 "CCI landmark order exposes foul pacts in auto spare parts business")
This is a seminal case because the CCI has, for the first time, elaborated on interesting antitrust concepts such as aftermarket and excessive pricing. Also, this was the first case where CCI has found an existence of a vertical agreement (between OEM and authorized dealer, OEM and OES) to be foul of the provisions of the Competition Act (“Act”).
For undertaking any abuse of dominance complaint, there are three steps which needs to be undertaken by the competition authority: (a) defining the relevant market; (b) determining whether the entity in question enjoys a dominant position in the relevant market; and (c) determining whether the dominant entity has abused its dominance.
Relevant market
This case best illustrates a concept of the relevant market being an aftermarket of a primary product. Consider the said example: a consumer wishes to buy a car. When he is exploring the options to buy a car, he has several options at each price segment, but once he has purchased the car, the consumer is “locked in” and has to use the spare parts of that particular OEM (for instance, a consumer who has brought a Maurti car cannot use spare parts of Volkswagen and or avail of the services of an authorized dealer of Ford).
In such cases, there is a presence of two different markets: one a primary market and another, the aftermarket. While determining whether the relevant market can be an aftermarket of a primary product, it has to be seen whether a consumer can shift the primary product when the prices of the spare parts of the said primary product goes up, without incurring substantial shifting cost. The CCI observed that consumers cannot change the car (i.e. shift from say, Volkswagen to Ford) if the prices of spare parts of Volkswagen go up exponentially.
Further, due to the technical specifications and the complex engineering used to manufacture each brand of cars by the OEMs, the spare parts of one brand is not compatible with that of another brand and therefore the products in the secondary market for spare parts are not interchangeable with those of the primary market and therefore they constitute distinct relevant product markets. Based on the above and based on actual economic evidence, the CCI came to conclusion that the relevant market is the aftermarket for supply of spare parts, technical designs for each OEM separately.
Dominance
The CCI observed that due to the technical specifications, spare parts of each OEM is separate from another OEM, and hence spare parts of two companies are not substitutable. Further, by way of various agreements entered into by the car manufacture with its OES and authorized dealers, it is made sure that spare parts are not made available to independent repairers “over the counter” and hence such independent repairers cannot exert any competitive influence on the OEMS and the consumers have no option but to go to the authorized dealer of the OEM to service their cars. Therefore, even if the primary market (market for cars) is subdivided into various segments the competitive constraints or effective competitive pressure in the aftermarket remains unchanged. Therefore, each of the OEMs enjoys over its customers and competitors because of the lock-in effect in the aftermarket for sale of spare parts and maintenance services. Further, since consumers cannot switch to another primary product (to avoid a price increase on the spare parts aftermarket) due to high switching costs and the fact that the residual value of a new car, post registration in the name of the new owner, is lower than the price of a pre-registration new car, the owner of a car may only shift to another product in the primary market after incurring substantial financial loss. Thus, the purchaser of a product in the primary market is to a great extent locked in with the primary product and the feasibility of switching to another primary product to avoid a price increase in the secondary market of spare parts or repair services is greatly limited. Based on the above, the CCI observed that each of the OEMs is dominant in the above defined relevant market.
Abuse of dominance and appreciable adverse effect on competition
The CCI observed that each of the OEMs are engaging in denial of market access by entering into agreements with its authorized dealers and OES ensuring that the spare parts and technical designs are not made available to independent repairers over the counter and thereby, denying market access to independent repairers to compete effectively. Further, the CCI undertook a price cost comparison of the spare parts sold to the consumers and found out that the OEMs are selling the spare parts to the consumers at huge mark up (sometime to extent of 100%) and thereby indulging in excessive pricing.
Way forward
It is very interesting that the CCI appreciated that relevant market can be an “aftermarket” for a primary product if it is found that consumers cannot change the primary product without incurring substantial switching cost. Similar explanation can also be taken in the real estate sector wherein a consumer is locked in after buying a house and has to suffer abusive conduct of real estate players. It remains to be seen how CCI interprets the aftermarket analysis in other sectors.
While it is seen that CCI did undertake an in depth analysis of the sector, it must be kept in mind that EU has taken a very cautious approach in this sector by way of multiple block exemptions in motor vehicle sector after analyzing the sector and coming to the conclusion in 2010 (the first motor vehicle block exemption was back in 1988) that independent repairers have the necessary infrastructure and skill set to repair the cars and maintain the brand image of the OEMs and thus spare parts must be made available to independent repairers at a fair price and technical designs can be licensed to independent repairers after paying the appropriate royalty. It would be interesting to see how the directions imposed by the CCI in this case (like making available spare parts to independent repairers, entering into arrangements to train the independent repairers) will pan out because of the state of independent repairers in India. One must note that once a customer buys a car, the same must be serviced periodically and by trained professionals, who are aware of the technical nuances of the spare parts and technical designs, to ensure that the brand of the car does not get tarnished. While the order of the CCI does point out interesting nuances like price cost comparison of spare parts, it remains to be seen how the directions will be taken forward in actual business reality.
The author is a Partner at Khare Legal and an expert on the CCI