A case against system markets-automobile industry of India

Source : http://www.legalserviceindia.com
Author : gayatrir.93
Published on : September 13, 2016

gayatrir.93's Profile and details
A final year student at the Campus Law Centre, interested in Competition law, Space law and International Criminal Law

A case against system markets: An analysis of the automobile industry of India

As part of any antitrust/competition analysis, one pertinent question that arises is the decision whether there is a single market that includes both, the equipment and its complimentary products and services, or separate markets, ergo, “primary market” for equipment and one or more “aftermarkets” or “secondary markets” for complementary products or services supplied by both manufacturers and Independent service organisations. Such animosity among both legs of the conglomerate market arises when the Original Equipment Manufacturers (hereinafter OEMs) adopt the defence of owning rights over the research and the development of the diagnostic tools, thus, providing them with exclusive rights over its repair and servicing. Such antagonism is conspicuous in the automobile industry of India, in which Independent Service Providers (ISPs) including unauthorized dealers and providers have created a sizeable market share by selling spare parts and diagnostic tools at 1/5000ththe price of OEM products.

While there are differences between the way US antitrust and EU competition law is applied, particularly to the arising need to integrate primary and secondary markets, the economic principles set out in the leading US case ofKodak, are widely followed on both sides.

I. US Principles

Section 2 of the Sherman Actposes a challenge to a manufacturer’s bid to exclude aftermarket competition wherein in such cases, a plaintiff must prove that, despite successful primary market competition to sell equipment, a manufacturer has market power in an aftermarket for goods or services relating to such equipment.

It was the U.S Supreme Court’s decision in Eastman Kodak Co. v. Image Tech. Servs., Inc. which came moulded itself into a leash around the necks of manufacturer’s who attempted to garner control over aftermarket. Here, the Supreme Court rejected Kodak’s claims of maintaining ground for competition through the presence of its rivals in the same relevant market. The court ruled that this was no reason to make unavailable spare parts or sell the same at 400% the price as such practices were openly anti-competitive. This decision, therefore, also rejected economic theory that competition in the primary market would always guarantee that it would be unprofitable for a manufacturer to exploit its own aftermarket customers.

II. European Competition principles

Most aftermarket challenges in the EU are based on Article 102, as they usually relate to the implementation of support policies or policy changes rather than restrictive agreements. Therefore, for the complainant seeking to prove his case or a regulator seeking to intervene, defining a market upon which a proprietary manufacturer has dominance is crucial to obtaining jurisdiction.

In the post-kodak era, it came to be seen as important to prove dominance in both primary as well as secondary market as prevailing economic theory amalgamated the two together. Ergo, a manufacturer could only have market power in a secondary market distinct from the primary market when the Kodak principles of lock in and informational imperfections at time of purchase were present.

In 2011, the EU Commission found IBM to have a dominant position in the secondary market for the maintenance of its own mainframe systems and had abused that position by imposing unreasonable terms on ISOs for the supply of spare parts and the provision of necessary technical information. In this case the Commission have agreed to accept commitments from IBM to ensure that ISOs:
1. Were provided with access to vital technical information to allow them to support IBM’s mainframe systems,
2. received prompt delivery of spare parts, and
3. paid the same price for spare parts as those accorded to self maintainers.

This showed that the commission’s approach towards the issue at hand was to seprate the two legs of market as distinct. However, this case was a settlement rather than a formal competition decision, so the description of the Commission’s case is somewhat limited. Regardless, the Commission is likely to have used the presence of high switching costs and a lack of whole life costing according to the Kodak principles to ground its case.

III. In the case of the Automobile industry in India

Recently, the Competition Commission of India (CCI) imposed an aggregate penalty of Rs. 25.54 Billion on fourteen OEMsfor creating anti-competitive effects through agreements for spares and after sales services which worked towards the complete foreclosure of independent services. The OEMs were found to be dominant in the markets for their respective brands and had abused their dominant position under Section 42 of the Act.

An appraisal of the order of the CCI in this matter draws one’s attention to certain issues that are central to the debate on the adoption of a system market-based understanding-

a. Whole Life cost analysis

The main contentions of OEMs that the primary market as well as the spare parts aftermarket form a single system market is essentially based on the principles of life cost. It assumes that not only does the consumer know the price and the value of the secondary products, but s/he is also fully capable of making a utilitarian and informed choice. It would go without saying that in a complex industry such as that of automobiles, expecting the consumer to possess knowledge the most cost-effective option amongst so many when even car makers may not possess such information regarding price and availability at the time of sale.
For this reason, the possibilities of a whole-life costing analysis may fluctuate depending upon the nature of customers. Courts have broadly classified customer groups based on sophistication and knowledge of technical know-how, along with access to the same. This has resulted in the presumption that various ancillary factors affect such a kind of analysis, which may more often than not, depend on the whims and fancies of the consumer group. It is one’s opinion that the ruling in theShamsher Katariacase was able to unravel the ulterior motive the OEMs of capturing the sizable market share held by the nearly 900 ISOs by claiming an IPR defence yet, maintain a 5000% excessive mark-up of ‘authorised’ secondary market products. Additionally, it was also noticed that many of the OEMs companies did not reveal the prices of the products in the aftermarket. It is therefore seen, that the Indian market context, a bid to integrate primary and secondary markets is inimical to consumer welfare, as it may closely boast of the sole motive of improving a dwindling market share of an OEM through anti competitive means.

b. IPR Defence

It may be identified that invocation of a refusal to deal on part of OEMs seems frustrated with the sale of spares and diagnostic tools in the open market by the OEMs. It may be observed that the unwarranted protection claimed by the primary market manufacturers under s. 3(5) of the Competition Act did not cover those rights that were not within Indian legislations. Additionally, the aforementioned sale of parts in the open market reduced the ‘necessary’ and ‘reasonable’clauses for restrictions imposed by the OEMs to frivolities.

