COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case Number: 08/CR/Mar01
In the matter between:
The Competition Commission of Applicant
South Africa
and
Federal Mogul Aftermarket Southern Africa (Pty) Ltd 1st Respondent
Federal Mogul Friction Products (Pty) Ltd 2nd Respondent
T & N Holdings Ltd 3rd
Respondent
T & N Friction products (Pty) Ltd 4th Respondent
Decision and Reasons for the Competition Tribunal’s Decision
The Complaint
1. The Commission has referred a complaint directed against Federal Mogul
Aftermarket (Pty) Ltd, which is part of the Federal Mogul group of
companies, a United States corporation registered on the New York Stock
Exchange, (henceforth referred to as “Federal Mogul”) a wholesale
distributor of a range of motorcar components, including Ferodo, the
products of a large multinational manufacturer of braking equipment. 1
1 Federal Mogul Aftermarket is responsible for the sales and distribution, as opposed to the manufacturing
of, inter alia, Ferodo friction products. Distribution of Ferodo products was previously done by T&N
Friction Products (Pty) Ltd trading as Ferodo. T&N Friction was deregistered in 1999 after Federal Mogul
bought the T&N group of companies in 1998. The T&N businesses consisted of three different businesses
being AE Engine Parts, Ferodo and Payen Gasket Manufacturing. In October 1998 Federal Mogul also
acquired Cooper Automotive. Initially there was some uncertainty as to the entity, which had had dealings
2. The complaint was filed in November 1999 with the Competition
Commission by Mr. Koos Erasmus, (“Erasmus”) the Managing Director of
Pee Dee Wholesalers (Pty) Ltd (“Pee Dee” also sometimes referred to as
‘Pee Dee Gauteng’). Pee Dee distributed friction products (i.e. motor
brakes and related products), principally Ferodo products, a leading brand
in the friction products market.
3. Erasmus approached the Commission alleging that he had been
effectively forced out of business as a result of Federal Mogul’s decision to
reduce the rebate (or, what is the same thing, increase the price) at which
they supplied him with Ferodo products. However, from the perspective of
the enforcement of the Competition Act, what is significant is Erasmus’
allegation that the respondent’s action to reduce his rebate arose out of
his participation in a price war – in short, Erasmus alleges that because he
offered products purchased from Federal Mogul at a price lower than that
imposed by his supplier, his rebate and, crucially, his margins, were cut,
rendering his business nonviable.
4. At the time during which Pee Dee’s rebate was cut by Federal Mogul, it
was trading in the East Rand as a wholesaler distributing Ferodo brakes
and related friction products. It was also known as Pee Dee Gauteng.
Erasmus had previously been employed by (and was a small shareholder
in) a company, called AZ Friction Products, a member of the B&U group of
companies and the largest wholesale distributor of Ferodo and other
friction products in Gauteng Province. During 1998 the Midas Group
Limited, a division of Dorbyl, bought AZ Friction from B&U. Midas consists
of a number of divisions, each specialising in the wholesaling of a
particular group of motorcar parts. AZ Friction was absorbed into the
particular group of motorcar parts. AZ Friction was absorbed into the
division of the Midas group specialising in the distribution of braking, or
friction products. It appears that Midas’ own retail outlets operate on a
franchise basis with the franchisees free to purchase their supplies from
the franchisor, Midas, or to give their business to an independent
supplier.2
5. Erasmus continued to run the AZ Friction business after its absorption by
Midas. His Ferodo account manager was Mr Brian van der Bijl. 3 (“van der
with the complainant. The first respondent, after further investigation and subsequent to the joinder of the
2nd and 4th respondents, determined that the conduct contained in the complaint occurred after Ferodo's
marketing and sales operations had been transferred to the Federal Mogul Group. Accordingly, counsel for
the respondents conceded that the first respondent was properly a respondent in this matter.
2 Midas naturally supplies both its own retail franchisees as well as other independent retailers.
3 Erasmus and van der Bijl had previously worked together at Ferodo. Van der Bijl left Ferodo in
December 1999.
2
Bijl”) This was not a happy time for Erasmus. He felt his entrepreneurial
style cramped by the requirements of working for a large group. He was
unable to meet the standards demanded of him by his customers – which
they had previously received from AZ Friction Products – because of a
range of inefficiencies introduced as a result of AZ’s absorption by Midas.
