The story of a INR 1,788 crore fine: Tyre makers, cartelisation and calculation errors
 |
Background on the tyre cartel case
In 2018, the Competition Commission of India (CCI) imposed a whopping fine of INR 1,788 crore on some of the biggest tyre manufacturers in India for allegedly fixing tyre prices. The companies penalized included industry giants like Apollo Tyres, CEAT, Birla Tyres, Goodyear, and MRF. This marked one of the heaviest fines ever levied by CCI for violation of competition regulations. However, the tyre manufacturers contested the fine amounts, alleging errors in CCI's complex calculations. After much back and forth, the fine amounts were eventually reduced by 30-50% for most companies. Nonetheless, this high-profile case shed light on long-suspected cartelization practices in the tyre industry.
Allegations of price fixing by tyre companies
CCI initiated an investigation against the tyre manufacturers based on allegations that they were coordinating prices and limiting production supplies in the replacement market segment. This referral market consists of tyres sold separately from original equipment manufacturers (OEMs) for replacing worn-out tyres on vehicles. CCI found evidence that the companies were determining prices collectively rather than independently. They allegedly exchanged commercially sensitive information and agreed to control production quantities to manipulate market demand and prices. Such explicit cartelization practices are considered serious contraventions of competitive conduct under the Competition Act.
CCI investigation and fine imposition
After a thorough probe, CCI concluded that the tyre companies had indulged in anti-competitive activities between 2006-11. The companies were found guilty of coordinating pricing policies, limiting production supplies, controlling discounts, and collectively negotiating with automotive OEMs. In August 2018, CCI levied hefty penalties on the manufacturers for violating competition norms through cartelization.
Companies fined
- Apollo Tyres: INR 653 crore
- CEAT: INR 420 crore
- Birla Tyres: INR 309 crore
- Goodyear: INR 171 crore
- MRF: INR 165 crore
- TVS Srichakra: INR 6 crore
Breakdown of fines
The penalties were calculated based on each company's revenue from the replacement tyre market during the period examined. A higher fine of 3 times revenue was imposed for the years where concrete evidence of cartelization was found. For other years, a lower fine of 0.5-2 times revenue was levied.
Companies' objections and calculation errors argument
The concerned tyre firms disputed the fine amounts, alleging that CCI's complex calculations were erroneous. They claimed procedural lapses and arithmetical inaccuracies in determining the revenue-linked penalties.
Apollo Tyres' objections
Apollo Tyres argued that CCI incorrectly considered global turnover rather than domestic turnover for computing the fine. It also objected to the calculation of the relevant turnover base.
CEAT's objections
CEAT contested CCI's approach of using gross revenue instead of net revenue for calculating the fine. It also pointed out duplication of revenues across years.
Goodyear's objections
Goodyear India detected errors in assessing the company's revenue for the base year 2006-07. It also argued against using gross revenue figures.
CCI's response and subsequent actions
Defense of calculation methodology
CCI defended the calculation methodology used to determine fines, maintaining it was as per the Competition Act regulations. It clarified interpretations made for computing relevant turnover and how specific revenue data was sourced for different companies. However, CCI admitted that some inadvertent errors may have occurred during the complex calculations involving voluminous data.
Reduced fines imposed
To address the firms' objections, CCI verified the calculations and offered to rectify any errors. After recomputing the fines, revised penalties were imposed in November 2018. Fines were reduced by 30-50% for most tyre companies, barring TVS Srichakra. Nonetheless, the penalties continued to be substantial at over INR 1,000 crore.
Impact on the tyre industry
Increased compliance burden
The heavy fines imposed on established industry players like Apollo, CEAT and MRF sent shockwaves across the tyre sector. Other manufacturers are now likely to tread more cautiously and bolster compliance with competition rules. The legal proceedings have increased the regulatory compliance burden for tyre firms.
More competitive pricing
With cartelization practices coming under tighter scrutiny, tyre pricing could become more competitive rather than collusive going forward. The investigation's outcome may prevent companies from coordinating prices or limiting supplies anticompetitively. Consumers can expect more transparent tyre pricing hereon.
Key takeaways from the case
- Long-prevailing cartelization practices in the tyre industry finally came to light through CCI's investigation.
- Leading tyre makers were found to be coordinating prices, supplies and discounts through mutual understanding, violating competition regulations.
- CCI levied heavy penalties on tyre companies after establishing sufficient evidence of cartelization spanning several years.
- Tyre manufacturers contested CCI's complex calculations for determining fine amounts, alleging errors.
- After re-verification, CCI agreed to reduce penalties by 30-50%, though fine amounts still remained substantial.
- The case highlighted the extensive competition law compliance required by tyre companies to avoid charges of cartelization in the future.
Get Access Now:
FAQs
What triggered CCI's probe into the tyre industry?
CCI initiated its investigation based on allegations that major tyre companies were coordinating prices and supplies in the tyre replacement market through mutual understanding, which amounted to cartelization.
How did CCI determine the fine amounts for tyre companies?
CCI calculated fines based on a percentage of each company's revenue from the replacement tyre market during the period considered. Higher fines of up to 300% of revenue were levied for years where concrete evidence of cartelization was found.
On what grounds did the tyre manufacturers object to the fines?
The tyre companies primarily disputed CCI's complex calculations used to arrive at the penalty amounts, pointing out errors in determining relevant turnover data and revenue figures.
Did CCI revise the fines after considering the companies' objections?
Yes, after verifying the calculations, CCI agreed to reduce the fines imposed on most tyre firms by 30-50% to rectify inadvertent calculation errors, though penalties still remained heavy.
How did the case impact the tyre industry?
The tyre industry is now likely to face stricter compliance requirements and pricing mechanisms may become more competitive with cartelization practices coming under scrutiny.
Post a Comment