CCI’s Hyundai Order May Force Manufacturers To Redefine Pricing PoliciesBloombergQuintOpinion
Many industries in India operate based on practices that have evolved over time. For instance, car showrooms in India are usually exclusive dealerships and one rarely comes across multi-brand dealerships. On the other hand, if one takes consumer electronics, there is a plethora of multi-brand stores such as Croma, as well as single brand stores, which carry the products of a single manufacturer alone. Again, when one purchases cars and electronics, one is encouraged and often bound to use the manufacturer approved spares and accessories, often at the cost of losing the warranty that the products carry. Are these practices anti-competitive? Or, is there an objective justification for them?
Another common thread across industries is that the consumer in India has become used to paying the Maximum Retail Price (MRP) or recommended or list price for almost all goods whether it is colas, juices, packaged pulses, medicines, toothpaste, cars, or stationery.
The MRP was intended as a measure of consumer protection against excessive pricing. However, the requirement for specifying the maximum price has had an unintended consequence: there is limited price competition in the market because all sellers sell at this maximum price.
Discounts are usually offered across the board by all the sellers at the same time, usually under the scrutiny of the manufacturing company, or as one-off schemes.
Only recently have large retailers such as Big Bazaar and e-commerce companies such as Flipkart and Snapdeal started to offer competitive discounts on products, passing on economies of scale and operations to the consumer. But that is another story.
Competition law seeks to ensure fair competition in the market. The Competition Commission of India (CCI) frowns most severely upon cartel arrangements between competitors that manipulate prices, supply, and production. If an arrangement between competitors is intended to skew market dynamics, the CCI does not examine the effects of such a practice on the market - such an arrangement is illegal, to start with. Vertical agreements, however, between persons at different levels of the value chain (such as a manufacturer and dealer, or a manufacturer and retailer) are treated with a more lenient eye. The CCI will usually inquire into the effects of the arrangement to confirm whether the market was adversely affected because of such an arrangement. So, vertical agreements such as exclusive supply and distribution agreements, tied or bundled sales, and resale price maintenance (RPM), under the law, are not illegal unless they adversely impact the market.
Resale price maintenance occurs where the manufacturer specifies the resale price for goods or services that distributors or dealers will charge. Across many jurisdictions of the world, RPM is less tolerable to regulators than other forms of vertical agreements because it has a direct impact on the price that consumers pay for the products that they purchase. Would it be correct to state that the CCI has also taken a similar approach to RPM?
The recent decision of the CCI in a case involving Hyundai Motor India Ltd. may have the potential to redefine the way corporations in India plan and implement their pricing policies.
In India, so far, it has been arguable that where the market for a product is generally competitive, the imposition of a minimum resale price would not ordinarily cause an adverse impact on the market. In fact, in its past orders, the CCI had not treated RPM any differently from other vertical restraints.
In the case of Hyundai Motor, the CCI examined, in explicit detail, the issue of RPM, in addition to other allegations of anti-competitive vertical agreements that certain car dealers had made against the car manufacturer, Hyundai. The dealers had complained about:
- their exclusive dealership arrangements with Hyundai and that taking up dealerships of other car manufacturers required Hyundai’s prior consent;
- the fact that the dealers were bound to procure spares and accessories only from Hyundai or its pre-approved vendors;
- the tie-in arrangements that tied the dealers’ purchase of desired cars with high-priced and unwanted cars and the fact that the consumer is required to purchase Hyundai approved compressed natural gas (CNG) kits, oils, and lubricants and even get insurance policies from approved vendors; and
- the “Discount Control Mechanism” through which dealers were only permitted to give a maximum permissible discount.
Further, they alleged that Hyundai was the “hub” for a collusive arrangement between the dealers (the “spokes”) to ensure that there is no price competition between them.
The CCI defined the markets in question as (i) the upstream market for all passenger cars in India; and (ii) the downstream level of sale and distribution of Hyundai passenger cars to end consumers in India. The definition of the upstream market is in keeping with the CCI’s previous orders in similar cases. The identification of the downstream market is interesting because it recognises a market where different dealers who sell the same brand must compete for business.
On the question of the exclusivity of the car dealerships, the CCI found that merely requiring permission from the manufacturer before setting up a dealership for a competitor manufacturer was not an exclusive arrangement that violated the law. This was also because there are many dealers of Hyundai that had, in fact, set up such competing dealerships. The cancellation of warranty for use of CNG kits, lubricants and oils that were not from approved vendors was also not a violation of the law because the manufacturer would have to bear the costs of warranty. However, mandating its dealers to use a particular oil/lubricant and penalising them where non-recommended oils were used was a violation. Since consumers were free to get insurance from companies other than those identified as preferred companies by Hyundai, there was no violation of the Competition Act.
On the question of RPM, the CCI found that the Discount Control Mechanism, which limited discounts by the car dealers, was an anti-competitive practice. This finding was supported by the fact that Hyundai imposed penalties on car dealers who had deviated and given more competitive discounts to the customer. The company admitted to having used mystery shoppers to investigate and report deviations by dealers. While the car manufacturer argued that this was done at the behest of the dealers themselves, the arrangement may have facilitated a cartel-like arrangement between the car dealers.
The CCI found that Hyundai’s discount control policy was an instrument to maintain a collusive outcome at the level of the distributors.
The Competition Act, 2002 (as amended) treats any collusion with respect to prices as the most blatant violation of the principles of fair competition and the CCI has consistently come down heavily on collusive activities among competitors. However, one is constrained to ask whether the many distributors/car dealers who were participants in this alleged collusion, will also pay the price (read, penalty) for their acts and omissions?
RPM can decrease pricing pressure on competing manufacturers when a significant player such as Hyundai imposes minimum selling price in the form of maximum discount that can be offered by the dealers who are in interlocking relationships with multiple manufacturers.CCI’s Observation
Interestingly, the CCI has not mentioned Hyundai’s market share or why it is a “significant” player. This begs the question: would it still be possible for a company to argue that since it is not a significant player, engaging in RPM would not violate the law? The possibility seems remote when the CCI repeatedly makes it a point to emphasise the need for intra-brand competition, the absence of which is likely assumed to have a direct bearing on inter-brand pricing competition. Perhaps a more detailed discussion on why the CCI had come to this conclusion with respect to the interplay between intra-brand competition on the one hand, and inter-brand competition on the other, would have helped.
From our general experience as consumers, one could possibly understand the context of the CCI’s observations. However, the economic question and business considerations of dealer viability remain unanswered in this context.
The consumer will laud the order, of course. The Indian marketplace is unique because most manufacturers are required to publish the MRP of their products. The Indian consumer has not fully enjoyed regular discounts on products and is conditioned to pay this maximum retail price.
The CCI has imposed a penalty of 0.3 percent on the average “relevant” turnover of Hyundai over three years from the sale of cars alone, and not on its total turnover. The CCI made its order after considering various arguments for mitigated penalties including the fact that the automobile sector witnessed robust competition and does not warrant intervention.
Avaantika Kakkar is Partner, Kirthi Srinivas is Senior Associate, and Arunima Chatterjee is an Associate with the Competition & Anti-Trust Practice at Khaitan & Co.
The views expressed here are those of the authors’ and do not necessarily represent the views of BloombergQuint or its editorial team.