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Rediff.com  » Business » Why consumers must cheer CCI's ruling on errant car makers

Why consumers must cheer CCI's ruling on errant car makers

Last updated on: September 02, 2014 15:11 IST

CCI ruling on the anti-competitive practices of car makers will go a long way in reducing the exploitation to which consumers are subject in accessing branded components and service facilities, says Avirup Bose.

The new political narrative under the Narendra Modi government is all about protecting the values and fulfilling the aspirations of the Indian middle class.

Experts are calling the "middle class"; the new "aam aadmi", for whom the government has pledged "proactive hand-holding". 

This pledge may have been co-opted by the Competition Commission of India (CCI) when it recently cracked down on the anti-competitive practices of 14 Indian car makers, penalising them Rs 2,544 crore (Rs 25.44 billion) besides imposing other behaviourial remedies.

The CCI's decision will help millions of middle-class car owners, providing them relief from rampant exploitation by car companies, and improve the means of livelihood of thousands of independent repairers and garage owners.

Exploitation of car owners intending to repair or service their cars is common in India and many such cases are routinely litigated before various Indian consumer courts.

Such complaints range from overpriced spare parts or service or repair charges, unavailability of required spare parts to unnecessary service "add-ons" by authorised dealers.

According to a recent KPMG report titled "Global Automotive Executive Survey" (2014), 78 per cent of car buyers consider "servicing options" an "extremely important" factor influencing purchase decisions.

In spite of such consumer preferences, how do car companies successfully exploit their customers once the consumer purchases the car?

The explanation lies in the structure of the automobile market.

For example, a Honda car owner has to rely on spare parts and ancillary repair services that are compatible with the sophisticated engineering of that particular model.

This significantly limits the inter-brand interchangeability of spare parts and repair tools.

This peculiar market structure, along with very low levels of standardisation of spare parts across the sector, allows a car company to acquire an artificial monopoly over the market for its own brand of spare parts and repair tools.

The CCI analysed the structure of the Indian automobile repairs market and found that car makers, by routinely restricting independent repairers/garage owners from accessing their own brand of spare parts and repair tools, ensure that their authorised dealer network is the only available service option for their customers.

Such foreclosure of competition in the repairs market allows each car maker to exploit its monopoly market power by charging exploitative high prices for spare parts and ancillary repair services (with a mark-up as high as 40 times).

The CCI also found that while car prices are being progressively reduced, car makers are cunningly recouping these lower margins by exorbitantly pricing spare parts and repair services.

The car owner also suffers in the resale market because a car can only be sold at a depreciated value.

So, even when faced with exploitative prices of spare parts and unfair after-sale service conditions, an average car owner is unable to shift to another brand of automobile without incurring substantial losses.

Therefore, the lack of any effective choice in the repairs market ensures that mere consumer consciousness of post-purchase service experience does not translate into real consumer benefit.

This is the core problem that the CCI addresses in its decision.

The effective yet simple remedy that the CCI proposes is that branded spare parts and ancillary repair tools should be made available to independent repairers/garage owners without any restrictions, including restriction on prices. An automobile is essentially an assembled product, with several parts being typically sourced from local or overseas component suppliers.

Spare parts manufactured by such suppliers are obviously compatible to the particular brands of automobiles since they are based on the design specifications of the respective car company.

Under current industry practice, car companies restrict their component suppliers from supplying spare parts directly to the open market.

The CCI has effectively removed this restriction.

The CCI hopes freer access to spare parts and repair tools will open up competing service networks for each brand of automobiles, which in turn will have a rationalising effect on prices of spare parts and after-sale repair services.

Car owners will also have much-needed choice of repairing their cars at reasonable rates and without compromising either on the quality of the spare parts or the repair job.

If the authorised dealers of each car company are forced to compete with more than 3,61,000 independent service providers/garage owners, who are currently foreclosed from competing in the Indian repairs market, the CCI expects dealers to improve their service conditions or provide extended warranties and other consumer benefits.

Further, for a level playing field, the CCI has directed car makers not to impose blanket conditions cancelling warranties if the consumer avails of the services of an independent repairer/garage, besides developing appropriate systems for training the latter.

The CCI's remedies will also curb the market for spurious spare parts - an industry that has proliferated due to the exorbitant price of branded spare parts.

Automotive Component Manufacturers Association (ACMA), estimates the market for spurious spare parts at Rs 10,500-14,000 crore (Rs 105-140 billion).

Effective implementation of the CCI's remedies will help car companies; re-capture most of this market, besides enhancing consumer safety - according to an ACMA estimate at least 20 per cent of accidents on Indian roads are caused due to use of spurious spare parts.

The CCI has also recommended that the government bring out an appropriate regulatory framework for the Indian auto parts industry, on the lines of those in the developed economies of the European Union or the US.

Critics of the CCI's decision have accused it of imposing unreasonable costs on the car makers, besides depriving them of their legitimate economic rights.

Such allegations are unjustified, given that the CCI's remedies do not promote a free-for-all scheme.

The decision specifically provides that component suppliers intending to sell spare parts in the open market will compensate the car makers for their proprietary designs as will independent repairers wanting to acquire repair tools or training.

The CCI's remedies are aimed at balancing the economic rights of car makers with their responsibility as dominant enterprises in their own brand of spare parts and repair services, not to distort competition in the market.

Car companies are free to make profits; they are being prevented from seeking "monopoly rents" by exploiting their customers.

From the US, Canada, France, Spain, Brazil, South Africa, Korea to China, competition law agencies have been increasingly aggressive against the anti-competitive practices of car companies.

Last month, China penalised 10 Japanese auto parts firms more than $200 million, its biggest-ever penalty, for violating the country's anti-monopoly law.

Many of the 14 car companies, penalised by the CCI are global players who should internalise the growing intolerance of antitrust agencies, across the globe towards their anti-competitive practices, rather than take solace in the fact that the monetary penalties imposed by the CCI, at two per cent of their respective average turnovers, constitute a minuscule portion of their revenues.

(The writer is a competition lawyer with the Competition Commission of India)

 

 

Avirup Bose
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