Explained | The allegations of cartelisation among domestic tyre manufacturers

The story so far: Last week, the Supreme Court issued notices to five tyre companies and industry body Automotive Tyre Manufacturers’ Association (ATMA) in the context of the Competition Commission of India’s (CCI) appeal against the National Company Law Appellate Tribunal (NCLAT) order over alleged cartelisation.

The latter had asked the competition regulator to reconsider the penalties imposed on tyre companies MRF, JK Tyre, Apollo, CEAT and Birla Tyres alongside ATMA for alleged cartelisation. The apex court will now hear the matter in September 2023. 

What happened?  

The chain of events started with a reference made by the All-India Tyre Dealers Federation (AITDF) to the Ministry of Corporate Affairs (MCA) against the five tyre companies and the industry body. It alleged that the tyre companies, who controlled 90% of the tyre production in India, engaged in price parallelism. It was alleged that the companies raised tyre prices on the pretext of rise in prices of raw materials (natural rubber and other inputs) but did not correspondingly decrease prices when raw material prices fell.

These actions were deemed not in line with typical competitive market practices with a largely homogeneous product. Hence, the allegations about coordination, price parallelism and cartelisation.  

In February 2022, the competition regulator imposed penalties of approximately Rs 1,788 crore on the five tyre companies combined with a cease-and-desist order. ATMA was fined Rs 8.4 lakh. It said that the companies exchanged price-sensitive information through ATMA and took collective decisions on regulating the price of tyres. The regulator added that ATMA collected and compiled company-wise and segment-wise data (both monthly and cumulative) on production, domestic sales and export of tyres that made the coordination among the companies easier. 

In December 2022, the order was challenged at the NCLAT – and was overturned.  

The tribunal ordered that the matter be remitted back to the CCI to “re-examine the calculation of arithmetical errors”. It asked the regulator to review thethe penalties imposed “to save domestic industry in view of the fact that domestic tyre industry is under lot of pressure from global tyre manufacturing where lot of unutilised capacity is available.” 

The order held that domestic industries must be penalised for violations but “be given a chance of reformatory instead of virtually putting the organisation on weak health”. It highlighted that Birla Tyre was already undergoing a Corporate Insolvency Resolution Process.  

Now, CCI has approached the apex court challenging the tribunal’s order.  

What were the arithmetical errors? 

The companies raised issues with respect to the computation of the price increase and the subsequent calculation of the corelation 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 held that the computation of correlation coefficient used an incorrect financial year— FY 2009-13 instead of FY 2011-12. The correct calculations indicate a much lower figure. The corelation coefficient helps to understand the relationship between two variables at a given time – it ranges between –1 and +1. The Commission used corelation analysis of the prices charged by the companies along with the percentage analysis.  

Pointing out these two factors, the appellants challenged the allegations of price parallelism.  

On this front, the Commission argued in its order that even if the errors were adjusted as per the prices submitted by the parties, it could be concluded that the price revisions were in the same direction and above 11% during the mentioned period. It added that this was the premise of the e-mail conversation between ATMA and MRF – indicating coordinated behaviour.  

The petitioners refuted the charges stating that Apollo and MRF had increased their prices ahead of the stated communication and not after.  

Was the scope of investigation also challenged?  

The companies argued that CCI “erroneously restricted” the scope of the investigation to the truck & bus bias (TBB) tyre segment, while not considering the steady shift in demand from bias to radial tyre.  

The two variants of tyres under discussion are bias (or cross-ply tyres) and radial tyres. The latter has a longer life and offers higher fuel efficiency in comparison to the bias tyre and thus, over the life of the tyre, is effectively cheaper. However, the Indian market, as concluded by the competition regulator in their order, is bias tyre-oriented because of Indian road conditions in varied geographic regions with diverse climatic conditions. Thus, its uptake in truck and bus segment were on the lower side. They deemed the “load bearing tyre” and a “mileage tyre” to be “incomparable”.  

The Commission however argued that the sale of truck-bus tyres represented 55% of their revenue and 46% in terms of tonnage. The replacement market (or the market for repair or new spare parts) was greater forheavy utility vehicles than passenger vehicles owing to increased wear-and-tear experienced by the former. Thus, the selection was not incorrect.  

What about contentions in terms of market dynamics?  

The appellants have argued that the CCI ignored the share of global tyre companies such as Michelin, Bridgestone and Goodyear. These companies control half of the global market and are aggressively competing with them in India, the appellants said, further stating that the CCI order did not determine the “huge capacity” of the foreign players, hence omitting to consider the “global competition impact vs indigenous production impact”. 

In an unrelated context, the CCI order held that the products manufactured by the companies are homogeneous in nature and substitutable from the point of view of the customers. The demand for tyres was deemed “fairly predictable” as the tyre industry is “cyclical and seasonal in nature because the demand for tyres is closely related to growth in the automotive sector which in turn is dependent on the growth of the economy”.  

Additionally, the entry barriers are also high as the manufacturing process is complex and requires heavy capital investment and technology. Thus, potential grounds are conducive for collusion, it argued.