The Oligopolistic Effect: How the Indian Automobile Industry Shapes Consumer Choice
Written by Akshitha Upadyayula, Club President and Contributor, Kairos Insights (Academic Year 2023/24); BA Economics and Finance Undergraduate Student at Mahindra University - School of Management
Introduction
The Indian automobile industry is not just a driving force for the country's economy; it's a giant that accounts for 49% of India's manufacturing GDP, contributes 7.5% to the overall GDP, and provides livelihoods for a staggering 32 million people.
With 33 cars per 1,000 people1, India stands as the world's fourth-largest automobile market.
This growth is fuelled by a burgeoning middle class, rising disposable incomes, and policies inviting foreign direct investment, positioning India within the global automotive value chain.
In this article, we'll delve into the intricacies of the Indian automobile market, its supply chain, and the impacts of its oligopolistic structure on consumer decisions. We'll also explore the role of regulatory bodies in ensuring fair competition and how recent legal cases have shaped the industry.
Market Concentration: A Closer Look at Oligopolies
In understanding the Indian automobile industry's impact on consumer choice, it's important to delve into the market concentration, a defining feature of this industry's structure. Two key indicators provide insights into this concentration: the Herfindahl Hirschman Index (HHI) and the 4-Firm Concentration Ratio. These metrics offer a comprehensive view of the industry's competitiveness.
The 4-Firm Concentration Ratio, currently standing at 86.24, provides a quick glimpse into the industry's concentration. Calculated by summing the percentage market share of the top four firms, this ratio serves as a gauge of market competitiveness. A ratio close to zero suggests perfect competition, while 100% signifies a pure monopoly.
Going a step further, the Herfindahl Hirschman Index (HHI) offers a more nuanced perspective. It considers a larger sample pool by summing the squared percentages of market shares across all firms in the industry. The HHI ranges from close to zero, indicating perfect competition, to 10,000, signalling a monopoly.
The HHI, which typically ranges from 1801 to 9999 for oligopolies, stands at 2489.7296 in the Indian automobile industry, clearly illustrating the industry's alignment to the oligopolistic market structure, characterized by the dominance of a select few2.
As of July 2023, market shares were distributed as follows3:
Maruti Suzuki India - 41.39%
Hyundai Motor India and Kia Motors India - 20.98%4
Tata Motors - 13.74%
Mahindra & Mahindra - 10.13%
Toyota Kirloskar Motor - 5.41%
Skoda Auto Volkswagen India - 2.42%
Honda - 2.28%
MG Motor India - 1.49%
Renault - 1.36%
Others - 0.8%
Market concentration in an oligopoly context carries significant implications.
A key feature of oligopolies is interdependence; a few major firms dominate the industry, and their actions ripple through market conditions.
This is relevant because when competitors are fewer, a firm’s decision to make even a small change in price or output can have a more direct impact on its rivals. Thus, each firm carefully considers its competitors' behaviours and reacts accordingly, shaping the consumer landscape. It also serves as a measure of monopoly power, price and quantity setting and aids in development of government policies.
Forces Shaping Market Concentration
Several forces come into play when assessing market concentration within the Indian automobile industry:
Comparative Cost Advantages: The industry offers attractive advantages for Original Equipment Manufacturers (OEMs)5 to establish manufacturing facilities. Factors such as low-cost labor, extensive vendor bases, government support, and export potential due to India's central location have been catalysts. However, underutilization of production capacity poses challenges to investment viability.
Barriers to Entry: High capital costs, intensive Research and Development (R&D) efforts, and patent protection contribute to the industry's high market consolidation. The capital-intensive nature of the sector deters new entrants, reinforcing the dominance of existing players.
Consumer Demand: The per capita car penetration in India remains significantly lower than in countries like China. Only about 8% of Indian households own cars signifying untapped market potential.6
Bargaining Power: Suppliers face competition from numerous auto component suppliers, limiting their bargaining power. However, patents over critical components can tilt the balance in favour of car manufacturers.7
Bargaining Power of Buyers: Consumers enjoy substantial bargaining power, thanks to the abundance of options in the differentiated product market. Factors like public transportation alternatives and shared mobility options further influence buying decisions.
Competition: Post the sector's delicensing in 1991 and the opening up of one-hundred per cent Foreign Direct Investment (FDI) through the automatic route8, nearly every major global player has established operations in India. This intense competition, involving both domestic and foreign players, contributes to the oligopolistic market structure.
Differentiated Products and Consumer Impact
In this fiercely competitive landscape, product differentiation is pivotal. The passenger car market is segmented by vehicle type and fuel type to cater to diverse consumer preferences. While product differentiation remains essential, it is not the sole determinant of success for firms. Creating robust service experiences and defining compelling brand identities are equally crucial.
The Indian Automobile Market Structure and Supply Chain
The Indian automotive supply network is a network of various entities, from raw material providers to distributors of finished goods and, ultimately, the end-users.
