India: COMPAT Penalizes Automobile Manufacturers For Anti-Competitive Practices

Last Updated: 14 December 2016
Article by   Trilegal

Facts of the case

In August 2014, the Competition Commission of India (CCI) had found international automobile manufacturers (OEMs) including Ford, Toyota, Hyundai, Honda and Maruti, guilty of contravening Section 3 (prohibiting anti-competition agreements) and Section 4 (prohibiting abuse of dominant position) of the Competition Act, 2002 (Competition Act).

According to the CCI, these manufacturers were involved in a number of anti-competitive practices including:

  • Restricting authorised services providers from selling spare parts over the counter to independent services providers;
  • Restricting authorised spare parts manufacturers/ original equipment suppliers (OESs) from selling spare parts directly in the market;
  • Cancellation of warranty in case the vehicle is repaired by an independent mechanic;
  • Restricting availability of diagnostic tools in the open market; and
  • Increasing prices of spare parts in an unfair manner.

CCI's order

Based on the facts of the case and the provisions of the Competition Act which prohibit the abuse of dominant position and anti-competitive agreements, the CCI concluded that all the OEMs involved in the case, were monopolists in the relevant market, with respect to their own spare parts and after-sale services.

It was observed that the OEMs, by preventing the authorised service providers from undertaking over-the counter sale of spare parts and restricting their OESs from selling spare parts in the open market, were preventing independent services providers from competing with their authorised services providers.  The CCI also concluded that the pricing and profit margin on the spare parts was unfairly high and reflective of the abusive conduct of the OEMs.  Accordingly, a penalty of 2% on the average annual turnover of the OEMs in pursuance of Section 27(b) of the Competition Act, was imposed.

COMPAT's order

The automobile manufacturer filed an appeal before the COMPAT, which upheld the decision of the CCI and found the automobile manufacturers guilty of abusing their dominant position and entering into anti-competitive agreements with their OES and authorized service providers.

In its order dated 9 December 2016, the COMPAT has detailed the evolution of the automobile sector in India and its projected growth, and examined the lack of regulatory control of the after-sale services market and spare parts market in the auto-mobile sector in India.

In view of the market practices of the automobile industry, the COMPAT acknowledged that there are certain valid concerns that exist for the OEMs.  Due to the lack of technical expertise amongst the independent service providers and presence of counterfeit spare parts in the open market, it was possible for consumers to be provided with sub-standard quality of services or parts under the brand name of OEMs.  Accordingly the COMPAT has opined that, to deal with such malpractices, the CCI's directions requires some modification.  The modified directions that are to be implemented within a period of one year are:

  • OEM's to remove all restrictions imposed through agreements and practices on OESs for selling spare parts including diagnostic tools etc., in the aftermarket or to authorised service providers;
  • If the intellectual property rights belong to OESs, OEMs shall not restrict the OESs from selling spare parts in the aftermarket with the trademarks of the OESs;
  • OEMs to open additional distribution network for sale of spare parts in open markets;
  • OEMs to remove all restrictions on OESs, authorised services providers and authorised distribution channels for sale of spare parts to independent repairers;
  • Ministry of Road Transport and Highways to develop voluntary standards for certification of garages/independent repairers;
  • OEMs to modify their warranty condition and cancel the warranty only to the extent that damage has been caused because of faulty repair work outside their authorized network;
  • OEMs to develop extensive information system with the objective of removing asymmetry in information;
  • OEMs to make available in the public domain, and also host on their websites, information regarding spare parts, their MRPs, arrangements for availability over the counter, and details of matching quality alternatives, maintenance costs, provisions regarding warranty and any such other information which may be relevant for full exercise of consumer choice and facilitate fair competition in the market; and
  • Ministry of Road Transport and Highways in consultation with other relevant Government Departments/Agencies/Industry Organizations to take up a program for standardization of automobile spare parts.

The COMPAT reduced the penalty imposed by the CCI by directing the OEMs to pay 2% on the average annual turnover of spare parts in the aftermarket, for the period immediately preceding three years before the year of enquiry by the CCI.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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