CCI probes against Maruti: Resale price maintenance menace can be overcome through online sales

The Competition Commission of India (CCI) is investigating allegations of anti-competitive practices adopted by Maruti Suzuki, mainly resale price maintenance. Resale price maintenance is detrimental to consumer interest. The manufacturer tells his dealers, through whom its products are sold, that while they are getting the goods at a wholesale price, there should be a minimum mark-up so that dealers don’t fall over themselves to woo their customers with discounts, ruinous to the manufacturer in the long run. Remember, dealers registering high volumes are able to offer much more discount vis-à-vis the ones doing modest sales.

Earlier in 2017, the CCI slapped a penalty of $12.5 million on Hyundai, but it went on to appeal the Supreme Court saying the CCI order was faulty inasmuch as Hyundai had only 14 percent market share. Maruti has an envious 50 percent share and is more vulnerable to the charge of harming consumer interest.

As recently as on 7 March 2019, Tesla reignited the 20-plus-year-old debate of automakers selling direct to consumers via the internet by announcing the online-only sale of its electric cars that have captured the imagination of car owners for their economy and environment friendliness.

In the US there is franchise law that protects auto dealers. Moreover, the retail auto segment in the US provides employment to 2 million persons besides contributing to federal and state taxes. So there is bound to be a legal challenge to Tesla's only-online move.

Representational image. Reuters

Back to India, the solution for the festering problem of resale price maintenance lies in embracing online sales. For one thing, there is no franchise law that comes to the rescue of dealers. Moreover, e-commerce is already such a rage in the country where consumers set a lot in store by the price factor. Indeed Indian consumers are by and large price sensitive. In the US there is a belief that cars are sold and not bought.

The auto manufacturers there depend a lot on the wily dealer to push their products so much so that year-end incentives are the mainstay of the dealers who try their best to fulfil their targets. In other words, it is the persuasive skills of the dealer and his salesmen all the way. Amazon caters to a few car manufacturers in the USA and is prepared to take on a more aggressive and substantial role but critics aver that cars aren’t commodities with numerous differentiating features and variants of the same brand supposedly defying online sales.

But that is not entirely true. A car manufacturer can sell both directly through its own portal as well as through e-commerce portals such as Amazon and Flipkart Of course, there could be initial logistics problems. The dealer procures huge land to stock the cars and his showroom is abuzz with activity with salespersons patiently explaining different variants of the car along with the financial options like EMI etc which apparently cannot be handled online.

But then online chat facilities can overcome this seeming limitation. And to fulfil the touch and feel and test drive instincts a manufacturer can arrange consumer centres in various cities. Direct selling results in lowering of prices to the consumers. Automakers can also rely on the marketplace offered by e-commerce portals to sell their wares. The service charges payable to e-commerce portals would be far lesser than the dealer commission.

Online sale of medicines provides empirical evidence of the potential of e-commerce portals being a boon for consumers. Elimination of middlemen is the key. But then medicines and cars aren’t the same. Logistics and service issues are pronounced in car sales. Yet there is no reason why an initiative cannot be taken if only to test the waters.

(The author is a senior columnist and tweets @smurlidharan)