Amazon and Flipkart found violating Competition law in India-DG investigation report out
Auto Component Makers Beware – CCI is
inquiring into your industry
The Indian automobile industry is the fourth largest in the world. It is the largest in the two and three-wheeler segment, second largest in the bus segment and the fourth largest in the passenger car segment, in terms of manufacturing volume. With the growing emergence of foreign car brands in India, the industry is generally perceived to be highly competitive and efficient and despite the present slowdown , the auto component manufacturers Industry, with an impressive CAGR of 13% ,continues to be vital for sustaining the growth and development of the automobile industry .
But despite this robust growth , there is an urgent need , particularly , for the small and medium enterprises amongst the auto component manufacturers, to be sensitized on a lurking threat of certain illegal market behaviors , such as cartels , which can invite “dawn raids”[1] followed by detailed scrutiny by the Competition Commission of India (CCI), the fair market regulator, leading to heavy penalties , which can wipe out the entire profits and push back the growth of the Industry . This blog is my modest attempt to sensitize the industry on growing instances of naïve cartelization and how to avoid CCI scrutiny and consequent huge penalties for the sustained growth of the auto component industry in India.
It is well known that a large part of the revenues of the auto component makers comes from the supplies of auto parts to the Original Equipment Manufacturers (OEMs). As per ACMA survey for FY 2018-19 , supplies to OEMs constituted 49.5% of the total revenues of the Industry followed by 15.2% from exports and 10.1% from sales in the aftermarket. Thus, supplies to OEMs constitute the major part of the business for each auto component maker. However, automobile component makers are frequently subjected to unfair trading conditions by the OEMs , say, by refusing to increase the prices despite clear trends of increase in prices of raw materials , for example, steel prices . It is a completely buyers’ market for the auto component makers .
In order to sustain their meagre profits and to prevail upon the strong countervailing buying power wielded by the buyers/OEMs , mostly large MNCs , the auto component makers are sometime forced to co-ordinate with each other to compete fairly against the large buyers/OEMs. However, perhaps due to ignorance of law, the auto component makers may fall in the trap of CCI , since even a benign meeting with competitors to bargain for an otherwise justified increase in prices from the buyers is considered as a cartel under the Competition Act, 2002. For instance, even innocuous messages sent to your competitors by any of your employees through mobile phones , including on WhatsApp , Telegram etc may prove to be vital evidence for successful prosecution of such naïve auto component makers .
How does the competition law , which is mandated to establish fair market practices and perfect competition in all sectors of the economy, affects the various stakeholders in the automotive industry , both OEMs and their suppliers ( and their respective trade associations like ACMA ) ? This can be achieved only through spreading knowledge and awareness on the finer aspects of the competition law and how it is affecting auto component industry globally .
In the above context , you may be surprised to know that , of late , there has been a spate of investigations into the auto component industry by Antitrust /competition regulators through out World , which should be a serious cause of concern for all.
Between 2009 and 2019, hundreds of automotive Original Equipment Suppliers (OESs) across 26 countries were investigated by competition law regulators in relation to an alleged global cartel in the supply of automotive parts sold to OEMs. These investigations have resulted in a combined penalty of 20 billion USD being imposed on 300 OESs worldwide. Given below is a list of press releases issued by the European Commission (EC) regarding the investigations leading to imposition of huge penalties (and settlements arrived ) into cartels of various auto components undertaken in the European Union (EU) and also in India in which you may find some known names :
- Car seatbelts, airbags and steering wheels- https://ec.europa.eu/commission/presscorner/detail/en/IP_19_1512
- Spark Plugs, braking systems- https://ec.europa.eu/commission/presscorner/detail/en/IP_18_962
- Vehicle lighting systems-https://ec.europa.eu/commission/presscorner/detail/en/IP_17_1741
- Car and truck bearings- https://ec.europa.eu/commission/presscorner/detail/en/IP_14_280;
- India- https://www.reuters.com/article/us-india-antitrust-bearings-exclusive/exclusive-india-probe-finds-skf-schaeffler-tata-steel-units-colluded-on-bearings-prices-idUSKBN1Y00A3
- Air cooling and engine cooling components- https://ec.europa.eu/commission/presscorner/detail/en/IP_17_501
How the current wave of auto-parts investigation began is uncertain, however, it is speculated that in 2009, a whistle-blower approached the Canadian Competition Bureau to apply for amnesty (Johnson Winter 2012). The Bureau sent requests for information to five other auto-parts suppliers and shared its findings with other antitrust authorities.[2]
The alleged collusive conduct concerned OESs colluding and fixing the prices, allocating markets, coordinating bid response and manipulating the bidding process in Requests for Proposals/Request for Quotation (RFP/RFQ) issued by the OEMs.
