On March 23, 2016, China’s National Development and Reform Commission (“NDRC”) published the draft of the State Council Anti-Monopoly Commission’s Antitrust Guidelines for Automotive Industry (the “Consultation Draft”) and invited comments from the public.
There have been quite a few antitrust investigations in China’s automotive industry in recent years. For the automotive aftermarket, auto suppliers in China have long been criticized for imposing restrictions on spare parts suppliers, distributors and repairers, which leads to the exclusive supply of original spare parts in the aftermarket as well as the foreclosure of repair technical information. Customers have been worried about the high parts-to-whole ratio and the unavailability to after-sale services.
In September 2014, to promote the elimination of monopoly in aftermarket and to encourage spare parts manufacturers to provide both original spare parts and spare parts with their own trademarks, ten administrative agencies (including NDRC, State Administration for Industry & Commerce (“SAIC”) and Ministry of Commerce (“MOFCOM”), etc.) jointly released the Guiding Opinions Regarding the Promotion of Transformation and Upgrading of Automotive Maintenance and Escalation of Service Quality (the “Guiding Opinions”), which pave the way for the Consultation Draft. The Consultation Draft contains provisions regarding the automotive aftermarket and is expected to regulate the behavior of auto suppliers in such market.
According to the Consultation Draft, the brand of automobile is one of the important factors to be considered for the market definition of aftermarket. In other words, auto suppliers who face fierce competition in auto distribution market may be considered as having dominant position or at least significant market power in the brand-specific aftermarket. After purchasing automobiles, consumers will need parts of the same brand or even the same model, as well as repair technical information of the same brand for repair, due to the compatibility and locked-in effect in the aftermarket. Considering the high value of automobiles, consumers will not be able to freely switch into other brands of automobiles when they are forced to accept unreasonable conditions for maintenance services. Consumer’s dependency on parts and brand-specific technical information grants auto suppliers strong position in the aftermarket.
The Consultation Draft further segments automotive aftermarket into after-sale parts distribution market and after-sale maintenance market. This article will analyze the Consultation Draft’s provisions on both two segments.
- Restrictions Imposed by Automakers on Spare Parts Suppliers
(1) The Manufacturing of Dual-Branded Spare Parts
The Consultation Draft provides that, except spare parts manufactured under subcontracting agreements, automakers with dominant market position should not restrict manufacturers of original spare parts from manufacturing dual-branded spare parts without justification. According to Consultation Draft, dual-branded spare parts can promote consumers and repairers’ recognition of matching quality spare parts and promote the competition in automotive aftermarket.
It should be noted that, on the basis of Consultation Draft, dual-branded spare parts include both original spare parts and after-sales spare parts. The Consultation Draft only prohibits restrictions on manufacturing original dual-branded parts, while keeps silence on restrictions on after-sales dual-branded parts. Our interpretation is that, automakers are entitled to use or dispose their own trademarks or logos, and therefore should be able to decide whether or not they would allow spare parts manufacturers to attach automakers’ trademarks or logos on after-sales spare parts.
(2) Exclusive Supply
Similar to dual-branded spare parts, the Consultation Draft provides that, except spare parts manufactured under subcontracting agreements, automakers with dominant market position should not require exclusive supply from spare parts manufacturers without justification. In other words, spare parts suppliers shall be able to independently provide spare parts of their own brands into the automotive aftermarket.
Although exclusive supply of after-sales spare parts may prevent free-riding and therefore ensure the efficiency and quality of after-sales service, according to the Consultation Draft, exclusive supply may impair competition in the aftermarket and lead to high prices or limited choices for consumers. Therefore, the Consultation Draft pays attention to the exclusive supply restriction.
In addition to regulation on abusive conducts, the Consultation Draft considers that, except limitations under subcontracting agreements, restrictions on suppliers of spare parts, repair tools, or equipment with respect to selling such parts or equipment would normally significantly restrict competition, even if the automaker imposing such restrictions does not have a dominant market position or any significant market power. Therefore, the Consultation Draft says that exemptions provided by Article 15 of the Anti-Monopoly Law (“AML”) should not be applied automatically to such restrictions, but can only be argued on a case-by-case basis.
(3) Determination of Subcontracting Agreement
As stated above, the Consultation Draft recognizes subcontracting agreement as an important cause for exemption for restrictions in aftermarket. For automotive industry, the common subcontracting agreements are agreements under which spare parts manufacturers produce spare parts as required by automakers, with necessary technology and equipment provided by the latter. Under such circumstances, spare parts manufacturers will no longer be seen as independent suppliers and certain restrictions are therefore allowed.
The Consultation Draft sets out the ground rule that, determining whether an agreement qualifies as a subcontracting agreement requires individual assessment. The key for making such judgment lies in whether automakers provide necessary technology or equipment for the manufacturing of spare parts. Such necessary technology or equipment includes but not limited to intellectual property rights, manufacturing process and know-how, research report and solutions etc. According to the Consultation Draft, however, tools, intellectual property rights or know-now already acquired or can be acquired by spare parts manufacturers with reasonable conditions, or general description of products shall not be considered as necessary inputs. If the technology or equipment provided by automakers is not necessary input, the agreement should not be treated as a genuine subcontracting agreement, and therefore the exemptions available for subcontracting agreement shall not apply.
