Inflated rubber, deflated you
23 Sep 2014 10:18 PM GMT
For the owners and users of passenger vehicles, the relief in recent lower natural rubber prices on a sustained basis in the last six quarters has not led to any price cut in the retail replacement tyre market. This is so as the original tyre manufacturing industry comprising a handful of units across the country is unrelenting in their spree of periodic price hikes. When owning and using any mode of personal vehicle is no longer a luxury, the automotive manufacturers- the automotive and the tyre segments remain impervious to efficient and invisible market mechanisms with the latter more so as they willfully resort to collusive behavior to keep tyre prices high. They overtly avoid passing on the benefits they might get from the government in tax cuts or a fortuitous fall in input costs as in the case of tyre to the eventual users/buyers.
Only recently, the Competition Commission of India (CCI), the fair trade practice enforcing arm of the Government, slapped hefty penalty on 14 passenger vehicle firms for not bolstering availability of spare parts to channels beyond their authorized dealers which would definitely have a telling effect on the mushrooming growth of spurious spare parts in the after-sale service automotive market. Viewed in this vein, the CCI penalty on automobile owners would definitely go a long way in giving the independent repair shops the leeway to capture dealers’ service business as availability of all sorts of spare parts would improve. This would also ensure that the car owners get affordable repair/replacement charges, as against the exorbitant cost they must perforce incur with the manufacturer-mandated channels for rectifications in machinery or spares.
On the tyre front, the major cost component in the input cost of manufacture is accounted for by the natural and synthetic rubber that constitutes more than 60 per cent of total cost. According to the All India Tyre Dealers Federation (AITDF), the price of natural rubber and synthetic rubber has tumbled by over 40 per cent and 21 per cent respectively in the last six quarters without any iota, if not commensurate, cut in tyre prices in the domestic replacement market. Alongside, the steady fall in global crude oil (the basic raw material in the use of other inputs such as nylon tyre cord fabric, synthetic rubber, carbon black, rubber chemicals, butadiene rubber etc) prices to $101 per barrel in the last two months has also not had any desirable dent on the tyre manufacturers cost calculation! The AITDF Convenor Mr S.P. Singh was on record that while the rise in natural rubber prices to Rs 240 per kg sent tyre prices zooming by 18-25 per cent in 2011-12, a subsequent drop in prices to Rs 145 a kg did not result in any modicum of relief in the form of lower tyre prices!
A few dominant tyre units were acting like a cartel to keep prices under their thumb and were challenged by the AITDF for contributing to market distortions by their patent price collusion tactics to wrest the best for themselves. The CCI had earlier in October 2012 absolved all the tyre manufacturers of charges of forming a cartel when challenged so by the dealers. This was further endorsed by the Competition Appellate (COMPAT) which had dismissed an appeal against the CCI Order on 29 April 2013. Still, the AITDF did not lose the verve in the interests of end-users and fair trade practices in retail markets, especially when natural and synthetic rubber prices the world over and in India have been on the wane. AITDF approached the Ministry of Corporate Affairs in September 2103 which directed it to the CCI that took up the matter in January 2014.
Interestingly, the CCI in its Order issued on 24 June 2014 directed the initiation by the Director General of an investigation to find out ‘the presence of any agreement or understanding or understanding within the meaning of the Section 3 of the Competition Act between the market players (five leading tyre companies) and the Automotive Tyre Manufacturers’ Association (ATMA) to maintain/increase the tyre prices’ — all clubbed as Opposite Parties). CCI maintained in its order that the decrease in the average price of raw materials was not reflected in the final prices of the tyres. Rather, the average tyre prices remained same during 2012-2014 for all the OPs (tyre units plus ATMA), showing some kind of collusive understanding.
The CCI further contends that in an oligopolistic market where major players have analogous market shares, even passing on rising raw material prices is difficult for the fear of losing market share. Raising prices is only feasible if prices are raised by all major players together, ‘a trend which was seen in the present matter’. Taking this point further, CCI said given a collective/general rise in price in a high raw material cost scenario, a subsequent decline in raw material costs should give an opportunity to major players to gain market share by decreasing prices before the competitor. ‘In the present case, this is not happening and during 2011-2012 onwards there seems to be a collective decision to maintain the prices’. This is prima facie a direct indictment on the collusive comport of tyre units of what is called in technical parlance ‘price parallelism’ to appropriate unjust enrichment at the cost of the hapless consumers.
This is also corroborated by a credit rating agency ICRA report on Indian tyre industry which said ‘rubber prices, after having peaked at Rs 240 per kg in April 2011, trended down to Rs 160-170 kg during 2012-2013. With bulk of the 2012-2013 revenues coming from replacement volumes (segments enjoying relatively high profitability) domestic tyre manufacturers were able to hold on to prices for a large part of the year, leading to an industry-wide margin expansion of over 200 basis points during 2012-2013’. This implies the benefit of reduced pressure on margins was not passed on to the consumers in terms of decrease in prices.
