CCI’s Horizontal Breakthrough in OEM Market: Leniency Granted to Japanese Companies
[Ashu Bhargav is a student at Law Centre - I, Faculty of Law, University of Delhi.]
The Competition Commission of India (CCI), in an order dated 9 August 2019, found NSK Limited, Japan (NSK) and JTEKT Corporation, Japan (JTEKT) and their Indian subsidiaries viz. JSAI Limited (JSAI) and RNSS Limited (RNSS) in contravention of Section 3(3)(a) and 3(3)(d) read with Section 3(1) of the Competition Act 2002 (Act) during the period between 2005 and 2011.
The parties involved in the investigation have significant presence in the supply of electric power system (EPS) to the original equipment manufacturers (OEMs) worldwide. This system facilitates for a vehicle to steer smoothly through a chain of components and linkages. Steering Systems can be operated through manual effort or power systems. The latter requires less effort on the part of the drivers. The power systems are again of two types – Hydraulic and Electric. The two Japanese corporations mentioned above are amongst the top 5 companies in the EPS category by way of revenue. The present investigation by the Commission was initiated on the basis of a lesser penalty application filed by NSK which provided the Commission the premise to form a prima facie opinion on the existence of such cartel. The cartel indulged in sharing sensitive information pertaining to their business operations. This mainly included sharing of pricing information related to supplying EPSs to OEMs through their respective Indian Subsidiaries namely RNSS and JSAI. The parties entered into an agreement to secure confidentiality. Hence, the article is based on the public version of the order.
RFQ process in the automotive industry
OEM is a company which manufactures a certain type of product for a company which then rebrands the product and sell it further. A typical setup of the Request for Quotation (RFQ) process in the automobile industry involves the purchasing department of an OEM requesting suppliers to send quotations for different components. These components are required by the OEMs to manufacture their product. The quotation consists of a technical offer and a commercial offer. Now, a technical offer is a representation by the supplier that it is technologically capable to supply the component. On the other hand, a commercial offer is one which indicates the price of the component, but it also indicates much more than just the price. It also includes a cost breakdown, for the OEMs prefer to understand how the price is calculated. In the cost breakdown suppliers are required to furnish details like labor hours, wages, depreciation, prototyping materials and machine efficiency. In a lot of cases, OEMs distribute the quotations received by them to competing suppliers to create situations like a bidding war. This final act by the OEMs not only makes it beneficial for them but also makes the whole process highly competitive, as it should be.
Investigation and assessment of evidence
In the present investigation, the unlawful conduct by the parties, as discovered by the Director General (DG), began with the receipt of RFQ from three OEMs. Thereafter, through a series of meetings and telephonic communications between their executives and employees, the parties influenced the quotation prices and allocated the market geographically between themselves. The market was further allocated on the basis of types of vehicles, platforms and product. Both NSK and JTEKT admitted to conducting these unlawful functions.
In these meetings, information was shared in a way which enabled NSK and JTEKT to win orders to supply C-EPS System and brushless EPS System respectively. The CCI noted that JTEKT gave quotations to OEMs only of brushless EPS Systems on the basis of information acquired by its liaisons with NSK. For the C-EPS System, NSK employed its subsidiary RNSS to receive RFQs from customers. Even though responses to such RFQs were sent by RNSS directly, these were sent on the basis of information gathered from NSK. Due to fact that the parent companies were admittedly part of the cartel, transactions between RNSS and customers also resulted in AECC in India. This point was furthered bolstered by the admission of NSK that RNSS was able to quote higher prices because of NSK’s act of cartelization. The CCI made clear that cartelization between the two Japanese companies harmed the competitiveness of the Indian market because the companies provided guidance to their Indian subsidiaries as to when and what price to quote in reply to a particular RFQ. In other words, cartelization between two international companies not directly competing in a particular market can affect the competitiveness of the market when it is proved that their subsidiaries acted under their guidance.
