Case Analysis : Maruti Suzuki India Ltd. (MSIL) and the Competition Commission of India (CCI)

Anything in excess or less is harmful. Therefore, a balanced approach has to be followed to ensure the smooth working of things. The same goes with competition, if less, it creates a monopoly, but if in excess, it takes a toll on the customer retention part of the company, which ultimately leads to a drought of the life “blood of a business”, i.e., profits.

Situation

Maruti Suzuki India was regulating the ‘Discount Control Policy’ for the dealers. The contract between MSIL and its distributor network stated that they could not freely give discounts to customers; rather, the discount percent was pre-fixed by MSIL over their diverse range of products, i.e., the vehicle segment for various models and variants. For example, if a buyer goes to the MSIL showroom and selects a sedan costing Rs. 10 lakhs, the customer will definitely negotiate with the dealership to reduce the price, so, he or she could buy the sedan but in this case the dealer cannot negotiate for the price after a specific margin and when the customer go to the other dealership of MSIL, the same incident repeats.

Now the customer has to purchase his or her favorite car with the golden discount percentage at the end of the day, even if he or she is a pre MSIL customer, who is surely qualified for the customer loyalty benefit in terms of rebate or freebies. Moreover, in the case of off-season sales and year-end sales, when the dealership has to meet a fixed revenue and sales target, they also cannot give extra discounts to the customer, which hampers their revenue and sales because the dealership fee of MSIL would be static, so, the dealership has to manage it from their dynamic revenue figures. On the other hand, the customer is also at the losing end as he or she has to buy an MSIL old model vehicle at a pre-fixed high price because the discount margins are capped. As a result, competition among MSIL dealers would have been reduced, and it would have all come down to geography-based market segmentation only.

Competition Commission of India

According to the CCI order, “The CCI passed a final order against MSIL for indulging in anti-competitive conduct of resale price maintenance (RPM) in the passenger vehicle segment by way of implementing a discount control policy vis-à-vis dealers, and accordingly, imposed a penalty of Rs 200 crore upon MSIL, besides passing a cease-and-desist order.”

MSIL violated Section-3 of the CCI Act, 2002, as well as its sub-clauses, Section-3 (1) and a few others, such as Section-3 (4) (e).

Section-3 of the CCI Act of 2002 discusses “Anti-Competition Agreements,” which hamper competition in the industry, market, and product by indirectly making a cartel and fixing the price of the product, be it the maximum price or minimum price within, between, or among themselves. Section 3 (4) (e) of the same provides for “Resale Price Maintenance.”

If they set the maximum price, the customer will not be able to buy the product at the minimum possible price. On the other hand, if they set the minimum price, the customer will be buying the product only from a single producer, thus creating an indirect monopoly in the market. This is generally done using the pre-datary pricing technique, where the producer sells the product at a price that is less than the price of the competition, to the extent that they are even selling the product below their cost price and incurring a loss to finish the competition. They (competitors) also lose the customer base of their current customer base. By incurring a loss, they also save themselves from huge taxes as the loss acts as a tax shield. On the other hand, competitors have to pay taxes even if they incur a very small amount of profits. Slowly, when these factors have broken the backbone of the competitor(s), effectively ending the competition and gradually establishing the brand’s monopoly.

CCI also found out that MSIL appointed ‘Mystery Shopping Agencies” to appear as customers at the company’s dealerships to find out if any kind of extra discount(s) was being offered to customers, which could also be seen as corporate to some extent.

By invoking Section-3 and its sub-clause (1) of the CCI Act, 2002, the producer is prohibited/barred from making any agreements related to price control by creating any kind of agreement(s) related to supply, production, distribution, storage, and acquisition and control that can have any adverse appreciable adverse effect, i.e., by creating a market barrier, by lowering the price to set off the existing competition, or by exclusive supply agreements.

As per the bare act- Section 3 in the Competition Act, 2002

Anti-competitive agreements.—

(1) No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.

(2) Any agreement entered into in contravention of the provisions contained in sub-section (1) shall be void.

