Hotai Motor Co., Ltd.

Case:

Key Words:

car, area of responsibility, cross-district transaction

Reference:

Fair Trade Commission Decision of March 28, 2012 (at the 1064th Commissioners' Meeting), Disposition Kung Ch'u Tzu 101031

Industry:

Wholesale of Motor Vehicles (4651)

Relevant Laws:

Subparagraph 6 of Article 19 of the Fair Trade Law

Summary:

1. The FTC received a written complaint from the Taipei City Taxi Drivers' Association about the sales area division policy of Hotai Motor Co., Ltd. (hereinafter referred to as Hotai Motors) for its distributors Taipei Motor Co., Ltd. (hereinafter referred to as Taipei Motors) and Kuotu Motor Co., Ltd. (hereinafter referred to as Kuotu Motors). Both dealerships could only sell cars to the taxi operators within their duty areas and cross-district transaction was prohibited. The conduct restricted the freedom of transaction of the dealerships and was in violation of Subparagraph 6, Article 19 of the Fair Trade Law.
2. Findings of the FTC after investigation:
   1. To ensure its regional sales system of "responsibility area" divisions could be fully executed to maintain Toyota Group's maximum profits, Hotai Motors had already established before 2006 the "Big Customer Bulk Purchase Subsidization Regulations" for the dealerships. The subjects of subsidization specified in the regulations were all big customers (those buying cars regularly) that made bulk purchases (buying large quantities each time) for business purposes (taxis and vehicles used by incorporated organizations or companies). The regulations did not apply to ordinary consumers. Starting from the second half of 2007, Hotai cancelled the subsidization for cross-district purchases and imposed tighter control on dealerships selling outside their responsibility areas. Such subsidies ranged from 2 to 3% and taxi operators were turned down when trying to make cross-district purchases.
   2. Hotai Motors had signed with each dealership the "Toyota Product Dealership Contract" in which the responsibility area of each dealership was specified. The cities and counties were separated into 8 sales responsibility areas respectively under the charge of Kuotu Motors, Taipei Motors, Tau Miau Motor Co., Ltd., Central Motor Co., Ltd., Nandu Motor Co., Ltd., Kaudu Motor Co., Ltd., Eastern Motor Co., Ltd., and Lanyang Motor Co., Ltd. Since Kuotu Motors and Taipei Motors were both responsible for the greater Taipei area where 70% of the taxis in Taiwan concentrated, car sales to taxi operators apparently meant a much more to the two companies than to the other dealerships and the competition between Kuotu Motors and Taipei Motors was particularly fierce. Taxi operators interviewed by the FTC all agreed that fuel efficiency, prices, and wear were their major considerations when making purchases and most of them preferred Toyota cars because of their lower parts replacement rates, fewer malfunctions, and better fuel efficiency. Although there was competition from other automakers in the country, the market share of even the No. 2 selling brand for taxis in the greater Taipei area still trailed far behind and its sales were declining from year to year. The brand loyalty of taxi operators was impressive.
   3. The reason why the dealerships accepted the "Big Customer Bulk Purchase Subsidization Regulations" and established their discount criteria accordingly was that the subsidies were part of their income. They also recognized the classification of the subsidization into different rates for sales inside and outside the responsibility area as a measure to ensure all dealerships could abide by the responsibility area system and not to sell outside their responsibility areas and engage in price competition. The sales records showed that the cross-district sales of cars for taxis made by Taipei Motors between 2006 and 2009 respectively were 16.4%, 3.6%, 0.9%, and 0.7%, while those by Kuotu Motors were 24.4%, 4.3%, 1.5%, and 0.9%. In both cases, the ratio obviously went down steadily. The cancellation of subsidization for sales outside the responsibility area to discourage dealers from engaging in such competition apparently worked. The records also indicated that the percentage of sales of cars for taxis in the total annual sales from 2006 to 2010 were 53.56%, 63.14%. 59.71%, 59.69%, and 61.97% for Taipei Motors and 46.44%, 36.86%, 40.29%, 40.31%, and 38.03% for Kuotu Motors. The ratio started to drop for Kuotu Motors after the cancellation of subsidization for sales made outside the responsibility area in 2007 and the sales of cars for taxis between Taipei Motors and Kuotu Motors remained at a stable 4:6 ratio. Undoubtedly, the subsidization regulations achieved the purpose of restraining the dealerships from competing outside their responsibility areas and it set a restriction on competition.
3. Grounds for disposition:
   By establishing the aforesaid subsidization regulations to restrict cross-district sales, Hotai Motors suppressed the dealers' interest in making sales outside their responsibility areas and also compressed the room for price competition between dealerships. In fact, it put a restriction on the liberty of the dealerships to compete for business opportunities and deprived the dealerships of their freedom to choose their customers. This entirely closed up the auto market for taxi operators between different responsibility areas and also reduced the intra-brand competition between different sales outlets. In other words, it was a restriction on market competition. Hotai Motors used the dealership contract to limit the responsibility area of each dealership and the obedience of the dealership as the criterion for the big customer bulk purchase subsidization to restrain their business activities. The conduct reduced the performance competition between the dealerships and was likely to restrict or impede fair competition in violation of Subparagraph 6, Article 19 of the Fair Trade Law. Acting according to the first section of Paragraph 1, Article 41 of the same law, the FTC ordered Hotai Motors to immediately cease the unlawful act and also imposed on the company an administrative fine of NT$3,000,000.

Summarized by Lin, Hui-Mei ; Supervised by Wu, Lieh-Ling

Appendix:
Hotai Motor Co., Ltd. 's Uniform Invoice Number: 03251108