For its subsidiary JSAI, JTEKT contended that JSAI was not to be held liable in the same RFQ as it was not privy to the information shared between the executives of NSK and JTEKT and, thus, it operated independently on a competitive basis. However, the CCI rejected this argument by taking the view that non-participation of JSAI in the RFQ only indicates that it was done to promote the interests of NSK, which were to win the order. There was no sound justification provided by JSAI or JTEKT for such non-participation. In the absence of a justification, the CCI decided that it was done for the sole reason that JSAI was also a part of the cartel.
Again, for another RFQ, executives of the two Japanese companies held discussions at the premises of NSK and telephonically which culminated in agreement on a minimum bid level. At one of these meetings, NSK disclosed to JTEKT of its inability to provide C-EPS Systems to the OEMs due to lack of a manufacturing base in India. Eventually, as noted by the DG, they did not submit a quotation for C-EPS System and so tender was given to JTEKT. But, for yet another RFQ for C-EPS system, NSK did not have the technological means to fulfill the order. Despite of non-existence of the required technology, it placed a higher quote for C-EPS System only to allow JTEKT to win the order.
The two companies also exchanged pricing information at a certain karaoke box where executives of each discussed their strategies. The CCI also got hold of an internal memorandum drafted by one of the executives of JTEKT, which included implying words like “JTEKT would lose by a narrow margin in India”. However, the DG later discovered that the OEM requesting quotations decided to conduct business with only a single supplier, much to the dismay of the parties. Consequently, the agreement at the karaoke box did not produce any desired result i.e. market allocation.
Relaxations in penalty
The EPS Systems being the relevant product, the CCI, for the assessment of penalty to be levied on JTEKT and NSK, used the ‘relevant turnover’ and ‘relevant profit’ of their Indian subsidiaries – JSAI and RNSS. This decision was made based on the reasoning of the CCI that the two Japanese companies conducted all of their businesses in India through their subsidiaries.
In light of the applications filed under Section 46 of the Act read with Competition Commission of India (Lesser Penalty) Regulations 2009 by the two Japanese companies, CCI granted reduction in penalty. NSK, being the first to approach the CCI and disclose vital information about the cartel, was granted up to 100% reduction. JTEKT was granted upto 50% reduction as it was the second to approach the CCI with information and evidences concerning the cartel. The top executives and employees who operated the cartel on behalf of their respective companies were also fined at the rate of 10% of their average income of three financial years. However, as per leniency policy, their quantum of penalty was reduced to the same levels as their employers. A total of 4 employees of NSK had left the companies before the investigation commenced. The order could not be served upon them for lack of addresses and lines of communications. The CCI ordered that they be investigated in due time. Another order dated 20 November 2019 by CCI levied penalties on the 4 remaining employees, but, on the principle of parity, their penalties were also reduced to nil.
The industry mentioned in the CCI order is fraught with the menace of cartelization so much that hundreds of original equipment suppliers have been investigated across 26 countries. A lot can be blamed on the over-saturation in the once large automotive markets like USA, Europe and Japan. The auto industry has been operating on tight margins for suppliers and OEMs alike. In a lot of cases, conditions imposed (detailed cost breakdown) by the OEMs on the suppliers make it even harder for suppliers. In these scenarios, suppliers look for easy solutions like cartelization. Suppliers have been found guilty numerous times in the last few years. Investigations by the EU Commission on voluntary disclosures by the suppliers (of car seatbelts, airbags, steering wheels, spark plugs, and braking systems etc.) have resulted in fines amounting to several hundred millions. A peculiar aspect of this industry is that cartelization is mostly done by Japanese companies. This is also not the first time when JTEKT and NSK are guilty for contravening antitrust laws. In one such investigation by the Antitrust Division, Department of Justice, USA, both the companies along with their co-conspirators were penalized for fixing prices of bearings, electric powered steering assemblies sold to the OEMs. The Antitrust Division collaborated with the Fair Trade Commission of Japan for valuable tips to bust cartelization by the two Japanese automotive companies. The industry requires a thorough investigation by the CCI. A robust knowledge-sharing mechanism to collaborate with antitrust authorities abroad needs to be employed by the CCI to investigate companies which have been habitual offenders.