His company was losing market share – it appears that even Midas’ own
franchise operations were turning elsewhere for their supplies of braking
products. Nor, for the same reason, was it a happy time for Federal Mogul,
at least, for those within the Federal Mogul operation responsible for
distributing Ferodo products. As a result of the compromised efficiency of
its largest wholesale distributor, the erstwhile AZ Friction Products now
part of Midas, the Ferodo product was itself beginning to lose market
share to competing braking products.
6. It appears that Erasmus shared his concerns with Mr. Barry Taylor, 4
(“Taylor”), the then Sales Director Wholesale Markets within the Federal
Mogul group. Erasmus informed Taylor of his intention to quit the employ
of Midas and strike out on his own. He queried with Taylor the prospect of
Federal Mogul utilising him as one of its distributors in the event that he
opened his own business.
7. Federal Mogul itself was going through some significant changes in 1998.
A new Managing Director, Mr. Frik Nel, (“Nel”), was appointed in late
1998. Nel had previously been Managing Director of Cooper Automotive,
one of the other divisions of Federal Mogul. Nel had no previous
experience in the friction products part of the business.
8. On the instruction of his US parent company, Nel’s first task was to secure
the more effective integration of the four divisions of Federal Mogul, in
the more effective integration of the four divisions of Federal Mogul, in
Nel’s own words, ‘to consolidate those four businesses into one’. 5 A key
pillar of Nel’s approach to his task was a reduction in the number of retail
distributors utilised by Federal Mogul. It should be borne in mind – and
the significance of this is demonstrated later that Midas distributed the
full range of Federal Mogul products. That is, in contrast with Pee Dee, it
was not a specialist distributor of brake products but rather a general
distributor of automobile parts. It was, indeed, one of the largest
distributors of Federal Mogul products.
9. Cognisant of Nel’s desire to reduce the number of distributors of Federal
Mogul products, but also concerned at the loss of the friction product
4 Mr Taylor and Koos Erasmus worked together at Ferodo during the 1980s. Mr Erasmus later joined AZ
Friction while Taylor rose in the ranks of Ferodo and, subsequently, Federal Mogul.
5 Transcript, 27 August 2002, pages 100–104.
3
division’s market share, Taylor approached Nel and enquired as to
whether he would be willing to allow Erasmus to distribute Ferodo
products. Nel, in accordance with the broader strategy that he was
pursuing, rejected this request out of hand.
10. Taylor conveyed Nel’s response to Erasmus. It is at this point that broad
agreement on the facts gives way to raging contention. In short, Erasmus
avers that Taylor told him that Federal Mogul feared that by agreeing to
accept Erasmus, an erstwhile employee of Midas, as one its distributors, it
risked alienating Midas, one its largest customers. However, Taylor
offered to put Erasmus in contact with Mr. Peter Sutherland and his son
David, long time distributors of Ferodo products. 6 The Sutherlands
operated out of KwazuluNatal province trading under the name of P&D
Wholesalers Natal. Erasmus says that Taylor suggested that he try and
persuade the Sutherlands to allow him, Erasmus, to use their trading
name in Gauteng, to effectively hold out to the market, that the
Sutherlands had expanded their activities to Gauteng Province. In this
way Federal Mogul could hold out to Midas that they had not licensed a
new distributor in Gauteng but that they had simply agreed to supply a
longstanding customer who had elected to expand to Gauteng and who
had employed Erasmus, well versed in that market, to manage their newly
established branch. 7
11. Peter Sutherland testified that Taylor approached him and suggested that
he permit Erasmus to use P&D Wholesalers’ name to trade in Gauteng as
Pee Dee Wholesalers (Gauteng) because of Federal Mogul’s (that is,
Nel’s) refusal to countenance the appointment of new wholesalers. 8
12. However, Taylor’s version differs significantly from those of both Erasmus
and Sutherland. He avers that the Sutherlands had made him aware of
and Sutherland. He avers that the Sutherlands had made him aware of
their desire to expand to Gauteng. A letter from David Sutherland to
Taylor appears to confirm this intention. 9 Aware of Erasmus’ unhappiness
at the state of affairs in Midas and anxious to retain his marketing skills,
Taylor had suggested to Erasmus that he make contact with the
Sutherlands in order to ascertain whether there were any prospects for
him, Erasmus, in the Sutherlands’ expansion plans.