The justification provided by the companies for placing such restrictions is that the independent service providers might not have adequate technical and mechanical skill to service the automobiles and the presence of several counterfeit spare parts in the market might not synchronise with the automobile’s working and might end up damaging it permanently. The CCI has ruled that the companies must not use such arguments and take away the choice given to the consumer between an authorised seller and an independent service provided. Therefore these restrictions are not justified and are anticompetitive in nature. With the secondary market seen as the relevant market, with a separate market share, it is clear that an integration of the two would only result in the OEMs usurping the former’s market share, while charging 5000% the original price and disrespecting the ideals of consumer welfare. One argues that the nuanced understanding of such a situation on part of the CCI as well as the COMPAT, through its intermediary orders is welcomed.

IV. Conclusion
On the other hand, the flipsidewould be that certain valid points may be made against the Order.
1. The Rejection of ‘system market’ has led to a situation that has convoluted the very idea of consumer choice. The consumption of the secondary market product, which has a substantial market share, continues to depend on the purchase of a particular car. In this manner, the car manufacturer continues to remain dominant.
2. With the prevalence of several ISPs who do not possess the requisite training to handle sensitive technology, the liability of the car manufacturer may be misplaced in the instance of malfunction or faulty usage. On such an occasion, warranty may be legitimately denied.

Kodak explains in great detail, what is mentioned fleetingly in s. 3(4)(a) of the Competition Act, 2002. The principle of ‘tie-in arrangements’holds significance in the debate on systems markets.

The former laid down four essential elements-
(1) the tying and tied goods are two separate products;
(2) the defendant has market power in the tying product market;
(3) the defendant affords consumers no choice but to purchase the tied product from it; and (4)the tying arrangement forecloses a substantial volume of commerce.

In the present case, it has been established that the primary and secondary markets are distinct in scope and utility to consumers due to ready access for aftermarket services in the latter as opposed to latter. It is also noticed that all the OEMs possess the market power in the secondary market to charge arbitrary prices for selling of spare parts to Independent Repairers. Due to such restrictive practices by the OEMs consumers are left with limited choice but to buy genuine parts from authorized centres of OEMs.

4. Substantial volume of commerce is affected as the car market in India is one of the largest in the world and the entire open market/aftermarket had been restricted from accessing genuine parts/know how from OPs. A move ahead would therefore be to further extrapolate s. 3(4) (a) of the act of 2002, which the aforementioned tenets governingtie-in agreements.

It is one’s opinion that besides bringing huge profits to the car owners, the stand of the CCI in separating the two markets will highlight similar practices carried out by other companies across different sectors. It is one’s opinion that the decision to reject the system markets approach is one which is mindful of the Indian market context and the nascence of Indian competition jurisprudence. Despite inviting myriad opposition and disaffection, this judgment must be commended for acknowledging the position of car owners as well as looking upon the violations of essential statutory provisions. Such an understanding acts as deterrent for other industries and might help ameliorate anti-competitive behaviour in the future.

# Rohan Venktaramakrishnan,How car makers are fleecing Indian drivers on spare parts (but may no longer be able to do so), Scroll.in ( 20thAugust 2016),http://scroll.in/article/676227/how-car-makers-are-fleecing-indian-drivers-on-spare-parts-but-may-no-longer-be-able-to-do-so
# Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $10,000,000 if a corporation, or, if any other person, $350,000, or by imprisonment not exceeding three years, or by both said punishments, in the discretion of the court.
# 504 U.S. 451 (1992)
# Prohibits abusive market behaviour by companies in a dominant position on the relevant market.
# Shri Shamsher Kataria vs Honda Siel Cars India Ltd. & Ors, Order dated 25thof August 2014
# Supra note 1
# Rajender Kumar Gupta v. Samsung India, 2014 CCI 76, the party alleged lack of access to service centres, thus resulting in lack of adequate knowledge to perform whole-life costing analysis.
# Jude Sannith,Nissan targets 5% market share, Moneycontrol.in (24thof August 2016),http://www.moneycontrol.com/news/cnbc-tv18-comments/nissan-targets-5 -market-shareindia-by-2020_4935641.html
(5) Nothing contained in this section shall restrict—
(i) the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under:
(a) the Copyright Act, 1957 (14 of 1957);
(b) the Patents Act, 1970 (39 of 1970);
(c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act, 1999 (47 of 1999);
(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of 1999);
(e) the Designs Act, 2000 (16 of 2000);
(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000);
(ii) the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.
# The Commission’s conclusion of lack of market access to spares and conclusion of entry barrier is contrary to its own finding that after the warranty period, consumers approached independent garages. With 60,000 organized dealers and 300,000 un-organized dealers, the claim of lack of access to spares and services appears unfounded.