In a major breakthrough, the Competition Commission of Pakistan (CCP) has issued show cause notices to Pakistan Automotive Manufacturers Authorised Dealers Association (PAMADA) and its 44 members for prima facie cartelization, collusion, price fixation and collective decision making. In this regard, the CCP has issued show cause notices to the PAMADA and its 44 members here on Monday - a major action against cartels in Pakistan.
The commission has also drafted a detailed analytical inquiry report on automobile sector containing data and other supportive evidence regarding cartelization. The CCP took a suo motu notice of allegations against PAMADA that it was fixing rates of automobile repair and paint jobs. Consequent to an inquiry conducted by the Commission, a search and inspection of the premises of PAMADA was also carried out, under Section 34 of the Act, on 7 May 2014.
According to the findings of the inquiry report, prima facie, collusion took place in four relevant markets, i.e., (i) new automobiles sales, (ii) genuine automobile spare parts, (iii) automobile body repairs and paint jobs, and (iv) the experienced sales and technical staff hiring by authorised dealers in Pakistan. With respect to the market for new automobiles, PMADA appears to have taken decisions regarding the division of the market and allocation of quota with respect to new automobile sales. Similarly, PAMADA apparently fixed the prices of genuine spare-parts supplied by automobile manufacturers by strictly prohibiting its members to offer discounts. In the area of body repairs and paint jobs, PAMADA took collective decisions regarding the rates of automotive body repairs and paint job services offered by its members, especially for insurance companies. And finally, the evidence of collusion was allegedly found in the area of human resources, where PAMADA allegedly took collective decisions to restrict the movement of human resources between automobile dealers.
The inquiry report noted that these arrangements between PAMADA and its members apparently have the object and effect of preventing, restricting or reducing competition in the relevant markets. On the basis of the findings of the inquiry report, PAMADA and its 44 Members were issued show cause notices. The CCP''s inquiry observed that collusion and cartelization are the most egregious forms of anti-competitive behaviour. When competitors take collective business decisions, the market and consumers suffer from uncompetitive prices, fewer choices, and reduced quality of products. Collusion and cartelization also raise entry barriers, restricting entry of new players, which further stagnates competition. The automobile sector in Pakistan is a relatively small one, with just a handful of major market players competing in the market. In this situation, any collusion in the sector, like the instances highlighted in this inquiry, will lead to a serious degradation of competition in the market. It would, therefore, be in the public interest to ensure that there is no collusion or cartelization in the sector so as to ensure a healthy competition therein.
It is the responsibility and obligation of the Commission under the Competition Act to ensure a free competition in all spheres of commercial and economic activity to enhance economic efficiency and to protect consumers from anti-competitive behaviour.
The report said that usually, the insurance companies entertain the claims of their clients at the authorised dealerships of the auto manufacturers to ensure quality of work, although similar work can be done in the open market at lesser rates, and the customers also prefer to get their work done at the authorised dealerships of auto manufacturers perceiving better quality. However, the documents impounded from the PAMADA office indicate that PAMADA members, by way of collectively fixing the rates of the services, are prima facie hampering the free market mechanism of price discovery. Such arrangement of fixing prices is clearly against the interest of insurance companies who are subjected to a fixed price irrespective of the quality of service they obtain, and to customer who invariably end up paying higher premiums. Furthermore, such arrangements leave no incentive for the service provider to improve the quality of service and attract new customers. Therefore, in long run, the investment in development of new products and services is also curtailed.
The documentary evidence indicates that PAMADA has formulated a policy whereby a member cannot hire another member''s employees without the latter''s consent. An example has been provided in the evidence in which an ex-employee of one PAMADA member who was hired by another PAMADA member was fired to avert a violation of PAMADA policy. This provides an unwarranted means of collectively controlling movement of human resource within the industry. The restriction hampers competition between members, as experienced sales and technical staff cannot freely move around, which is critically important for bringing effective competition in the relevant market.
During the examination of documents, it has been observed that PAMADA members have divided the market for new automobile sales and have allocated quotas on the basis of geography and customers. The evidence indicates that PAMADA''s members, along with other dealers, have taken the decision to divide and allocate vehicles sales along territorial lines and have an understanding not to poach each others'' corporate clients. Clearly, this restricts and potentially eliminates any meaningful competition, to a large extent, in the relevant market, it added.
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