13. In essence, then, on Taylor’s version, Federal Mogul had always viewed
6 It appears that Peter Sutherland and Barry Taylor, also go back to Ferodo – indeed Sutherland testified
that he had signed Taylor’s first employment contract with Ferodo.
7 Mr Erasmus resigned from Midas in March and P&D Wholesalers opened its doors in April 1999 .
8 See transcript of 26 August 2002, page 86 where the Commission questions him on this.
9 See page 1 of the respondents’ paginated records.
4
Pee Dee Gauteng as a branch of P&D Natal, as part and parcel of the
Sutherlands’ business. On Erasmus’ and Sutherland’s version, Federal
Mogul was well aware that the Gauteng business was independently
controlled by Erasmus and that the involvement of the Sutherlands was
simply a pretence directed at Midas. Indeed, Erasmus insists – and this is
corroborated by Sutherland that Taylor, a senior employee of Federal
Mogul, devised this ruse in the interests of Federal Mogul.
14. Although a welter of evidence was led on this factual dispute we are, in
the end, unable to decide which version represents the truth.
15. Indeed, in the range of probabilities, the dwindling sales of Midas,
Ferodo’s largest distributor, suggests a third possible explanation, and that
is that Taylor, anxious to revive Federal Mogul’s friction products sales, a
division for which he had been responsible, and confronted by the
reforming zeal and inflexibility of Nel, someone who had no direct
experience in the friction products business, sought to deceive Nel by
conniving to retain Erasmus, a valued distributor, while at the same time
holding out to Nel that he was at one with his new CEO’s desire to reduce
the number of distribution outlets. 10 Peter Sutherland’s account of his
initial discussion with Taylor on this matter is instructive: 11
Mr. Coetzee (legal counsel for the Commission): I think perhaps
explain how did it come about as far as you’re concerned, that
another entity opened up in the Gauteng area under almost a
similar name as that of your closed corporation.
Mr. Sutherland: I was approached by Mr. Barrie Taylor who said
that Mr. Koos Erasmus was thinking of leaving his current
occupation and going to work for himself and had approached Mr.
Taylor and asked for a distributorship of the Ferodo product. Mr.
Taylor and asked for a distributorship of the Ferodo product. Mr.
Taylor advised me that the structure that they had in place wouldn’t
allow for that, but if I would be happy enough to allow Mr. Erasmus
to use the name, it would be alright with him.
16. And later when pressed to explain how he could have allowed Erasmus to
trade using a name similar to his own, Sutherland, referring to Taylor,
10 According to van der Bijl, AZ Friction sold almost 50% of Ferodo’s total turnover prior to Midas taking
over. See page 22 of transcript of 26 August 2002. van der Bijl, at the time Regional Manager of Federal
Mogul, also testified to the decline in the sales of Ferodo products after AZ’s incorporation into Midas. He
noted in his testimony Midas’ concern at this situation manifest in the extent to which senior Midas
managers engaged him in discussion of the issue.
11 Transcript, 26 August 2002, page 87.
5
replies:12
‘…when you’re asked by somebody that you’ve worked with for a number
of years and who said in his approach to you, there’s no other way. The
exact words were that we need his (that is, Erasmus’) expertise to
maintain the portion of market in Johannesburg and we need this
man to do it’
And further:
“No, I was saying right from the outset, I agreed that they could use the
name to get themselves established so they could hold the market
share they were going to lose and it was done in all honesty and
that’s all that was done”
17. Note that this explanation differs from the accounts of both Taylor and
Erasmus, but appears to have a logical consistency that both alternative
explanations lack – that Taylor was concerned about Ferodo’s decline in
market share as a result of Midas’s poor performance is not denied as is
his high regard for Erasmus’ salesmanship; that Nel would not allow new
distributorships is clearly admitted; and so, Taylor contrived to find a way
around Nel’s strictures while simultaneously reviving Ferodo’s fortunes.
Not only is this view consistent with the admitted facts, but it may have
worked had Midas, and then Erasmus, not upset the applecart by breaking
the rules of the game.
