Vinkesh Gulati – President, Federation of Automobile Dealer Associations
The turnover of the automotive industry in India accounts for 6.4% of overall GDP, 20% of industrial GDP and 35% of manufacturing GDP, making it one of the key sectors of the economy. Original equipment manufacturers (OEMs) and car dealerships are the two mainstays of this industry. Car dealerships are mainly SMEs that employ more than 4 million people, making them an important player in the country’s well-being. OEMs and dealerships have had a tumultuous relationship over the decades, given the financial might of OEMs and the relatively small dealership businesses that typically invest their savings in the capital-intensive automotive sector. Often, the adverse outcomes of these power imbalances end up harming consumers.
The relationship between OEMs and dealers is generally governed by dealership contracts. But the language and terms of contracts often tilt in favor of OEMs. Unfortunately, the law does little to help David, with Goliath in charge. Although OEM-dealer agreements are governed by the Indian Contracts Act of 1872, the act does not contain clear solutions to the problems faced by dealers. Indeed, the law presumes, unless proven otherwise, that the two parties are on an equal footing. Although there are coercion and undue influence provisions in the Act, the invocation of these provisions by dealers carries enormous financial and reputational costs.
Dealership contracts contain provisions that unduly favor OEMs. For example, the purchase and sale of accessories (spare parts, cosmetic add-ons, music systems) and consumables (lubricants, paints) are tightly controlled by OEMs, with dealers required to purchase these items only from equipment manufacturers or via a very short list of approved equipment. sellers. For example, many OEMs require dealers to purchase their branded oils and lubricants at a higher price, even though the same specification is available in the market at a lower price. The burden of these costs is ultimately transferred to the consumer who then avoids authorized workshops at local garages.
The contracts also contain unfair restrictions on the dealers’ businesses. In a recent case against Tata Motors, the Competition Commission of India observed that Tata Motors required dealers to facilitate financing of customer vehicles only from Tata, which was considered anti-competitive. Such provisions not only affect dealerships, but also negatively impact the consumer’s ability to choose among various financing options. This inequity extends to the compensation provisions. Most Indian dealership contracts either lack clarity on indemnification and liability or are one-sided and in favor of OEMs. In one particular case involving the now defunct United Motorcycles, a United Motorcycles dealer had to deal with a consumer complaint arising from manufacturing defects, which should clearly fall within the jurisdiction of the OEM.
Termination provisions are also prima facie in favor of OEMs, giving them greater flexibility while terminating contracts with inadequate notice clauses and without clear buy-back obligations. More recently, Ford announced restructuring operations in India and a look at the Ford dealership agreement clearly reflects the unfairness inherent in the contract, which details 27 different events in which the agreement can be terminated by Ford India due to specific Merchant action or inaction. There are no detailed matching events that give the dealer a similar option. The contract also imposes 12 different obligations on the concessionaire in the event of termination, regardless of the terminating party. No corresponding obligation is imposed on Ford India in this situation.
In contrast, agreements in the United States are fair, with clearly defined duties and obligations for both parties. It is pertinent to note that entities in India such as Honda have much more balanced agreements in the United States. This is largely due to the specific laws that govern OEM-dealer relationships in the United States. The law is often seen as the great equalizer that steps in to right wrongs that the market itself cannot right. The regulatory framework in the United States recognizes the power imbalance and specifically governs OEM-dealer relationships and provides checks and balances to ensure power imbalances are resolved. Such protective laws also exist in Australia and South Africa.
In India, there is no legislative protection in place to address the imbalance in concession contracts. Self-correction of imbalance is highly unlikely, given the inherent imbalance of contractual structures. The recent and relatively easy wave of releases from foreign manufacturers such as General Motors in 2017, MAN Trucks in 2018, United Motorcycles in 2019 and Harley-Davidson in 2020 illustrate this imbalance.
Protective legislation is therefore necessary. This would not only level the playing field between OEMs and dealers, but would also benefit consumers and the industry as a whole by providing for fairer contracts and more transparent business practices.
The author, Vinkesh Gulati, is president of the Federation of Automobile Dealers Associations. Views are personal.