Is It Anti-competitive Behaviour For Oems To Bid Against Their Resellers?

Original Equipment Manufacturers (“OEMs”) are at times allowed to bid for tenders with entities that resell (“Resellers”) products manufactured by the OEM, for example Volkswagen Aktiengesellschaft (AG) tendering with Lindsay Saker VW. Automatically the OEM’s bid price will be lower than its resellers bid price. Some tender documents specify that they only accept bids from either OEMs or its resellers but not both, and some are not specific. This article will focus on the latter.

There is nothing in the relevant legislation such as the Competition Act 89 of 1998 and the  Preferential Procurement Policy Framework Act 5 of 2000 and  Regulations prohibiting OEMs and its resellers from competing for the same bid. The only prohibition is as per National Treasury’s direction contained in the briefing session for tender RT3/2018 supply, delivery, installation, commissioning and maintenance for the office automation solutions (“NT Briefing Session”).

NT Briefing Session

National Treasury’s (“NT”) direction in the NT Briefing Session is contradictory as demonstrated below.

The following paragraphs from the NT Briefing Session will capture the essence of NT’s direction regarding OEMs and resellers bidding against each other.

Question 10 from Rena Business Solutions

As per Phase 1 Section 20.2: Bullet 6, Are OEMs allowed to tender in parallel with their dealers they support? And if so, how would National Treasury treat the bids e.g., pricing and support is given from OEMs?

Response 10(1)

South African OEMs (if any) can bid in parallel with the dealers, but each group will be evaluated separately. As an example, distributors will be evaluated separately from sub-distributors and resellers. The pricing submitted will be the price for the entire contract period for each group.

Emphasis is put that the overseas or international OEMs cannot tender except if partnering with a South African company in the form of a Joint Venture etc.

The above quoted paragraph does not appear to prevent South African OEMs from submitting proposals for the same tender as their resellers. The only caveat is that the OEMs must be evaluated against other OEMs, and not against resellers.

The following was also stated in the NT Briefing Session:

Question 10(4)

In a situation where the OEM is bidding alongside its B-BBEE partner and dealer which they support, how will it affect all the three of us when it comes to pricing adjudication?

Response 10(4)

An OEM will not be competing with a reseller it will be competing with other OEMs.

Question 10(5)

Would it be correct to say that the OEM is considered the distributor, the B-BBEE partner the sub-contractor, and the reseller the dealer as per the above question?

Response 10(5)

Within the industry, these names are used interchangeably and therefore the contract is open for South African distributors, sub-distributors, resellers and whatever name used within the industry. Key is that each category will compete on its own (e.g. resellers will compete with resellers)”.

In accordance with the NT Briefing Session, OEMs are to be evaluated against other OEMs and the same would apply to resellers in that they should only be evaluated against other resellers.

Should the above responses be binding to other tenders then they would create an undesirable tendering environment. The effect of this would be that if only two (2) bidders respond to a tender, one being an OEM and the other a reseller then automatically the OEM will directly go against the reseller, and this will be in contravention of the above quoted responses. Apart from the NT Briefing Session, which is inherently not law in itself, there is nothing in law which prohibits OEMs from competing with resellers for tenders.

Competition Act 89 of 1998

Anti-competitive behaviour practices are business or government practices that prevent or reduce competition in a market. The Competition Act, as one of its purposes, is to maintain an effective and competitive economic environment in South Africa by addressing any behaviour within a market that tends to impede, restrict or distort competition in connection with the supply or acquisition of those goods and services in South Africa.

Vertical Relationship

Section 1 of the Competition Act defines a vertical relationship as “the relationship between a firm and its suppliers, its customers or both”.

Allowing OEMs and resellers to bid for the same tender may amount to potential anti-competitive behaviour in terms of section 5 of the Competition Act which prohibits agreements between parties in a vertical relationship, such as a reseller and an OEM, which has the effect of substantially preventing or lessening competition in the market. Section 5 also prohibits the practice of minimum price resale maintenance. Minimum price resale maintenance is when manufactures (OEM) recommend a resale price to their distributors/suppliers (resellers).

Exceptions to the minimum price sale are contained in section 5(3) which states that:

• the supplier or producer makes it clear to the reseller that the recommendation is not binding; and
• if the product has its price stated on it, the words “recommended price” appears next to the stated price.

The relationship between an OEM and its reseller is vertical in nature and if it is determined that there exists an agreement between an OEM and a reseller that substantially prevents or lessens competition in the bid process then this will amount to anti-competitive behaviour.

Horizontal Relationship

Alternatively, the anti-competitive behaviour could be in terms of section 4 of the Competition Act, which provides for prohibited restrictive horizontal practices.

Section 1 of the Competition Act defines a horizontal relationship as a relationship between competitors.

In circumstance where an OEM and its reseller although in a vertical relationship, but when they bid for the same tender, they submit bids as competitors which places them in a horizontal relationship.

Section 4 provides three (3) practices as restrictive horizontal practices, which are:

• Directly or indirectly fixing a purchase or selling price or any other trading condition;
• Dividing markets by allocating customers, suppliers, territories, or specific types of goods or services; or
• Collusive tendering.

The above three (3) restrictive horizontal practices will not find application as per section 4(2) if there is no shared ownership or directorship across the bidders, OEMs and resellers.

Collusive tendering is described as any agreement between competitors pursuant to which contract offers are to be submitted to or withheld from a third party. The Competitions Act, however, does not provide a definition of collusive tendering.[1]

If an OEM and its reseller for example make an agreement that the other submits a lower or acceptable bid in exchange that the work will be divided or profits shared, this will amount to collusive tendering.

In the absence of the above agreement there cannot be talk of collusive tendering, consequently no anti-competitive behaviour.

Conclusion

Even though allowing OEMs and resellers to compete against each other for tenders prima facie appears to be unfair, it does not inherently amount to anti-competitive behaviour as per the relevant legislative prescripts.

[1] ‘5.7.3 Collusive Tendering’ Phillip Sutherland MyLexisNexis, November 2021.