18. However, despite the quantum of evidence devoted to this issue we, like
Mr. Brassey for the respondents, have to be reminded of its significance in
relation to our task. Mr. Brassey suggests that the Commission needs the
complainant’s version to be accepted in order to establish the lengths to
which Federal Mogul would go to satisfy Midas. A failure on the
Commission’s part to establish this would, argues Mr. Brassey, not allow it
to explain why Federal Mogul would choose to punish Erasmus for a price
war which, on all versions it appears, was initiated by Midas. We
disagree. We will show later how the evidence and the incentives clearly
disagree. We will show later how the evidence and the incentives clearly
establish why Federal Mogul would have sought an end to the price war
by bringing Erasmus rather than Midas to book.
19. We do not, in short, believe it necessary to establish whether Pee Dee
Gauteng was part of, or independent of, the Sutherlands’ KwazuluNatal
operation. Even if we accept the respondent’s version that Federal Mogul
believed in good faith that Pee Dee Gauteng and PD Natal were strongly
12 Transcript , 26 August 2002, page 99 and 107, respectively.
6
associated and, indeed, that they were so associated, it remains our
finding that the respondent has contravened Section 5(2) of the Act.
20. At the risk of stating the obvious, what the evidence must establish is
whether or not the practice of resale price maintenance has occurred. It is
necessary to turn to an examination of the requirements for successfully
sustaining a charge of resale price maintenance.
Resale Price Maintenance
21. The Commission alleges that Federal Mogul is in contravention of Section
5(2) of the Competition Act. Section 5(2) prohibits the practice of
minimum resale price maintenance. It may, for consideration of the
argument presented to us, be worthwhile reproducing Section 5 of the Act
in its entirety. It reads:
5. Restrictive Vertical Practices Prohibited
1) An agreement between parties in a vertical relationship is
prohibited if it has the effect of substantially preventing or lessening
competition in a market, unless a party to the agreement can prove
that any technological, eficiency or other procompetitive, gain
resulting from that agreement outweighs that effect.
2) The practice of minimum resale price maintenance is prohibited.
3) Despite subsection (2), a supplier or producer may recommend a
minimum resale price to the reseller of a good or service provided –
(a) The supplier or producer makes it clear to the reseller
that the recommendation is not binding; and
(b) If the product has its price stated on it, the words
“recommended price” appear next to the stated price.
22. Respondent’s counsel has sought to persuade us that a threshold
condition for an adverse finding under section 5 is the existence of an
agreement, which, in the event of its breach or violation, is given effect to
by the imposition of a sanction. He acknowledges the wide meaning given
by the imposition of a sanction. He acknowledges the wide meaning given
by the Act to ‘agreement’ but nevertheless insists that ‘...there must be
some element of understanding between Federal Mogul and say, Midas,
or say, the distributors generally, that if anybody breaks ranks he will be
sanctioned.’ An argument is then made for this interpretation that seeks to
rely on the structure of the Act by distinguishing between, on the one
7
hand, those offences that arise out of the unilateral action of a dominant
firm – the Section 8 offences and, on the other hand, those ‘exceptional
situations’ that arise ‘where one person, as it were, cleaves onto himself
market power by association with another’. These latter are, in counsel’s
estimation, the offences provided for in Section 4 (‘horizontal restrictive
practices’) and Section 5 (‘vertical restrictive practices’) of the Act.
23. However section 5(2) does not, on the face of it, accord with this
interpretation. It states plainly that the ‘ practice of minimum resale price
maintenance is prohibited’ with no reference to an ‘agreement’ to maintain
minimum prices. However, we do not have to determine this because we
will show that even on the respondent’s interpretation there has been a
violation of Section 5(2), which is to say there is sufficient evidence of an
understanding in the industry regarding the price at which the distributors,
such as the complainant, are generally obliged to onsell Ferodo products
to their customers. However, even if there is insufficient evidence of an
understanding, a unilateral determination of a minimum resale price
backed up by a sanction for noncompliance still falls foul of Section
5(2).13 On either test we agree with Mr. Brassey that it is ultimately a
‘question of causation’, a matter of determining why the respondent,
Federal Mogul, reduced the complainant’s discount. 14
24. It is to this question that we now turn.
Why did Federal Mogul reduce the rebate at which it supplied Pee Dee
Gauteng?
