usually more than 100% and in certain cases approx. 5000%).

Further, CCI also rejected the theory of 'cluster marketsiii' raised by car makers. Car makers submitted that each automobile consists of thousands of spare parts and each spare part is not interchangeable or substitutable with another. CCI observed that a 'clusters market' exists for all the spare parts for each brand of cars, manufactured by the car makers, in the Indian automobile market. CCI agreed with the DG's findings that there exists a primary market for "manufacturer & sale of cars in India" and two aftermarkets for "sale of spare parts" and "repair and maintenance services" respectively in India.

Assessment of Dominance of Car Makers

In determining the dominance of OEMs, CCI observed that due to the technical specificity of the cars manufactured by each OEM, the spare parts of a particular brand of an automobile cannot be used to repair and maintain cars manufactured by another car maker. Further, each OEM is a monopolist player and owns a 100 % of the market share of the spare parts and repair services aftermarket for their own brand of cars. Therefore, car makers face no constraints from the existing supplies from actual competitors and has a clear competitive advantage in the aftermarket for sale of spare parts/diagnostic tools. Based on the above, the CCI observed that each of the OEMs is dominant in the above defined relevant market.

Abuse of Dominance

Denial of Market Access: CCI observed that although the importer agreement/arrangements between the car makers and their overseas suppliers are silent on the rights of such overseas suppliers to sell spare parts directly in the Indian aftermarket, however, such overseas suppliers are not supplying spare parts directly into the Indian aftermarket. Further, the agreement entered by the OEMs with the local OESs has revealed that invariably there are restrictions on the OES from supplying parts directly to third parties without the prior written consent of the OEMs. CCI held that:

  • Each OEM severely limits the access of independent repairers and other multi brand service providers to genuine spare parts and diagnostic tools required to effectively compete with the authorized dealers of the OEMs in the aftermarket which amounts to denial of market access by the OEMs under Section 4(2) (c).
  • On the issue of spare parts/ manuals being proprietary material, CCI held that unlike Section 3(5)iv, there is no exception to Section 4(2).

Unfair Pricing: All OEMs have substantially marked up the price of its spare parts by an average of 100% and in some extent to as high as 5000% and such mark-ups are disproportionate to the economic value of the products supplied by the OEMs. Further, in all the cases, the margin from spares business exceeds the margin from car business substantially. Therefore, CCI held that the exploitative pricing conduct by each OEM is a manifestation of lack of competitive structure of the Indian automobile market and hence, all the car makers have violated Section 4(2) (a) (ii).

Leveraging the Dominant Position: CCI observed that the OEMs typically provide after-sale services and repair of their brand of automobiles through a network of authorized dealers and these authorized distributors are also the source of supply of genuine spare parts of various models of automobile manufactured by an OEM. Further, the OEMs restrict the ability of the independent repairers to obtain spare parts from the authorized dealers. In view of the same, OEMs use their dominance in the relevant market of supply of spare parts to protect the other relevant market namely; the after sales service and maintenance thereby violating Section 4(2) (e).

In view of the foregoing, CCI held that each OEM has 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 Act. However, CCI never opined on DG findings in relation to the application of 'essential facility doctrine' in the present case.

Vertical Restraints

Arrangement between OEMs & overseas suppliers (Parent Company): CCI rejected the DG finding on the possible existence of an internal arrangement/understanding between the OEM and their overseas suppliers restricting the latter from supplying spare parts directly to the Indian aftermarket. OEMs argued that most of the overseas suppliers are their group companies or overseas parent companies. CCI applied the 'single economic entity'v doctrine and held that such arrangement will not violate Section 3(4).

Arrangement between OEMs & OES: CCI observed that most of the OESs are not selling directly in the aftermarket. The OEMs contended that spare parts manufactured by the OESs using IPRs like patents, designs, copyrights, trademarks etc., of the OEMs are proprietary to the OEM and therefore cannot be sold by OES to third parties without prior consent. Further, the regulations imposed upon the OESs are necessary to ensure quality control and protect the goodwill of the brand of the OEM. In response, CCI observed that:

  • OEMs can license their safety check methodology to their OESs for a royalty fee.
  • OEMs can require that the OESs label the genuine spare parts sold by them directly in the aftermarket with appropriate labels to limit their liability.
  • OEMs in their contracts with their customers can limit their warranty against the use of faulty or defective spare parts sold by their OESs.
  • OEMs can contractually require the OESs to produce the finished spare parts (which are meant to be sold in the open market) in compliance with the applicable industry standards and other consumer laws of India ensuring that the safety of consumers purchasing such spare parts is not compromised.

CCI opined that the ultimate choice should be left with the consumers who may choose either an authorized dealer of the OEM or an independent repairer to purchase spare parts of repair services. There is a requirement for the creation of a collaborative space between the independent repairers, multi-brand operators, the OEMs and their OESs so that they can play an effective role in curbing the usage of spurious spare parts and providing the automobile consumers of India with competitive and efficient repair and maintenance. CCI held that the restrictions placed on the OESs adversely affects the competition in the automobile sector and violate Section 3(4).

