The curious case of spurious spare parts and industry monopoly

Oblivious to most car owners in the country, a pitched battle is being fought by 17 car manufacturers in India and some proponents of free market economy that may alter in some significant quantum, the shape of the after sales aspect of owning an automobile in the country. The moot point is the alleged monopoly of the car industry on spare parts and the Competition Commission of India stands as the judge in the matter. It’s a multi layered problem with varied repercussions. Here is how.

Availability of spurious spare parts is an age old problem that plagues this sector. While the automotive production is itself pretty organised, a few jugaads here and there notwithstanding, the upkeep of these cars is largely in the hands of an unregulated and highly unorganised industry. In any town in India, big or small, there is always a friendly neighbourhood automotive market that can fix any car at any price.

Any price? Almost. Some even claim they can assemble a car at a cost that will be less than half of a new car. How do they manage that? Partly through ingenuity. The mechanics are often sparsely educated and without any mechanical or technical degrees. But are street smart and tech savvy nevertheless. There is no way to quantify their skill but it is no less than any shop floor worker in any car factory. The labour cost then is a major saving.

Secondly there are no overheads. No advertisements, no principles of cleanliness or hygiene to cater to. No threat of a rebound should the quality of service offered is inconsistent. Which, mostly it is. And lastly, due to use of cheap and at times “spurious” spare parts.

Estimates suggest that currently, the proportion of spurious sales amounts to Rs 5,300 crore accounting for 30-35% of the total demand for replacement parts in the country. The replacement market itself is currently valued at Rs 16,500 crore and is poised to grow significantly with the increasing population of vehicles in the country. The impact of this is multifarious across the Government, customers and manufacturers.

The Government sees a loss of revenue in the form of excise, duties, VAT and other local taxes. This amount is estimated at approximately Rs 4,250 crores as per ICRA Management Consultancy services. The manufacturers suffer not just from loss of sales and revenue but also brand image as the spurious auto component makers copy the markings of leading brands, to perfection, making it difficult for the customer to make out the difference. And ultimately the customers suffer as these fake parts have a much shorter life causing further damage to the vehicle.

More importantly, spurious parts are often unsafe and unreliable. It can contribute to accidents and to the loss of life or limb. This is however just one side of the story. There is another angle to it which is far more irksome for the domestic industry.

In an intensely competitive domestic car market, dealers these days make more money through after sales and service than direct sale of a new car. So he is happy to see you walk into his showroom and drive out in a car but happier when every 6-8 months you pay a visit to get your car serviced. In just 2 such visits he will milk out more dough from you than whatever little he had to cede while trying to sell you the car by way of discounts.

The company earns in the process too. The dealers are encouraged to only use authorised spare parts which are almost always priced higher than what they should. It is a classic case of branding really. A Honda Accord will do as much as a BMW 3 series but you need to pay more for latter because of the branding. The companies get a share of this. For example, Maruti’s branded accessories and spare parts for example is a constant source of revenue for them. The parts that are sold are high on quality and durability too but that is an unintended benefit. And there is no guarantee that a duplicate part is always, by nature, defective too.

An unbranded duplicate part costs less and hence finds favour with your neighbourhood mechanic whose sole attractiveness is his pricing. But that is not always the only reason. Even if he wants to get a branded original part, it is difficult for him to do so thanks to a vicious circle devised by the industry to keep them out of business. Every time he gains a customer, a dealer loses one and so does the company. If hordes of car owners start relying on the local mechanics, the sustenance of dealers themselves would be endangered.

It makes sense then for the car companies to not allow component makers to sell parts directly in the open market as that would mean free supplies to these mechanics. And the lack of these parts would mean there would always be demand for duplicate parts. A chicken and egg situation really. Even some of the organised standalone service networks, a relatively new phenomenon in India, like the one started by ex Maruti CEO Jagdish Khattar is a victim of this kind of veiled monopoly of spare parts.

Should the CCI rule in favour of the 17 car companies, it would mean a legal ratification of this monopoly. For you, it would mean higher cost of service and one that is sure to go up arbitrarily in future. Should they choose to rebuff them instead and rule in favour of allowing parts to be sold in the open market, the sundry mechanics are likely to prosper and car dealerships would have a bigger problem at hand. And the propensity of bargain hunters in India is such, that cheaper duplicate parts would still find a market with these stand alone garages. So while you can get your car serviced at very competitive rates, you can never really tell if it is safe and secure at all times.

There is no easy answer to this then. Perhaps a mix of both would be required. Embolden the car companies and their dealers but do not allow them to monopolise it. And encourage sale of branded spare parts at least to stand alone organised service stations. A little bit of reform should not harm anybody.

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