Background
25. The price at which Federal Mogul supplies the wholesale distributors of
13 Phillip Areeda in Antitrust Law, Volume VII, page 61, par 1443d refer to this as the
“implied acceptance agreement theory”. According to Areeda “..the implied agreement
“implied acceptance agreement theory”. According to Areeda “..the implied agreement
theory requires proof of three elements. First, there must be an announced condition, or
its equivalent, on future dealing. Second, the sanction for noncompliance must be
credible. Third, the plaintiff would have to show that the market effects are similar to
those associated with express enforceable agreements, namely widespread compliance
with the manufacturer’s specifications.” Also see Nkosinathi Ronald Msomi and others v
BAT, Tribunal Case No. 49/IR/Jul02, footnote 37 on page 13.
14 Note that this does not mean that the offence only occurs when the sanction is imposed. Knowledge on
the part of the retailer of the price at which the wholesaler or the manufacturer wishes them to trade
coupled with knowledge that retribution may be exacted in the event of their failure to comply with this
wish falls foul of Section 5(2)
8
Ferodo products is determined by the size of the rebate that it gives off its
announced list price. These distributors, in turn, supply the product to
their customers at the Federal Mogul list price less a rebate that is,
naturally, smaller than that extended by Federal Mogul to the wholesale
distributor. The difference between the wholesaler’s rebate and the
retailer’s rebate is the former’s margin. As we will show, a significant
grouping of Federal Mogul’s wholesale customers, including the
complainant, received a rebate of 47.5% off the list price and then onsold
this to their retailer customers at the Federal Mogul list price less 35%,
earning, in the process, a margin of 12.5% of the list price. There were, it
appears, additional rebates available to the wholesalers from Federal
Mogul, notably one of 4% to encourage timeous payment, but this need
not detain us for the moment. What is principally at issue is the size of the
rebate at which the respondent supplied Ferodo products to its wholesale
distributors.
26. It is common cause that at a meeting held on the 1 st October 1999 in the
office of the complainant, Erasmus, Taylor informed Erasmus that the
rebate of 47.5% which he had received from Federal Mogul since he had
commenced business in April 1999 was immediately to be reduced to
40%.15 Erasmus insists that this was done because of his participation in
a price war initiated by Midas, his erstwhile employer and the largest
retailer of Ferodo products in Gauteng. In other words, Erasmus, contrary
to the established practice in the industry and the express wish of his
supplier, Federal Mogul, had provided Ferodo products to his customers
at a rebate greater than 35%. Federal Mogul, for its part, avers that the
at a rebate greater than 35%. Federal Mogul, for its part, avers that the
rebate was cut because of Erasmus’ poor payment record. Taylor, in his
affidavit, explains that Federal Mogul wanted to reduce its exposure to
Pee Dee as a result of the increased credit risk it posed. 16
The Determination of Federal Mogul’s Rebate
27. The complainant insists that Federal Mogul’s pricing of Ferodo products
operates off a standard structure of rebates, with the scale of monthly
purchases the sole determinant of the rebate actually received by any
given customer. The top discount rate available to the larger purchasers
of Ferodo products is 47,5%. The respondent, on the other hand, insists
that the size of the rebate offered to any given customer is determined by
a number of factors, critical amongst them is the customer’s volume of
purchases and his payment record or creditworthiness. The respondent
effectively disputes the existence of a standard rebate structure. At least
15 Mr Erasmus, Mr Taylor and Mr van der Bijl were present at the meeting.
16 See par. 35.2, page 33 of the answering affidavit of Barry Taylor where he explains this.
9
the respondent insists that the determination of a particular customer’s
place on the rebate structure is complex – on the respondent’s version a
large customer with a poor payment record could be afforded a lower
discount rate than a small customer with an acceptable payment record.
28. The record supports the complainant’s version. The schedule on page 35
of the record, to which Nel refers on page 141 of his testimony, 17 appears
to confirm this. A glance down that schedule confirms that the largest
wholesalers receive the top rebate of 47.5%. Smaller distributors receive
smaller discounts. Purchasers of impeccable creditworthiness, but
smaller volumes – for example, the multinationals, Ford and Robert Bosch
– receive lower rebates than Erasmus or the Sutherlands bearing out the
contention of the complainant and that of several of the witnesses that the
volume of purchases, rather than the creditworthiness of the customer,
determined a given distributor’s ranking on a standardised scale of
rebates.18
29. Several of the witnesses were examined on precisely this question.
Hence, under searching crossexamination from respondent’s counsel,
van der Bijl, who was employed in the marketing of Ferodo products from
1987 until 1999, insisted that the rebates were standardised and
determined solely by volumes purchased. These exchanges bear
repetition:19
Mr. Brassey: Now these discounts are massaged by reference to
the credit worthiness of the purchaser, the amount of goods that
will be purchased, the volume and sales, etc., aren’t they? There is
not a standard discount given by Ferodo to its purchasers?