(3) Any agreement entered into between enterprises or associations of enterprises or persons or associations of persons or between any person and enterprise or practice carried on, or decision taken by, any association of enterprises or association of persons, including cartels, engaged in identical or similar trade of goods or provision of services, which—

(a) directly or indirectly determines purchase or sale prices

(b) limits or controls production, supply, markets, technical development, investment or provision of services;

(c) shares the market or source of production or provision of services by way of allocation of geographical area of market, or type of goods or services, or number of customers in the market or any other similar way;

(d) directly or indirectly results in bid rigging or collusive bidding, shall be presumed to have an appreciable adverse effect on competition: Provided that nothing contained in this sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. Explanation.—For the purposes of this sub-section, “bid rigging” means any agreement, between enterprises or persons referred to in sub-section (3) engaged in identical or similar production or trading of goods or provision of services, which has the effect of eliminating or reducing competition for bids or adversely affecting or manipulating the process for bidding.

(4) Any agreement amongst enterprises or persons at different stages or levels of the production chain in different markets, in respect of production, supply, distribution, storage, sale or price of, or trade in goods or provision of services, including—

(a) tie-in arrangement;

(b) exclusive supply agreement;

(c) exclusive distribution agreement;

(d) refusal to deal;

(e) resale price maintenance, shall be an agreement in contravention of sub-section (1) if such agreement causes or is likely to cause an appreciable adverse effect on competition in India. Explanation.—For the purposes of this sub-section,—

(a) “tie-in arrangements” includes any agreement requiring a purchaser of goods, as a condition of such purchase, to purchase some other goods;

(b) “exclusive supply agreement” includes any agreement restricting in any manner the purchaser in the course of his trade from acquiring or otherwise dealing in any goods other than those of the seller or any other person;

(c) “exclusive distribution agreement” includes any agreement to limit, restrict or withhold the output or supply of any goods or allocate any area or market for the disposal or sale of the goods;

(d) “refusal to deal” includes any agreement which restricts, or is likely to restrict, by any method the persons or classes of persons to whom goods are sold or from whom goods are bought;

(e) “resale price maintenance” includes any agreement to sell goods on condition that the prices to be charged on the resale by the purchaser shall be the prices stipulated by the seller unless it is clearly stated that prices lower than those prices may be charged.

(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.

Outcome(s)  of the Case

Free and fair competition was being hampered due by this policy. The prices due to this policy had a minimum floor selling price and a maximum ceiling discount price. Customers were hampered because they were not able to get the best minimum price for the product due to the fight for sales among the dealerships. The MSIL indirectly created a cartel among its dealers by fixing the discount price. If MSIL started doing the same thing with the resale vehicles via their resale unit True Value or in the case of spare parts, after sales services, then it would have been very inconvenient for the customer because the cost of servicing would have increased and, as the first few services are designated for the company, the customer would become a handicap, plus, if he/she tries to service the vehicle from some other place outside the company, then their insurance or free service and warranty period will have lapsed, the customer may have a high monetary risk. The CCI fined MSIL a hefty Rs. 200 crore (INR) and ordered MSIL to scrap this policy. For this subject matter, they (CCI) levied only the Indian unit of the Maruti Suzuki. The distribution network and control elements in the CCI Act, 2002 were disrupted, i.e., the distribution dealers were influenced by the producer and controlled the pricing policy by the producer. Also, MSIL has been doing corporate spying to identify the dealers who were violating

This clause, which was again an unethical move and decreased the trust factor among its dealership network. Due to this, the dealership staff would also have the threat of being banned or fired, which could affect their livelihoods. Furthermore, you can see the sense of an indirect undue influence in this matter. Aside from that, the anti-competition agreement(s) are generally void. In 2016-2017, the telecommunication (telecom) sector also saw the violation of the same laws when Reliance Jio used the pre-datary pricing technique against Airtel, Vodafone and Idea to cut the competition by creating a blue ocean shift, but at that time, the decision was in favor of Jio because the customers were getting benefits. Customers spend less and can avail more telecom-related services like voice calling, internet data, etc.. Hence, we can say that it should be a win-win situation for the customer.

About the Author:  Ritwick Kundu is a student at Bharati Vidyapeeth .

Note: The views in this article are personal only.

 References

1. https://www.business-standard.com/article/automobile/cci-slaps-fine-of-rs-200-crore-on-maruti-suzuki-over-dealer-discount-policy-121082400009_1.html
2. https://indiankanoon.org/doc/1153878/
3. https://www.indiatoday.in/business/story/explained-why-cci-imposed-rs-200-crore-fine-on-maruti-suzuki-1844645-2021-08-24