In India, the investigation into the auto-parts cartel has been slow to take off but has picked up steam in the last two years. On 09 August 2019, the Competition Commission of India (CCI) issued its first Order against an auto-parts cartel, resulting in a penalty of INR 17,07,31,443/- on JTEK Corporation, Japan and JTEKT Sona Automotive India Limited for cartelization in the supply of Electric Power Steering Systems. Incidentally, the other cartelists i.e. NSK Limited, Japan and Rane NSK Steering System Ltd took benefit of the Competition Commission of India (Lesser Penalty) Regulations, 2009 (“Leniency Regulations”) and escaped penalties under the Competition Act, 2002 (“Act”) .
The auto-part cartel investigation in India seems to be following the trend in Europe, where leniency applications were filed in all the nine cases decided by the EC concerning the auto-parts cartel.
What is leniency?
The leniency regime aims to provide benefit of lesser penalty to enterprises and/or individuals who come forward and disclose to the CCI their role in a cartel and co-operate with subsequent investigations.
Section 46 of the Competition Act read with the Leniency Regulations codifies and governs the law on leniency in relation to cartel investigations in India.
Under the Leniency Regulations, the CCI has the discretion to award lesser penalty of up to 100% to an applicant if it is the first to make a vital disclosure by submitting evidence of cartel which enables the CCI to form a prima facie opinion regarding the existence of the cartel, and the Competition Commission did not have sufficient evidence to form such an opinion at the time of application. Further, the CCI may also grant the benefit of reduction in penalty to an applicant which makes a vital disclosure at the investigation stage by submitting evidence which establishes the cartel and the CCI and Director General, Competition Commission of India did not have sufficient evidence to establish such a contravention at the time of the application.
The applicants subsequent to the first applicant may also be granted the benefit of a reduction in penalty on making a disclosure by submitting evidence which, in the CCI’s opinion, may provide “significant added value” to evidence already in the CCI’s possession. The applicant marked second in the priority status may be granted a penalty reduction of up to 50%. The applicant marked as third in the priority status may be granted a reduction of up to 30%. As per the latest amendments, there is no limit to the number of applicants and, as such, the third and all subsequent applicants thereof may be granted a reduction in penalties of up to 30%.
Thus, the primary consideration for grant of leniency is the ‘stage’ at which the applicant applies for leniency. In the cases decided by the CCI till date, 100% immunity has only been granted to the first applicant i.e. the applicant who provided evidence which enabled the CCI to form a prima facie opinion regarding the existence of the cartel.
The second consideration is the concept of “significant added value”. The question as to what constitutes “significant added value” is essentially a question of fact, depending on the nature and extent of disclosure made by an applicant. However, the determination of “significant added value” is essentially the discretion of the CCI. Discretion is exercised by the CCI with due regard to: (i) the stage at which the applicant has come forward with the disclosure; (ii) the evidence already in the possession of the CCI or the DG; (iii) the quality of information provided; (iv) the facts and circumstances of the case.
However, in a welcome change, the CCI in recent orders has also granted in reduction in penalty where the applicants did not provide significant added value, but provided full and genuine co-operation to the investigation, including to admission to cartelization. In the Dry Cell Battery case the CCI granted 30% and 20% reduction, respectively, to the applicants despite not providing any significant added value.
Conclusion
India is one of the last major jurisdictions where the investigation into the global auto-parts cartel is still ongoing. The CCI is expected to close the investigation and pass relevant orders in the coming years. Taking a cue from foreign regulators, the investigation in India is also believed to have been aided by many leniency applications filed mostly by Indian subsidiaries of multi -national OESs . The investigation into the global auto-parts cartel is a classic example which reinforces the widespread dependence of antitrust authorities on leniency programs to generate cartel cases.
Auto component makers in India are, therefore, advised to take competition compliance seriously and to contact experts to train their employees and senior management on how to avoid falling into CCI inquiry . In case any of you happen to know of any impending investigations or receive notice from CCI please prepare yourself to be ready for a possible “dawn raid “ which is now mostly used by the DG /CCI to collect evidence on coordination between competitors before it is destroyed! You may consider making use of the leniency program of CCI in consultation with experts to obtain waivers from huge penalties .
[1]“ Dawn raid” is a colloquial term used for surprise raids by DG/CCI staff , usually in early morning hours in the residence and factories /offices of the cartel members during which they seize all hard drives , computers , laptops etc . CCI has undertaken 5 dawn raids till date, the latest being on 5th September 2019 against suppliers of tarpaulin to Food Corporation of India. https://economictimes.indiatimes.com/news/politics-and-nation/cci-raids-4-companies-accused-of-rigging-bids-for-fci-tarpaulin/articleshow/70986385.cms?from=mdr
[2] https://www.antitrustinstitute.org/wp-content/uploads/2019/07/Auto-Parts-Cartel-Twilight-of-AAI-WP_7.17.19.pdf, last accessed on 13 December 2019.
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