Emerging market watchdogs could dent car industry

Hindustan Motors

29/08/2014 03:57

(The author is a Reuters Breakingviews columnist. The opinions 
expressed are his own.) (Refiles to fix formatting.) 
    By Ethan Bilby 
    HONG KONG, Aug 29 (Reuters Breakingviews) - 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 percent 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 Aug. 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  005380.KS  , which has 
a large and successful Chinese joint venture. Assume a fifth of 
the unit's revenue - about 21 billion yuan ($3.4 billion) last 
year - comes from spare parts and enjoys the same 10.4 percent 
net profit margin. If new competition in the parts market 
chopped that in half, Hyundai's global earnings would have been 
about 4 percent 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. 
     
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    CONTEXT NEWS 
    - India's antitrust watchdog, the Competition Commission of 
India (CCI), said on Aug. 26 it was fining 14 car companies a 
total of 25.4 billion rupees ($421 million) for restricting the 
sale of spare parts in violation of local law. 
    - The regulator said that carmakers had abused their 
dominant local position to prevent independent dealers from 
offering spare parts. They also charged "arbitrary and high 
prices" for the parts. 
    - Officials said carmakers must allow third-party equipment 
suppliers to licence genuine parts to sell under their own 
brand. The carmakers would receive a royalty payment on any 
patents they hold. Carmakers must also scrap the condition which 
states that using non-approved garages for repairs violates a 
car's warranty, and any restrictions on providing original spare 
parts to independent repairers. 
    - Companies receiving fines include branches of global auto 
groups Honda, Volkswagen, Fiat, BMW, Ford, General Motors, 
Skoda, Mercedes-Benz, Suzuki, Toyota, and Nissan, as well as 
Indian groups Tata Motors, Hindustan Motors, and Mahindra & 
Mahindra. 
    - The groups are to be fined two percent of their average 
revenue, mostly from 2007-2010. Tata Motors received the largest 
fine of $223 million. By comparison Mercedes-Benz will pay $3.8 
million. 
    - China's National Development and Reform Commission (NDRC), 
is conducting a probe into parts pricing in the auto 
industry. Officials said on Aug. 6 that Chrysler, owned by 
Italy's Fiat, and Volkswagen-owned Audi had engaged in 
anti-competitive behaviour. Audi has already said its sales arm 
violated part of the country's anti-monopoly laws, and that it 
would accept a penalty. 
    - Reuters: CCI fines car makers $420 million for 
anti-competitive practices  ID:nL3N0QW221  
    - India ruling: http://bit.ly/1qH2mOk 
 
     
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 (Editing by Peter Thal Larsen and Robyn Mak) 
 ((ethan.bilby@thomsonreuters.com)(Reuters messaging: 
ethan.bilby.thomsonreuters.com@reuters.net)) 
 
Keywords: BREAKINGVIEWS CHINA/AUTOS