Striking at spares

Emerging market watchdogs could dent car industry

Emerging markets are where the big growth is for automakers. Now local competition watchdogs are using their heft to upend the car parts industry. India has fined car companies $421 million and forced them to open up the market for spare parts to rival manufacturers. If Chinese regulators take a similar approach, carmakers' earnings could suffer.

India's car market is on an upshift. New registrations are set to grow 15 per cent next year to almost 4 million, according to Nomura. Similarly high growth rates mean already-giant China is expected to move 27 million new cars in 2015, about a third of the world's total.

Spurred on by the industry's increasing prominence, Indian and Chinese regulators have taken a closer look at restrictive practices in the sale of car parts. Many carmakers force consumers to repair their vehicles at the manufacturer's dealership if they want to keep their warranty. Carmakers in India also refused to allow independent garages to stock their parts. Western authorities already frown on such restrictions. The European Union banned them in 2002.

Now India's Competition Commission has also decided that the practice violates the country's antitrust law. In an August 26 ruling, it ordered carmakers to drop warranty restrictions and make original parts available. However, it went further than its Western counterparts by forcing automakers to let other suppliers manufacture patented parts under licence. The challenge to car groups' intellectual property is unprecedented.

India is still a relatively small market for foreign manufacturers. But the ongoing price-fixing probe in China means the precedent is worrying. Take Hyundai, which has a large and successful Chinese joint venture. Assume a fifth of the unit's revenue - about ¥21 billion ($3.4 billion) last year - comes from spare parts and enjoys the same 10.4 per cent net profit margin. If new competition in the parts market chopped that in half, Hyundai's global earnings would have been about four per cent lower.

Carmakers argue that less control over their parts might force them to trim warranty protection, raising costs for consumers. Still, India's move seems more likely to hurt automakers. If China takes a similar view, earnings could get side-swiped.