Arrangement between OEMs & Authorized Dealers: CCI held that the clauses in agreements requiring authorized dealers to source spare parts only from OEMs or their approved vendors is anti-competitive in nature. Further, by restricting 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 Act.

IPR exemption under Section 3(5) of the Act

CCI noted that none of the OEMs has submitted the relevant documentary evidence to successfully establish the grant of the applicable IPRs, in India, with respect to the various spare parts and hence, they cannot avail of the exemption provided in Section 3(5). On the issue of OEMs having a technology transfer agreements (TTA) with their overseas parents, CCI held that even if the parent corporation of the OEMs held such rights in the territories where such rights were originally granted, the same cannot be granted upon the OEMs operating in India by entering into a TTA, unless such rights have been granted upon the OEMs.

Issue of Penalty

While considering the mitigating factors such as absence of appropriate legislative and regulatory framework and willingness to voluntarily discontinue some practices, CCI decided to impose a total penalty of INR 2544 crore rupees (USD 420 million) @ 2% of total turnover in India. Apart from fines, CCI also directed OEMs to adopt various corrective measures including giving access of spare parts/ diagnostic tools to independent repairs, availability of spare parts in open market, training of independent repairer/garages etc.

Implications of the order & way ahead

The order holds significance because this is the first case where CCI has penalized companies for violating Section 3(4) dealing with vertical restraints and excessive pricing under Section 4 dealing with market abuse. CCI has also urged the need of an independent regulator and may give its recommendations to the Government like the one given in DLF Belaire Association Case. On the issue of penalty, it is the lowest (in terms of %) imposed by CCI until date. At an individual company level, for example, the highest fine of INR 1346 crore levied on Tata Motors is a tenth of its annual consolidated profit and a minuscule portion of its revenue. The same is true for most others like Mahindra and Maruti. The present fines may also be consider as a tip of the iceberg as the car makers are also exposed to potential compensation claims by affected customers.

CCI has directed car companies to stop certain anti-competitive practices and to implement number of measures to make market competitive. However, looking at the dynamics of auto market, absence of a sectoral regulator/ governing regulations and lack of the implementation of an effective monitoring system by CCI, it would be a challenging job for CCI to keep check on the compliance of its order OEMs. If implemented properly, the ruling will bring a paradigm shift in the aftermarket of the automotive industry. CCI has also not dealt with the situations where an OEM can legitimately refuse to share the technical information with independent repairers, for example, information that would enable a third party (independent repairer) to bypass or disarm on-board antitheft devices and/or recalibrate electronic devices, or tamper with devices which limit the speed or other performance-related parameters of a motor vehicle.

The OEMs are set the challenge the order of CCI before Competition Appellate Tribunal (COMPAT). The main issue before the COMPAT will be the determination of relevant market, protection of IPRs and computation of penalty. However, some foreign OEMs may also consider not to appeal due to the de minimis amount of fine and considering the fact that they have implemented these corrective measures in various other counties.

While the ruling will benefit the car owners—estimated to be over two crore—it is also set to bring focus on such practices adopted by companies across other sectors like white goods. This will open the Pandora box and may result in number of complaints before CCI as similar practices are also followed by many other electronic companies (e.g. Apple, Sony, and Xerox etc.) in their aftermarkets.

* Vaibhav Choukse is a competition lawyer working as Senior Associate with Law Firm, Vaish Associates, Advocates in New Delhi (India). He holds a LL.M in Commercial Law with focus on EU Competition Law from Kings College London. Views are personal. He may be reached at vaibhavchoukse@vaishlaw.com

Footnotes

i 2010 Comp LR 0061 (Supreme Court))

ii Unified 'systems market' comprising a set of products or services, which cannot be distinguished into two different antitrust markets, since the consumers demand the primary and the secondary products as a 'system' and determining inter-changeability and substitutability of such products when distinguished into different markets are an inefficient determination of competitive market behaviour for such complex durable goods where the competition for the sale of the products exists at the "point of sale of primary goods" (even if consumers are uninformed, have high switching costs and become locked in ex post).

iii Cluster markets are characterized by transaction complementarities between various components of a bundle of products or services. The relevant unit with respect to market definition is the bundle of goods or services that is demanded by consumers and supplied by the producers and not the individual units of such bundle although such units may not be interchangeable or substitutable with each other.

iv The Competition Act 2002 recognises the importance of IPR, including patents. While section 3 of the Competition Act prohibits anti-competitive agreements, sub-section (5) thereof states that this prohibition shall not restrict "the right of any person to restrain any infringement of or to impose reasonable conditions, as may be necessary for protecting any of his rights".

v Agreements between entities constituting one enterprise (Parent & its subsidiary) cannot be assessed under the Competition Act

© 2014, Vaish Associates, Advocates,
All rights reserved with Vaish Associates, Advocates, 10, Hailey Road, Flat No. 5-7, New Delhi-110001, India.

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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Authors
MM Sharma, Head Competition Law & Policy Practice
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