Mr van der Bijl: The initial discount off the wholesale price for the
major distributors was a standard discount we would give and the
fortyseven and a half was a discount for a larger…
fortyseven and a half was a discount for a larger…
Mr. Brassey : For a major purchaser?
17 Transcript dated 27 August 2002.
18 See pp 147ff for Mr. Nel’s wholly unpersuasive explanation of why companies like Ford and Robert
Bosch, their creditworthiness notwithstanding, received smaller rebates than did other less wellresourced
companies. In the end Nel seems to suggest that he had simply managed to ‘get away’ with extending a
lower level of rebate to these companies, to dupe them, despite what several witnesses conceded was
general awareness in the market of Federal Mogul’s rebate structure. More plausible is that these
companies did not demand a larger rebate because they understood that their volume of purchases did not
qualify them for an additional concession.
19 Transcript, 26 August 2002, pages 4244 and 46, respectively.
10
And further:
Mr. Brassey: If you started to default in your payments…then if
you as a purchaser started to default in your payments, then
Ferodo would have another look at the discounts wouldn’t it?
Mr. van der Bijl: I’ve never known it to be like that. Obviously we
would address it with the purchaser. We’d never say look you
know you’re getting fortyseven and a half and we need to reduce
because you’re not paying.
And further:
Mr. van der Bijl: …I’ve never been to a major distributor and had to
say, you can’t qualify for that discount.
Mr. Brassey: But it was one of the means in which Ferodo could
effectively respond to inadequacies in its purchasers, was by
cutting the discount?
Mr. van der Bijl : I think they could have if one wasn’t meeting their
sales volumes that they expected. It was purely…You know those
discounts we used to call a volume related type discount, you know
if a major distributor qualified. We’ve had a smaller one, we’ve had
a couple of smaller ones. You qualified for a fortyfive because
their purchases were smaller, but it’s in line with what they’re
purchasing.
And further:
Mr. Brassey: If we look at the discount levels starting from the
bottom, is it fair to say that the smaller you are and the less
creditworthy you are, the less is your discount rate. And I’m
concentrating only on the rebate at 1999 for the moment. Would
you say that’s a fair conclusion to draw?
Mr. van der Bijl: It’s not the way we based it as far as I can
remember. As I say it was purely on credit…was purely on the size
and the volumes one could move. It was volume related. All our
discount structures were volume related at that…to qualify.
30. This account of the manner in which the rebate is determined is borne out
11
in the following exchange between Taylor and the Commission’s legal
counsel on page 102103 of the transcript dated 28 August 2002:
Mr. Coetzee: …if I can look at the payment terms, settlement
discount, credit limit to be approved, and the discount, who decides
on those aspects?
Mr. Taylor: Well it was company policy at the time. Our payment
terms were standard so it wasn’t a question of making a decision.
So the regular terms would have been thirty days and the four
percent20 and in terms of the discount structure, it was also pretty
known….It was standard.
Mr. Coetzee: When you say that the discount was pretty standard, what do you
mean by that?
Mr. Taylor: Well within the discounts that were operating at the very time, this
was the discount level that prevailed. There weren’t, apart from one or two other
levels, depending on where you sat in our business profile, it wasn’t an ad hoc
situation that you could just apply a discount that seemed appropriate on the
occasion.
31. It is left to Nel to assert, in a highly implausible account, that the rebate
was determined by a complex of factors in addition to volumes purchased,
indeed, that the principal determinant of the rebate was creditworthiness,
followed by ‘the strategic nature of the account’, and then, finally, by ‘what
volume, potential volume that they would require as part of the process’. 21
However, later on, Nel himself tries to weaken the effect that
creditworthiness has on the rebate by saying that “creditworthiness is only
one leg of it (the discount). The volume is what thereafter determines it.“
As already intimated, Nel’s inability to render a plausible account, in terms
of relative degrees of creditworthiness, is manifest when he is unable to
account plausibly for why organisations like Ford and Robert Bosch,
clearly customers bearing no credit risk whatsoever, are receiving a lower
clearly customers bearing no credit risk whatsoever, are receiving a lower
rebate than many of Federal Mogul’s larger, though, from a credit
perspective, more risky, customers. Clearly, where the determination of
Federal Mogul rebates is concerned, size does not merely count, it is all.
