No, no – automakers are not being taken for a ride by components suppliers

31st October 2014

By: Kelvin Kemm

  

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I have seen news reports that the Competition Commission has launched an investigation into elements of the automotive industry relating to the supply of components to original-equipment manufacturers (OEMs).

My immediate reaction was a sense of unease. I suspect that the Competition Commission is wrong.

A really fierce area of competition is the sale of new cars. Automotive companies are constantly in a daily fight to offer customers more. Freeway plans are offered, no monthly payments for the first three months are offered – and all sorts of other scheming.

Does one really imagine that large motor companies are so dopey that they do not fiercely check the prices that they pay for millions of rands worth of incoming parts to their plants?

The Competition Commission says that major companies are affected, including Ford, Isuzu, Toyota, Honda, Suzuki, and more. What it boils down to is that it is being said these companies need to be protected by the Competition Commission against naughty component suppliers, which are ganging up to overcharge the big companies. Really?

Then I looked at what the naughty suppliers are selling to the big boys. They include items like power management controllers, evaporative fuel management canister systems and clearance sonar systems. So I now have to conjure up this image of the hordes of smaller companies which make evaporative fuel management canister systems, all colluding to bluff the likes of Ford and Toyota into paying higher prices.

So, with tears in their eyes, sobbing their hearts out, companies like Ford and Toyota go to the Competition Commission to ask for help to make their businesses more profitable. To me, the story of the Wizard of Oz is more believable. To my mind, the likes of Ford and Toyota are quite capable of looking after themselves in the world of business. They do not need the Competition Commission to help them.

There are also clearly not hordes of companies making evaporative fuel canister systems. I would imagine that the Fords and Toyotas of this world have perfectly competent people who go and talk to many potential competent suppliers and then negotiate very good deals for themselves.

In fact, I have had experience in these fields. I have been contracted in the past by both the big guys and the smaller guys to carry out strategy development work for them, and so I know how much of this works.

I often have sympathy for the smaller suppliers because the big companies frequently drive such a hard bargain that the smaller guys battle to make a living.

Then an economist who is often quoted in the media says the Competition Commission should be applauded for trying to change this state of affairs. He has been reported as saying that high penalties should be imposed on companies that take part in “such behaviour”.

Does this now mean that the Competition Commission is going to end up issuing fines of many millions, which it then keeps? In other words, the consumers pay anyway, but they pay government instead of companies.

This is what happened when the Competition Commission issued huge fines to construction companies who built the soccer stadiums for the 2010 soccer World Cup. The man in the street paid government. The construction companies just recovered the fines on their next few contracts to consumers. They had no option.

As I have said before, to my mind, the soccer stadium story was not collusion – it was cooperation. There is a very big difference. Had the construction companies not cooperated in getting all the stadiums built, then the stadiums would have been much more expensive and probably would not have been finished in time. The ‘customer’ in the big stadiums was the government engineers. They could not have been conned by ‘collusion’ in their own professional fields. The government engineers are smart – they are not dumb.

I just find it virtually impossible to believe that the likes of Ford and Toyota are being taken for a ride by component suppliers, and that they do not know it. Even harder to believe is that they need the Competition Commission to help them run their businesses.

By the way, if you stop at the curio sellers outside the Union Buildings, in Pretoria, and visit a dozen different stalls and ask the price of the carved elephants, they are all remarkably the same. Do we smell collusion and price fixing there? Should we send in the Competition Commission to smash up the curio sellers?

The Competition Commission must learn the difference between productive business cooperation and collusion. Productive business cooperation benefits consumers.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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