- Restrictions Imposed by Automakers on Distributors and Repairers
(1) RPM of Spare Parts and Repair and Maintenance Service Fees
Article 14 of the AML expressly prohibits fixing resale price and restricting minimum resale price (“RPM”). RPM of spare parts and repair and maintenance service fees is commonly seen in the automotive aftermarket. The Consultation Draft points out that RPM can be achieved by direct restrictions, i.e. stipulating distributors’ resale price in the contract, or by indirect restrictions, i.e. fixing distributors’ margin or discount level, or cancelling rebates, ceasing to supply or terminating authorization of the distributors who fail to comply with the recommended price.
With respect to setting recommended price, guiding price or maximum price of spare parts and repair and maintenance service fee, the Consultation Draft confirms that it has positive effects, but also points out that, if such recommended price or maximum price is widely implemented by distributors under the pressure of automakers (such pressure could be in way of granting incentives), it may also result in the effect of RPM.
(2) Territorial Restriction and Customer Restriction
Territorial restriction normally refers to that auto suppliers agree to supply goods to certain distributors within a defined distribution territory, and such distributors undertake not to sell out of the defined area. Customer restriction normally refers to that auto suppliers restrict distributors to sell or not to sell the products to certain customers. Article 14 of the AML does not explicitly prohibit territorial restriction or customer restriction. In practice, such restrictions may be regulated by the catch-all clause of Article 14 (as a vertical restriction) or Article 17 (as abuse of dominance) of the AML.
The Consultation Draft agrees that, as territorial restriction and customer restriction may generate distribution efficiencies, such restrictions imposed may be exempted in accordance with Article 15 of the AML, if the auto suppliers imposing such restrictions do not have significant market power. The Consultation Draft for the first time provides that a company with less than 25-30% market share may be deemed as not having a significant market power.
However, the Consultation Draft also provides that, the following territorial or customer restrictions normally would have serious anti-competitive effects, therefore cannot be exempted automatically (must be assessed on a case-by-case basis):
- restricting distributors’ passive sales;
- restricting cross-supplies between distributors, or between distributors and repairers;
- restricting distributors and repairers from selling parts to end users for repair and maintenance purpose; and
- restricting suppliers of parts, repair tool and diagnostic equipment from selling such parts, tools and equipment to distributors, repairers or end users.
Passive sales, according to the Consultation Draft, refer to that a distributor sells products (or provides services) to a customer upon such customer’s request, rather than as a result of its own marketing approach to the customer.
It is to be seen that whether the analytic structure adopted by the Consultation Draft on territorial and customer restrictions would be applied by the authorities in other industries.
(3) Exclusive Purchasing
Except for the exclusive supply as mentioned above, exclusive purchasing also exists in the automotive aftermarket, which refers to auto suppliers restricting distributors and repairers from purchasing matching quality spare parts or purchasing original spare parts from other channels (including parallel import).
The Consultation Draft for the first time codified the concepts of original spare parts and matching quality spare parts which have been widely used in automotive industry. However, the Consultation Draft does not provide who is eligible for the authentication and what the authentication standards shall be followed. It is commented that such issue shall be regulated by other laws and regulations rather than by the AML.
In addition, the Consultation Draft points out that if the auto supplier requires distributors or repairers to accept unreasonable sales target or stock of spare parts, or require tie-in sale of the parts, tool or equipment that are not ordered by distributors or repairers, such restriction may result in an exclusive purchasing obligation of the contract goods or the tying product for them, which may constitute vertical restrictions prohibited under Article 14 of the AML. If the auto supplier is considered as having a dominant position in its brand-specific aftermarket, the above restriction may also be challenged as abuse of dominant market position under Article 17 of the AML.
(4) Access to Repair Technical Information
The Consultation Draft considers that, given the compatibility and locked-in effect of the aftermarket, the repair and maintenance work normally will be completed based on the brand-specific technical information, and the auto suppliers are often the only companies able to provide distributors and repairers with all technical information for the provision of repair and maintenance service. Therefore, the Consultation Draft expressly states that automakers with dominant market position in their brand-specific aftermarket shall not restrict distributors and repairers’ access to repair technical information, diagnostic equipment and repair tools without justifications. It should be noted that, in practice, non-authorized distributors or repairers normally compete with those authorized distributors and repairers on the spare parts and repair and maintenance service at a lower cost. The Consultation Draft does not distinguish authorized and non-authorized distributors and repairers, which may further ensure the repairers (especially the non-authorized repairers) to have access to technical information.
(5) Vertical Restriction Imposed through the Warranty Clause
The primary concern of the vertical restriction imposed through the warranty clause in the automotive aftermarket is the repair and maintenance work not covered by warranty and the replacement of the spare parts. In practice, the auto suppliers have been blamed for imposing restrictions on the after-sale service and the supply of parts through warranty clauses, which has resulted in the limited supply channels of spare parts and high prices of repair and maintenance service. The Consultation Draft states that auto suppliers shall not require the warranty to be made conditional on the customer having all the repair and maintenance work being carried out by authorized repair networks (even for the work not covered by the warranty clause), or restrict distributors from providing repair and maintenance service to vehicles purchased from parallel import.
- Conclusions and Recommendations
In summary, the Consultation Draft sets out more detailed action guidance for auto suppliers, spare parts suppliers, distributors and repairers through distinguishing the definition of automotive aftermarket and specifying various types of vertical restrictions. It is worth noting that in the brand-specific aftermarket, auto suppliers are more likely to be considered as having dominant position or significant market power, and therefore, it is recommended that auto suppliers re-examine and evaluate their business policy and practices in a more prudent way in order to comply with the new regulatory and compliance requirements.