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Contrarian View on CCI's Auto Order

Published on Thu, Sep 04,2014 | 18:19, Updated at Thu, Sep 04 at 18:19Source : Moneycontrol.com 

CCI’S AUTO SPARE PARTS ORDER: A CONTRARIAN VIEW! 
By: Subodh Prasad Deo, Partner, Saikrishna & Associates & Former Additional Director General, CCI

While the CCI order has been welcomed by the consumers / independent repairers and perhaps the OES (original equipment suppliers), there is a contrarian view that ought to have been examined in the matter, notwithstanding the fact that it’s a very well-reasoned order, namely, the fact that competition in the primary market amongst the OEMs (car manufacturers) subsumes and engulfs the absence of competition in the secondary market of sale of spares / diagnostic tools (the secondary market).

While the CCI refuses to accept the proposition that the primary and secondary markets are unified, it skirts the issue of examination of competition in the primary market and as a result fails to appreciate the fact that the car manufacturers factor the price of the car in the primary market by considering their likely revenues from the after sale services. That the revenues of the so called secondary market funnels the competition in the primary market is established from the fact that several of them incur losses in sale of car (primary market) and are able to recoup the same / profit only from after sale services. Thus, both the markets could not have been seen as being disjunct. Absent recoupment from sale of spares, the sale prices of car would obviously increase across the board for all manufacturers that would harm the consumers. Thus, the car prices which are competitive today would most likely increase while the cost of after sales repair, which are uncertain today would still remain uncertain in the future. From a behavioural point of view, it is inconceivable as to why an entity which competes in the primary market would not have the proclivity to compete also in the secondary market. That it is not doing so means that the entities don't view the two markets as separate since the both ultimately contribute to the balance sheet of the company.  In the absence of any allegation or proof of cartel behaviour, the CCI ought to have explained why all the car manufacturers, who are vigorously competing for sale of cars, would not choose to publicize the fact that they offer better terms for consumers in the after sale market, so as to push up the sales of cars in the primary market. In fact they do so, which may indicate that both the markets are integrated and are not separate.

The CCI has overlooked the issue that the reluctance on the part of the car manufacturers to make spares / diagnostic tools available in the open market is a regulatory issue that could be addressed by the Ministry of Surface transport, just as they stipulate norms for emission compliances etc. Like Europe, there are no block exemption rules or stipulations in India for motor vehicle markets. If a regulatory failure is seen as a competition problem, entailing penal consequences, then market participants may not understand what a permissible and non-permissible behaviour is. Their incentives to invest / innovate new practices would suffer if their conduct is assessed by an artificial / mechanical anti-trust analysis, while the participants believe and practice vigorous competition in the market.

In any case, OEMs and OESs have exercised their freedom to contract and enter into a commercial deal. The said contract cannot be said to be predicated upon the dominance of the car manufacturers in the relevant secondary market, in as much as, the OES had the freedom not to accept the seemingly onerous terms being imposed upon them by the OEMs. Thus, the agreements between the OEMs and the OESs do not flow from the factum of dominance of the car manufacturer but from exercise of a free volition to contract. It is not the case of the CCI also that the OEMs have imposed onerous terms on the OESs by virtue of their dominance in the relevant secondary market. The CCI has viewed such agreements as anti-competitive agreements that violate the provisions of Section 3(4) of the Act. Enterprises enter into anti-competitive agreements to increase / acquire the necessary market power required to inflict anti-competitive injuries upon the market participants, which without such agreements is not feasible; however, for the dominant enterprise, such market power is assumed to be inherent and subsisting. It is therefore not evident as to how the CCI could conceptually reconcile the co-existence of anti-competitive agreement and abuse of dominance for the same relevant market / transaction. There cannot be an abuse of dominance qua the consumers and at the same time injuries inflicted upon them by virtue of anti-competitive agreements with the OESs in the same relevant market / transaction. They are in fact antithetical to each other.

Further, it is also not explained as to how an anti- competitive agreement by the entities operating in the supply chain (OEMs and OESs), could be attributed only to the OEMs without in any manner implicating and ascribing culpability upon the OESs. The same could only be done if the CCI held the view that the OESs were forced into the said agreement by virtue of the dominance of the OEMs in the relevant market. However, the CCI has not held so. Thus, there seems to be an apparent conflict in the attribution of abuse of dominance by the OEMs and the anti- competitive agreements entered into by the OEMs with the OESs.

It is also not clear as to how the competition remedy ordered by the CCI, facilitates the open market repair shops and consumers. Since most of the technology / tools are patented or IPR protected (proprietary in nature), the OEMs would most likely compensate for the loss incurred in sale of spares / services by seeking exorbitant royalties for making the technologies available to independent original equipment suppliers who would then pass on the costs to the independent repairers and customers. Even if spares (and diagnostic tools) are sold at authorized centres and open market at same MRP, it cannot bring parity because the OEMs would get the payment of royalty, which would reduce their costs qua their competitors / open repairers. Further, it would be impossible to monitor the implementation of such order that impacts lakhs of parts used in automobiles.

Mr. Deo does not represent any of the parties in the matter and his views expressed here are purely academic and personal. They may or may not represent the views of his firm.

 
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