Though it might take several months for the completion of the investigation and submission before the CCI which will take an equally lengthy process to pass its final order, given the time taken in past cases, the hapless consumers’ interests would only get ill-served as they get no reprieve in the meanwhile. With market forces operating in the economy, the concerned departments such as the Department of Commerce, Industrial Policy Promotion and the Directorate General of Foreign Trade too would not intervene to discipline the errant forces as price control tools are not used even when known case as this is highlighted to them by the complainant! So, the ordinary user of tyres would have to grin and bear with no place to lodge his grouse! Â
Markets and regulators take their own time to fix the faults or level the playing field with delayed justice to the eventual consumers. Sadly and starkly, this in no manner stands in the way of manufacturers making hay while the sun shines or official agencies wallow in their bureaucratic sponge beds like bovines do in the muddy water. IPA
Only recently, the Competition Commission of India (CCI), the fair trade practice enforcing arm of the Government, slapped hefty penalty on 14 passenger vehicle firms for not bolstering availability of spare parts to channels beyond their authorized dealers which would definitely have a telling effect on the mushrooming growth of spurious spare parts in the after-sale service automotive market. Viewed in this vein, the CCI penalty on automobile owners would definitely go a long way in giving the independent repair shops the leeway to capture dealers’ service business as availability of all sorts of spare parts would improve. This would also ensure that the car owners get affordable repair/replacement charges, as against the exorbitant cost they must perforce incur with the manufacturer-mandated channels for rectifications in machinery or spares.
On the tyre front, the major cost component in the input cost of manufacture is accounted for by the natural and synthetic rubber that constitutes more than 60 per cent of total cost. According to the All India Tyre Dealers Federation (AITDF), the price of natural rubber and synthetic rubber has tumbled by over 40 per cent and 21 per cent respectively in the last six quarters without any iota, if not commensurate, cut in tyre prices in the domestic replacement market. Alongside, the steady fall in global crude oil (the basic raw material in the use of other inputs such as nylon tyre cord fabric, synthetic rubber, carbon black, rubber chemicals, butadiene rubber etc) prices to $101 per barrel in the last two months has also not had any desirable dent on the tyre manufacturers cost calculation! The AITDF Convenor Mr S.P. Singh was on record that while the rise in natural rubber prices to Rs 240 per kg sent tyre prices zooming by 18-25 per cent in 2011-12, a subsequent drop in prices to Rs 145 a kg did not result in any modicum of relief in the form of lower tyre prices!
A few dominant tyre units were acting like a cartel to keep prices under their thumb and were challenged by the AITDF for contributing to market distortions by their patent price collusion tactics to wrest the best for themselves. The CCI had earlier in October 2012 absolved all the tyre manufacturers of charges of forming a cartel when challenged so by the dealers. This was further endorsed by the Competition Appellate (COMPAT) which had dismissed an appeal against the CCI Order on 29 April 2013. Still, the AITDF did not lose the verve in the interests of end-users and fair trade practices in retail markets, especially when natural and synthetic rubber prices the world over and in India have been on the wane. AITDF approached the Ministry of Corporate Affairs in September 2103 which directed it to the CCI that took up the matter in January 2014.
Interestingly, the CCI in its Order issued on 24 June 2014 directed the initiation by the Director General of an investigation to find out ‘the presence of any agreement or understanding or understanding within the meaning of the Section 3 of the Competition Act between the market players (five leading tyre companies) and the Automotive Tyre Manufacturers’ Association (ATMA) to maintain/increase the tyre prices’ — all clubbed as Opposite Parties). CCI maintained in its order that the decrease in the average price of raw materials was not reflected in the final prices of the tyres. Rather, the average tyre prices remained same during 2012-2014 for all the OPs (tyre units plus ATMA), showing some kind of collusive understanding.
The CCI further contends that in an oligopolistic market where major players have analogous market shares, even passing on rising raw material prices is difficult for the fear of losing market share. Raising prices is only feasible if prices are raised by all major players together, ‘a trend which was seen in the present matter’. Taking this point further, CCI said given a collective/general rise in price in a high raw material cost scenario, a subsequent decline in raw material costs should give an opportunity to major players to gain market share by decreasing prices before the competitor. ‘In the present case, this is not happening and during 2011-2012 onwards there seems to be a collective decision to maintain the prices’. This is prima facie a direct indictment on the collusive comport of tyre units of what is called in technical parlance ‘price parallelism’ to appropriate unjust enrichment at the cost of the hapless consumers.
This is also corroborated by a credit rating agency ICRA report on Indian tyre industry which said ‘rubber prices, after having peaked at Rs 240 per kg in April 2011, trended down to Rs 160-170 kg during 2012-2013. With bulk of the 2012-2013 revenues coming from replacement volumes (segments enjoying relatively high profitability) domestic tyre manufacturers were able to hold on to prices for a large part of the year, leading to an industry-wide margin expansion of over 200 basis points during 2012-2013’. This implies the benefit of reduced pressure on margins was not passed on to the consumers in terms of decrease in prices.
Though it might take several months for the completion of the investigation and submission before the CCI which will take an equally lengthy process to pass its final order, given the time taken in past cases, the hapless consumers’ interests would only get ill-served as they get no reprieve in the meanwhile. With market forces operating in the economy, the concerned departments such as the Department of Commerce, Industrial Policy Promotion and the Directorate General of Foreign Trade too would not intervene to discipline the errant forces as price control tools are not used even when known case as this is highlighted to them by the complainant! So, the ordinary user of tyres would have to grin and bear with no place to lodge his grouse! Â
Markets and regulators take their own time to fix the faults or level the playing field with delayed justice to the eventual consumers. Sadly and starkly, this in no manner stands in the way of manufacturers making hay while the sun shines or official agencies wallow in their bureaucratic sponge beds like bovines do in the muddy water. IPA
Next Story
