Tyre Industry: No Cartel!

Remember the 6,300 crore rupee bombshell that CCI dropped on the cement industry for cartelization in June this year? Besides the penalty amount, the regulator drew severe criticism for allowing a lower standard of circumstantial evidence to prevail and for not appreciating economic evidence to the extent it should have. This week’s CCI order has done quite the opposite. After 2 years of investigation the CCI’s Director General of Investigations found 5 tyre companies guilty of cartelization. But a majority of CCI members decided otherwise…even though the 5 companies in question together controlled 95% of the market.

Payaswini Upadhyay talks to experts to analyze the decision. In a complaint to the Competition Commission of India in 2007, the All India Tyre Dealers Federation or AITDF alleged collusive pricing, tax avoidance and trade malpractices by tyre manufacturers. In 2010, CCI initiated investigation against 5 tyre companies- Apollo Tyres, Ceat Tyre, JK Industries, Kesoram Industries and MRF. Two years later, the majority of the members at the Commission concluded that there is not sufficient evidence to hold a Competition Act violation by the 5 companies. But in a minority order, a single member of the Commission differed, agreeing with the investigation report instead - that found the companies guilty of cartelization. Samir Gandhi
Partner, AZB & Partners
“This order of the CCI is encouraging, the order of the CCI looks into some of the finer details and nuances of the way the tyre industry has actually behaved and perhaps it does so in slightly more detailed way than the order of the dissenting minority which tends to gloss over a few issues which perhaps could've been dealt with more detail. So, sum of all parts, I would tend to go with the order of the majority.” To prove cartelization in the tyre industry, the Director General of Investigation relied upon the existence of price parallelism between 2005-2009. In doing so, the DG relied upon the similar percentage change IN net dealer prices. But CCI’s majority view observed that the price movement in percentage terms had wide variations and even in absolute terms, the price range was between 6-12% - and hence concluded against THE existence of price parallelism. In arriving at this conclusion, the regulator also took into account the plus factor to assess if there was price parallelism on account of concerted action. The plus factors taken into account were- capacity utilization, profit margins, net dealer price and market share. On all of these, the majority order did not find any violation by the 5 companies. Samir Gandhi
Partner, AZB & Partners
“I think that the CCI has done a better job to appreciate some of the finer nuances of how the industry actually works and that's fairly important because its easy to infer the existence of a cartel based on pure finding of price parallelism without for a moment examining that the prices have moved in parallel because of certain reasons or whether indeed in homogenous products, such as tyres, cement, steel etc, whether prices would but naturally move within a certain narrow band because there isn't much of a play between the cost of production of one product and another. I think its come some distance since its previous orders where it perhaps glossed over some of those factors and tended to assume that just because capacity utilization was slightly lower that what perhaps it could have been, that in itself was the existence of a cartel or equally prices tended to move in a similar fashion was in itself indicative of a cartel when we all know that in a commodity product, by definition, prices tend to move more closely to each other.” Suhail Nathani
Partner, ELP
“The cement cartel case turned the way it did because of the post meeting conduct in prices. The tyre manufacturer’s case turned the way it did because of a large and open door on imports which could come in and take out any competitive conduct that would impact the market.” The second aspect based on which the DG HAD found the 5 companies guilty of cartelization was the role played by the industry body ATMA i.e. Automotive Tyre Manufacturers Association. The DG noted that ATMA members collectively adopted various course of actions including anti-dumping petitions, blacklisting of importers, export realization and unremunerative prices from supplies made to equipment manufacturers. BUT, The majority order observed that though, on a superficial basis, this looked like cartel behavior but there was no substantive evidence to prove so. Suhail Nathani
Partner, ELP
“Let’s take the cement case – they had members who stepped out of the Association on the basis that it could be anti competitive, they changed their Charter in terms of what the Association could or could not do. However, post every meeting that they had, the quantity and quality of the data they exchanged, plus the fact that they had a High Powered Committee in which people who were not members of the Association actually participated, I think, turned the cement case. If you look at the tyre case, the role that ATMA played was actually, if you will, appreciated by the CCI because they said that it looked at industrywide issues like anti-dumping, taxation, import prices- so there is clear guidance on what an Association can or cannot do.” The majority may have not agreed - but both arguments of the Director General- existence of price parallelism and plus factors and the role of ATMA- found favor with one member of the Commission. In the minority dissenting order, the member has concluded that the failure of the parties to establish any wrong in the DG’s working on pricing establishes that price parallelism existed. On the plus factors, the minority order agrees with DG’s conclusion that capacity utilization had gone down between 2005-2006 and 2009-2010. The minority order has also found ATMA a part of the tyre industry cartel that facilitated exchange of business information among its members. Suhail Nathani
Partner, ELP
“The minority view alludes to certain aspects of the investigation, and as you know we don't have the benefit of having the DG's report before us, but it talks of certain conduct which quite honestly are anti-competitive. Assuming, these were to be true and these were to be analyzed further, there could be a conclusion that there is a cartel operating. So one of the observations made by the minority view that there was exchange of information which led to certain price fixing, there was exchange of information on raw material costs- now if that is actually backed up by evidence and serious evidence at that, then those would tantamount to a cartel.” And probably this is the reason why the Commission should consider making the Director General’s report public as well. Specifically on the tyre cartel order, practitioners seem to be lauding the fact that CCI did not get swayed simply by the circumstantial evidence but gave due weightage to economic analysis- a positive not only for the companies in question but also cartel jurisprudence at large. In Mumbai, Payaswini Upadhyay