the story So Far: Last week, the Supreme Court issued notice to five tire companies and industry body Automotive Tire Manufacturers Association (ATMA) in reference to their appeal against the Competition Commission of India’s (CCI) order of the National Company Law Appellate Tribunal (NCLAT). ,
The latter had asked the competition regulator to reconsider the penalty imposed on ATMA as well as tire companies MRF, JK Tyre, Apollo, CEAT and Birla Tires for alleged cartelization. The apex court will now hear the matter in September 2023.
What happened?
The chain of events began with a reference made by the All-India Tire Dealers Federation (AITDF) to the Ministry of Corporate Affairs (MCA) against five tire companies and the industry body. It alleged that tire companies, which control 90% of tire production in India, are engaged in price parity. It was alleged that the companies increased tire prices on the pretext of increase in raw material (natural rubber and other inputs) prices but did not reduce the prices accordingly when the raw material prices fell.
These actions were not considered to be in line with typical competitive market practices with a largely homogeneous product. Hence, the allegations of coordination, price parity and cartelization.
In February 2022, the competition regulator imposed a fine of around Rs 1,788 crore on five tire companies and ordered them to wind up. ATMA was fined Rs 8.4 lakh. It said the companies exchanged price-sensitive information through ATMAs and took collective decisions to regulate the price of tyres. The regulator said ATMA collected and compiled company-wise and segment-wise data (both monthly and cumulative) on production, domestic sales and exports of tyres, thereby facilitating coordination among companies.
In December 2022, the order was challenged in the NCLAT – and overturned.
The tribunal ordered that the matter be sent back to the CCI to “re-examine the calculation of the arithmetical errors”. It asked the regulator to “review the penalty imposed to protect the domestic industry, as the domestic tire industry is under immense pressure from global tire manufacturing, where a lot of unutilized capacity is available.”
The order said that domestic industries should be penalized for violations, but “the organization should be given a chance to improve rather than keeping it in poor health”. It highlighted that Birla Tire was already undergoing a corporate insolvency resolution process.
Now, CCI has approached the apex court challenging the order of the tribunal.
What were the arithmetic errors?
The companies raised issues with regard to calculation of value addition and subsequent calculation of correlation coefficient. They argued that the percentage increase in price (between March 2011 and 2012) calculated by the competition regulator was incorrect. It was to be in the range of 11.6% to 16.5% and not 11.16% to 11.64%.
Further, the NCLAT order stated that the wrong financial year – FY 2009-13 was used instead of FY 2011-12 in computing the correlation coefficient. The true count shows a much lower number. The correlation coefficient helps to understand the relationship between two variables at a given point in time – it ranges between -1 and +1. The commission used a percentage analysis as well as a correlation analysis of the prices charged by the companies.
Pointing to these two factors, the appellants challenged the allegations of price parity.
On this front, the Commission argued in its order that even if the errors are adjusted as per the prices submitted by the parties, it can be concluded that the price revisions were in the same direction and were more than 11% during the mentioned period . It said this was the basis of e-mail conversations between ATMA and MRF – indicating coordinated behaviour.
The petitioners rebutted the allegations by stating that Apollo and MRF had increased their prices before the alleged communication and not after.
Was the scope of the investigation also challenged?
The companies argued that the CCI “unfairly restricted” the scope of investigation to the truck and bus bias (TBB) tire segment, while not considering the frequent shift in demand from bias to radial tyres.
The two versions of tires under discussion are the bias (or cross-ply tire) and the radial tire. The latter have longer life and offer higher fuel efficiency than bias tires and are, thus, effectively cheaper over the life of the tyre. However, the Indian market, as concluded by the competition regulator in their order, is biased tyre-oriented due to Indian road conditions across diverse geographical regions with diverse climatic conditions. Thus, its offtake in the truck and bus segments was low. He considered the “load-carrying tire” and the “mileage tire” to be “incomparable”.
The commission, however, argued that the sale of truck-bus tires represented 55% of their revenue and 46% in terms of tonnage. The replacement market (or market for repair or new parts) was higher for heavy utility vehicles than for passenger vehicles, due to increased wear and tear experienced by the former. Thus, the selection was not erroneous.
What about disputes in terms of market dynamics?
The appellants have argued that the CCI has overlooked the stake of global tire companies such as Michelin, Bridgestone and Goodyear. The appellants stated that these companies control half of the global market and are aggressively competing with them in India. Indigenous production effect”.
In an unrelated context, the CCI order stated that the products manufactured by the companies are identical in nature and substitutable from the point of view of the customers. The demand for tires was deemed “fairly predictable” as the tire industry is “cyclical and seasonal in nature as the demand for tires is closely related to the growth in the automotive sector which in turn is dependent on the growth of the economy”.
Additionally, entry barriers are also high because the manufacturing process is complex and requires heavy capital investment and technology. Thus, the probable grounds are conducive for collusion, it argued.