32. Indeed, Federal Mogul employed another payment instrument to ensure
that their customers were encouraged to honour their credit terms. We
refer to the settlement discount which customers received if they settled
their accounts timeously. Note Nel’s account of why highly creditworthy
customers like Ford and Robert Bosch did not receive settlement
20 This refers to the settlement discount intended to promote timeous settlement.
21 Transcript, 27 August 2002, page 122.
12
discounts:
Mr. Nel: ….But if I can refer to creditworthiness, if you go to the
Samcor Ford account, you’ll see there’s no settlement in there at
all, because I have no doubt in my mind that we’re going to get our
money there. I don’t have to entice them to pay on time. I know
I’m going to be paid and I know my money is sure. If you go to the
Delta account you’ll see there’s no settlement discount, because I
know I’m going to get my money and I will get it on time, no
problem with that either. And that’s really how we structure the
whole process. 22
33. On the evidence presented to us, it is clear that the scale of purchases is
the preeminent, indeed the sole, determinant of the level of the rebate
afforded a Federal Mogul customer. This does not, of course, mean that
Federal Mogul was somehow prevented from using, in selected cases, a
reduction in the rebate to punish a customer for a poor payment record,
that is, for poor creditworthiness. This will have to be established by the
evidence. However, where all the evidence suggests that the rebate is
volume related and that the settlement discount is designed to encourage
timeous payment or creditworthiness, one must approach sceptically the
respondent’s insistence that in this single case it reduced the rebate
because of considerations related to creditworthiness.
34. We should add that on the evidence it is also clear that the level of sales
envisaged and attained by Pee Dee Gauteng justified, on Federal Mogul’s
own practice, the scale of rebate afforded Erasmus. It has been
suggested by the respondent that this was so only as long as Pee Dee
Gauteng ‘s sales were aggregated with those of P&D Natal. However a
glance at the schedule on the record shows that Erasmus’ sales
significantly exceeded those of the Sutherlands, in fact they were double
significantly exceeded those of the Sutherlands, in fact they were double
that of P&D Natal, and were, on their own, in the top five of sales in the
country in 1999. 23 The following exchange between Taylor and counsel
for the Commission, though somewhat ambiguous, bears out the
proposition that Erasmus received the maximum rebate because of the
sales volume attained by Pee Dee Gauteng: 24
Mr. Coetzee: …..I’m asking you did you give him this fortyseven or
did the company which we term PD Gauteng get the fortyseven
and a half percent discount, based on the fact that David
22 Transcript, 27 August 2002, pages 144 – 145.
23 See page 35 of the Respondent’s paginated bundle.
24 Transcript, 28 August 2002, page 105.
13
Sutherland was part of the operation?
Mr. Taylor: He got the fortyseven and half percent because the level that he was
intending to trade at, the creditworthiness and the association. It was a
combination of factors. It transpired later in his dealings that he was able to
stand alone on that fortyseven and a half percent. (our emphasis)
Pee Dee Gauteng’s Creditworthiness
35. We should make clear at the outset, and we will return to this issue in
greater detail, that, evidence aside, Nel’s claim that the level of rebate is
determined by creditworthiness is unconvincing purely as a matter of
conventional business logic and experience. The rebate is determined up
front – indeed the term ‘rebate’ is somewhat misleading because the level
of rebate is simply synonomous with, it is actually the sole determinant of,
the basic price at which Ferodo products are sold to the wholesale
distributors. It is common business practice and makes perfect business
sense to determine price in relation to the volumes purchased. However, it
is certainly not conventional business practice to charge a premium price
to a customer deemed, for whatever reason, to be a credit risk thus
reducing his potential margins and increasing, if anything, the level of
credit risk. If a customer is deemed not to be creditworthy then this
assessment will surely be reflected in the volume of credit extended. It is
also common and sensible business practice to ameliorate the credit risk
by the provision of targeted incentives, such as the settlement discount
offered by Federal Mogul.
