CCI directives-not necessarily bad news for OEMs

ETAuto.com, December 29, 2014, Mumbai

The Competition Commission of India’s (CCI) recent penalty on a few car manufacturers for what it calls “restrictive and anti-competitive trade practices” may be perceived as a disagreeable reprimand to the auto industry. But the situation may not be as grim as the first reading suggests.

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The CCI says that the auto companies or OEMs are guilty on three counts

a) Denying independent or non-affiliated repairers access to genuine spare parts and technology

b) Spelling out that warranties will be cancelled if customers approach independent repairers

c) Binding Original Equipment Suppliers (OES) from selling in the open market

The CCI has also feels that car companies are selling spares at exorbitant prices; customers have no choice but to pay high prices for branded spare parts. The CCI has alleged that car companies have created a monopoly with these tactics. In its directives, CCI has demanded that the companies ensure availability of spare parts and diagnostic tools in the open market.

But the paradox is that OEMs may not lose by adhering to the CCI ruling, rather it may gain! And gain substantially, if they can quickly expand their service footprint across the country harnessing the potential of the selfsame open market!

At the root of OEMs worries about the open market is a clear conflict of opportunity vs cost. Spares and services business is meant for after-sales support. So on the one hand, very good availability of spares and services throughout the country enables better vehicle sales but on the other hand making them available through third parties in the open market erodes the OEMs own opportunities for sales and profit through their own dealerships.

The key would therefore be to expand the service network but on their own terms. This is possible since the opportunities in this market are immense. For starters, OEMs need not worry that their bottom lines will necessarily be jeopardized. The gains from opening up the market are far too many to ignore.

Growth Potential
In India, there is plenty of potential to grow the aftermarket spares business. The size of the components business in the Indian automotive after-market, as assessed by industry studies, is between Rs.28,000 crore and Rs24,800crore. Cars make up 26 per cent of this.

The service market is worth Rs.8000 crore. Together they are expected to touch Rs.40,000 crore by 2015 and Rs.60,000 crore by 2020. The spare parts after-market could touch Rs.37,000 by 2015 if it grew at the rate of 11 per cent. This market is barely addressed by OEMs; a recent study by ACMA has found that the coverage is just 15-20 per cent.

This is primarily because most of the vehicles leave the fold after the warranty period. Another survey by ACMA found that nearly 20% of cars on the road are over 15 years old but the average age of those visiting dealers is less than seven years. This indicates that the older cars aren’t driving into OEM service centers.

Opportunity to curb parts and service leaks
Since car manufacturers have been unable to adequately cater to the rapidly expanding after-market, this market need is met partially by parts that are pilfered from dealerships and service centers.

Often times, service centers push some of their stock into the open market in a bid to fulfill their monthly targets set by the OEM. As the objective is to clear inventory or achieve bulk sales these parts are often sold at a lower price. Thus, the OEM’s interests and intentions are both compromised.

Opportunity to crackdown on counterfeiting
Poor availability of spare parts has also made the industry vulnerable to counterfeiting. According to ACMA, 36 per cent of the products in the aftermarket are fake; the figure is growing at the rate of 9-11 per cent annually. Not only does this trend gobble up market share of the OEMs, but could also weaken the health of cars and put at risk owners’ lives.

Opportunity to offer services to an growing market segment
Fleet operators and taxi owners constitute a rapidly growing segment; one estimate puts the number of such cars on the road at five lakh. They are finicky about quality, safety, price and reliability.

They demand that the right part be supplied to them at the right price and at the right time. Leave them waiting for too long and they quickly switch to an alternative. Time lost is money lost for a fleet operator.

No relevant competition from OESs
The OESs are not equipped to service these pockets that the OEMs are neglecting. They are geared toward wholesaling, not distribution which requires a completely different approach to the market.

Moreover, they tend to chase the after-market only during economic downturns when the OEMs’ production volumes dip.

In order to tap into these opportunities existing in the market, OEMs need to increase reach and range to safeguard and grow their market share.

For this ideally they should harness the existing independent multi brand garages since this would not only please CCI but also help make the service footprint quickly across the country through a multi-tired service center chain.

Coupled with an effective and efficient pull based distribution system, this becomes a win-win relationship for all parties concerned.

a) Develop a multi-tiered service center system
Since OEMs are unable to cover the cars that leave their fold and enter the secondhand market, they can reach these cars with the help of associates or franchisees (multi-brand garage owners).

This Tier 1 of service centers could be developed in places that do not have an authorized service center for an OEM. These owners could be trained and equipped to fix minor and few major issues. OEMs could also create a Tier II consisting small garage owners trained/certified and managed by owners in Tier I or by authorized service providers in the region to take care of small repairs.

The OEM service centers, with their advantage of parts availability, can offer service levels that cannot be matched by even multi-brand car garages. They will be preferred by the less price sensitive car owners who will also be willing to pay a premium for “first fit” parts. With the help of franchisee service centers, they can achieve depth in the spares business and reach segments that are currently unserved.

b) Transition to pull-based distribution
It is also imperative that car manufacturers move to pull-based method of replenishing stocks. Attempting the above step with the traditional push systems (setting sales targets, pushing inventory onto entities in the supply chain) would lead to the usual problems of irrelevant and excess inventory. Further, channel partners’ working capital would be blocked.

They will not have the money to invest in equipment, technology and training. The pull system, on the other hand, would serve the cause of ‘high availability at lower inventory’. Further, before implementing the pull system, OEMs have to
– Replace wholesalers with dedicated distributors with clearly-defined territories.

– Ensure perennial stocks – relevant and wide range – at retail points. The distributor has to be kept motivated to collect orders and fulfill them regularly.

– Establish an efficient central warehouse which can service the channel partners regularly.

This will push down the level of inventory in the entire supply chain. Distributors will benefit tremendously from these measures. Their inventory turns will improve and ROI will go up.

They will be motivated to invest resources towards buttressing the pull system. Therefore, OEMs can welcome the CCI directives and make the most of the opportunities in the after-market. Basically, they can have their cake and eat it too.

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