These are classified into tiers:
Tier 1: Original Equipment Manufacturers (OEMs), components manufacturers/assemblers.
Tier 2: Second-tier suppliers.
Tier 3: Third-tier suppliers.
Additionally, there's the aftermarket, which serves two key purposes: the supply of spare parts, including diagnostic tools and technical manuals, and the provision of after-sales services, encompassing vehicle servicing, maintenance, and repairs.
Competition Issues in the Sector
The industry hasn't been without its share of competitive concerns and legal battles. OEMs, wielding significant influence, have faced allegations of cartel-like behaviour and misuse of influence, particularly in the aftermarket.
The Competition Commission of India (CCI) has taken on the mantle of ensuring a level playing field, striving to foster competition and eliminate anti-competitive practices.
One of the contentious issues in the industry is Resale Price Maintenance (RPM). OEMs set maximum prices for distributors and dealers, ensuring uniform pricing across all dealerships. However, this practice, resembling a cartel, stifles price competition both within and between brands, resulting in higher costs for consumers.
Tying/Tie-in Arrangements
Tie-in arrangements, prevalent in the auto industry, compel buyers to purchase additional goods or services along with their main purchase. For instance, dealers may require customers to buy insurance, oils, or maintenance services with their vehicles. These arrangements limit competition from other providers, restricting consumer choice.
Exclusive Supply Agreements
Exclusive supply agreements between OEMs and their authorized dealers can restrict the sale of spare parts over-the-counter, forcing dealers to obtain parts solely from OEM-approved suppliers. Such restrictions can lead to counterfeit goods entering the market9 and enable OEMs to inflate spare part prices, further constraining consumer choices.
Issues in Aftermarket
The aftermarket, encompassing spare parts, accessories, and repair services, is of paramount importance to consumers due to the high costs associated with switching vehicles. However, OEM-imposed restrictions can make it challenging for consumers to access alternative spare parts or services.
Abuse of Dominant Position
In the Indian automobile market, OEMs often function as de facto monopolists in the spare parts and repair services market for their own brand of vehicles. Consumers are bound to use OEM-specific parts, creating dependency on the manufacturer. Furthermore, OEMs can hinder independent technicians from competing with their authorized dealers, potentially abusing their dominant position and inflating prices.
Legal Actions and Consumer Choice
The case of Shamsher Kataria v. Honda Siel Cars India Ltd. and Others10 serves as a poignant example of how the CCI has taken action against anti-competitive practices.
The investigation found that car manufacturers restricted spare parts sales in the open market, limiting consumer choice and leading to inflated prices. Further, there was complete restriction on availability of technological information, diagnostic tools and software programs required for servicing and repairing the automobiles to independent repair shops.
These practices also posed entry barriers for independent service providers.
The CCI's corrective measures, including ceasing anti-competitive conduct, facilitating easy access to spare parts and diagnostic tools, and penalizing car manufacturers, underscore the importance of fair competition and consumer choice in the automotive aftermarket.
Navigating the Digital Landscape: Big Data's Influence on Consumer Choice
As the Indian automobile industry navigates the digital age, the influence of Big Data looms large, casting both a shadow and a spotlight on consumer choices. This section scrutinizes the potential negative impact of Big Data, focusing on two significant aspects: personalized pricing and tie-in arrangements.
Personalized Pricing: A Double-Edged Sword
In the realm of personalized pricing, OEMs can identify the details of how car owners interact with their vehicles. If the benefits derived from such data are distributed widely, the risk of price discrimination arises. Essentially, OEMs could adjust pricing based on each car owner's ability to pay, a practice that may seem equitable but could lead to unintended consequences.
At the point of purchase, when consumers are making decisions about which vehicle to buy, they often lack the means to undertake a comprehensive whole-life cost analysis. This leaves them vulnerable to pricing strategies that are heavily influenced by the data collected by OEMs. These companies are better positioned to determine the precise moment when a car owner's data usage becomes profitable for them, potentially resulting in a pricing structure that caters to the OEM's financial gain rather than the consumer's interests.
This concern is not unfounded. The European Commission, in its report on access to digital car data11, explicitly highlights the issue of users who derive significant benefits from data usage being charged higher prices.
Tie-In Arrangements: The Digital Focus
In this context, tie-in arrangements refer to situations where car owners are compelled to select specific providers of ancillary services, such as telecom services for data connectivity, as dictated by the OEM. While such arrangements may appear innocuous, they have the potential to disrupt fair competition.
Consider a scenario where, at the time of purchasing a car, the car owner is mandated to opt for a particular telecom service provider selected by the OEM to provide data services12. On the surface, this may seem like a logical choice, ensuring seamless integration and compatibility. However, it raises significant concerns, especially from a competition law perspective.
Mandated tie-in arrangements without clear and objective justifications can undermine the principles of fair competition. The car owner may find themselves locked into data plans that are excessive or unsuitable for their needs, as they have no alternative but to opt for the predetermined data plan. What's more, OEMs might decide to appoint the selected telecom service provider as the exclusive option, monopolizing access to data services related to the car.
