The turnover of the automobile industry in India constitutes 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 auto dealers are the two pillars of this industry. Auto dealers are predominantly SMEs that provide employment to over 4 million people, making them a significant stakeholder in the welfare of the country. OEMs and dealers have had a tumultuous relationship over the decades, given the financial might of OEMs and relatively small enterprises of the dealers who usually invest their life savings into the capital-intensive auto business. Often, unfavourable outcomes of such power imbalances end up hurting consumers.
The relationship between OEMs and dealers is typically governed by dealership contracts. But the language and provisions of contracts are often tilted in favour of OEMs. Unfortunately, the law does little to help David, with Goliath calling the shots. While OEM-dealer agreements are governed under the Indian Contract Act, 1872, the law does not contain clear solutions to the issues faced by dealers. This is because the law presumes—unless proven otherwise—that both parties are on equal footing. While there are provisions related to coercion and undue influence in the Act, invoking those provisions by dealers comes at huge financial and reputational costs.
Dealership contracts have provisions that unduly favour OEMs. For instance, procurement and selling of accessories (spare parts, aesthetic additions, music systems) and consumables (lubricants, paints) is tightly controlled by OEMs, with dealers required to buy such items from either only OEMs or through a very short list of approved vendors. For example, many OEMs force dealers to buy their branded oils and lubricants at a higher price even though the same specification is available in market at a lower price. The burden of these costs is ultimately transferred to the consumer who then shies away from authorised workshops to local garages.
Contracts also contain unfair restrictions on dealer businesses. In a recent case against Tata Motors, the Competition Commission of India observed that Tata Motors was forcing dealers to facilitate financing for customer vehicles only from Tata, which was seen as anti-competitive. Such provisions not only affect dealers, but also negatively impact the consumer’s ability to choose from various financing options. This unfairness extends to provisions on indemnity. Most Indian dealership contracts either lack clarity on indemnification and liability or are one-sided and in favour of OEMs. In a particular case involving the now defunct United Motorcycles, a dealer of United Motorcycles had to deal with a consumer complaint that arose out of manufacturing defects, which should clearly be under the OEM’s ambit.
Provisions on termination are also prima facie in favour of OEMs, giving them greater flexibility while terminating contracts with inadequate notice provisions and no clear repurchase obligations. Most recently, Ford announced restructuring operations in India and one look at the Ford dealership agreement clearly reflects the inequity embedded within the contract, which details 27 different events in which the agreement can be terminated by Ford India due to a specific action or inaction of the dealer. There are no corresponding events detailed that give a similar option to the dealer. The contract also imposes 12 different obligations on the dealer in case of termination, irrespective of which party initiated the termination. There are no corresponding obligations imposed on Ford India in this situation.
In contrast, agreements in the US are equitable, with clearly laid out duties and obligations upon both parties. It is pertinent to note that entities in India such as Honda have far more balanced agreements in the US. This is largely due to specific laws that regulate OEM-dealer relationships in the US. The law is often regarded as the great equaliser that steps in to right the wrongs that the market itself cannot rectify. The regulatory framework in the US recognises the power imbalance and specifically governs OEM-dealer relationships and provides checks and balances to ensure that the power imbalances are addressed. Such protective laws also exist in Australia and South Africa.
In India, there are no legislative protections in place to address the imbalance in dealership contracts. Self-correction of the imbalance is highly unlikely, given the inherent imbalance in contractual structures. The recent and relatively easy slew of exits of foreign OEMs such as General Motors in 2017, MAN Trucks in 2018, United Motorcycles in 2019 and Harley-Davidson in 2020 exemplifies this imbalance.
A protective legislation, therefore, is needed. This would not only level the playing field between OEMs and dealers, but would also benefit consumers and the industry at large by providing for fairer contracts and more transparent business practices.
The author is Vinkesh Gulati, president, Federation of Automobile Dealers Associations. Views are personal.