This monopolistic grip over ancillary services can stifle competition, limit consumer choices, and potentially lead to inflated costs.
In an era where consumers expect flexibility and freedom of choice, such tie-in arrangements raise critical questions about the balance between convenience and consumer rights.
In this digital landscape, where data is the new currency, vigilance and thoughtful regulation are essential to ensure that consumer choices remain uninhibited and fair.
Conclusion
The oligopolistic structure of the Indian automobile industry exerts a significant influence on consumer choice. From RPM to tying arrangements and exclusive supply agreements, there have been instances where OEMs have wielded their power to limit competition, resulting in higher prices and constrained options for consumers. However, regulatory bodies like the CCI have played a crucial role in curbing anti-competitive practices, striving to create a more level playing field. As India's automotive industry continues to evolve, the balance between market dominance and consumer choice will remain a central challenge for policymakers, manufacturers, and consumers alike.
Capegemini. “India Automotive Sustainability Evolution.” Capgemini, 2 January 2023, https://www.capgemini.com/in-en/insights/expert-perspectives/sustainability-in-automotive-industry-an-india-perspective/. Accessed 20 September 2023.
The top four firms being considered for the calculations are; Maruti Suzuki India - 41.39%, Hyundai Motor India (and Kia Motors India) - 20.98%, Tata Motors - 13.74%, Mahindra & Mahindra - 10.13%
Kukreja, Sahil. “Top-selling car manufacturers in India in July '23 with market share: Maruti Suzuki to Kia.” The Times of India, 10 August 2023, https://timesofindia.indiatimes.com/auto/web-stories/top-selling-car-manufacturers-in-india-in-july-2023-with-market-share-maruti-suzuki-to-kia/photostory/102593802.cms. Accessed 20 September 2023.
While they are legally separate companies, they are sister entities who share car platforms and parts. Their dealers and service centres are also often owned by the same people. Hence, we have combined the market shares of Hyundai and Kia.
Original Equipment manufacturer, an organization that makes devices from component parts bought from other organizations. In the automotive industry this refers to the companies that manufacture the final product – that deal with the final release of the vehicle to the market.
Sunilkumar, Singh Rahul. “Only 1 in 12 Indian households have car, Mahindra asks netizens for conclusion.” Hindustan Times, 27 December 2022, https://www.hindustantimes.com/car-bike/only-1-in-12-indian-households-have-car-mahindra-asks-netizens-for-conclusion-101672146176271.html. Accessed 21 September 2023.
Malek, Marcus. “Car manufacturers or part suppliers: who's in the patent driving seat?” IAM, 16 September 2015, https://www.iam-media.com/article/car-manufacturers-or-part-suppliers-whos-in-the-patent-driving-seat. Accessed 21 September 2023.
The Economic Times. “Nod for 100% FDI in auto sector.” The Economic Times, 7 March 2002, https://economictimes.indiatimes.com/news/economy/policy/nod-for-100-fdi-in-auto-sector/articleshow/3120904.cms?from=mdr. Accessed 20 September 2023.
“Lastly, agreements between OEMs and their authorized dealers, if found to be containing clauses restricting over-the-counter sale of spare parts, requiring dealers to source spare parts only from OEM-approved vendors or restricting them from dealing with cars of competing brands without the OEM’s consent, may also constitute vertical restraint like refusal to deal and/or exclusive supply and/or exclusive distribution arrangements. In fact, restricting the availability of genuine spare parts in the market may give rise to the market of spurious goods and also allows OEMs to mark up the prices high of spare parts while making a sale, thus causing consumer harm”: The Competition Authorities of BRICS Working Group on Automotive Sector. “A STUDY ON COMPETITION ISSUES IN THE AUTOMOTIVE SECTOR REPORT BY THE COMPETITION AUTHORITIES OF BRICS WORKING GROUP ON AUTOMOTIV.” Competition Commission of India, https://www.cci.gov.in/images/internationalevent/en/a-study-on-competition-issues-in-the-automotive-sector1667283867.pdf. Accessed 21 September 2023.
Case No. 03 of 2011 decided on 25.08.2014 and 27.07.2015 . At the time the reference article was written, the matter was sub-judice and pending at the Hon’ble Supreme Court of India.
Martens, Bertin, and Frank Mueller-Langer. “Access to digital car data and competition in aftersales services.” EU Science Hub, 16 October 2018, https://joint-research-centre.ec.europa.eu/publications/access-digital-car-data-and-competition-aftersales-services_en. Accessed 21 September 2023.
Gopakumar, Gopika. “RBI slaps ₹10 crore fine on HDFC Bank post car loan probe.” Mint, 28 May 2021, https://www.livemint.com/companies/news/rbi-slaps-penalty-on-hdfc-bank-post-car-loan-probe-11622217109724.html. Accessed 21 September 2023 : A Related Example. Although this fine was imposed on a bank, it serves as an example of a mandatory tie-in that several consumers were unaware of.