36. It is surely then trite that estimates of relative creditworthiness will impact
most directly on the level of credit actually extended. When Pee Dee
Gauteng made its initial purchases during April 1999 from Federal Mogul
Gauteng made its initial purchases during April 1999 from Federal Mogul
the bill was invoiced for payment to P&D Natal. Note that a new credit
application form was not completed because, avers Nel, he had
understood that it was part of the P&D Natal’s account. 25 Both Erasmus
and Sutherland have testified that this was immediately rectified with
Federal Mogul – they both, in other words, aver that the intention was
always that payment be made by Gauteng. 26
25 This averment strikes us as somewhat implausible or, at least, indicative – and by no means the only
indication – of Federal Mogul’s rather cavalier attitude to the extension of credit. Even if we accept that
Nel thought that the newly opened Gauteng entity was trading on the Natal account, the additional amount
of credit required was very significant and the business against which it was extended was an entirely new
business venture. While we do not know the extent of PD Natal’s credit limit, judging from the volume of
sales of PD Natal and Pee Dee Gauteng, the credit required to support the new Gauteng venture must have
equalled or exceeded the credit limit for the long established Natal operation.
26 See transcript: Sutherland on page 89 of 26 August 2002 and Erasmus on page 17 of 27 August 2002.
14
37. A separate account for Pee Dee Gauteng was opened during May after
Federal Mogul was approached with such a request via Van der Bijl. We
were not told who made the request or why it was made, although it
appears that requests of this type were not unusual. It appears that
Federal Mogul’s policy dictated that once a new account was to be
opened – even if only a new branch account – a new credit application
had to be completed. 27 This was done and Erasmus completed it on the
3rd May 1999 although Taylor requested that David Sutherland as the
sole director of the company provide a resolution granting Erasmus the
authority to complete the credit application. However, the Deed of
Suretyship required when granting credit is manifestly defective as
Erasmus and not Sutherland signed it. Moreover, there is no indication
that P&D Natal was standing surety for Pee Dee Gauteng. 28 And yet
when, at the end of the credit application process, the responsible Federal
Mogul staff recommended a credit limit for Pee Dee Gauteng of R1 million,
Nel, of his own volition, upped the limit to R1.5 million! Clearly, at this
stage then – May 1999 – Federal Mogul, and Nel in particular, clearly did
not doubt the creditworthiness of Pee Dee Gauteng.
38. The respondents insist that they believed that P&D Natal stood behind the
account and that this is established by the fact that Taylor requested a
resolution from David Sutherland. 29 However, it is noteworthy that this
credit application arose out of both Sutherland and Erasmus indicating
clearly that the Gauteng operation would be responsible for footing its own
bills. Moreover, the credit check that was done as part of the new credit
application does not reflect an evaluation of P&D Natal’s creditworthiness.
application does not reflect an evaluation of P&D Natal’s creditworthiness.
Again this either represents a remarkable degree of confidence in the
Sutherlands and/or Erasmus or an extremely cavalier attitude to extending
significant trade credit. Clearly it does not reflect the slightest concern at
the creditworthiness of Pee Dee Gauteng.
39. This appears to have been brought home to Federal Mogul by Erasmus’
tardy history of payment in the months that followed. The evidence placed
before us appears to indicate that Erasmus had to be hounded in order to
persuade him to pay his bills. However, this does not appear to have set
27 See transcript, page 123 – 124 of 27 August 2002 where Nel explains Federal Mogul’s policy.
28 In fact the space is left open where ‘P&D Wholesalers (Natal)’ should have filled in its name had it been
providing surety. See page 6 of the Respondent’s records as well as the transcript of 28 August, on page 34,
where Nel says that in his mind the resolution tied P&D Natal to the suretyship.
29 Indeed, it is also consistent with the version that has Taylor, who requested the resolution from
Sutherland (and who requested that Sutherland become a director of Gauteng), attempting to deceive Nel
(who would have ultimately had to sign off on the credit application)
15
him apart from the rest of the trade, indeed from the rest of the retail trade,
who have much to gain from holding back payments to suppliers for as
long as they are able to get away with it – in Nel’s own words ‘if we don’t
chase the money, you just don’t collect it’. What is rather more
remarkable is how Federal Mogul, on numerous occasions, allowed
Erasmus both to pay late and retain his settlement discount.
40. The evidence shows that the first payment for the opening order (April)
was due at the end of June 1999. That payment was in time, however
Federal Mogul was told that the payment in respect of the May order
would be late. 30 This was paid around the middle of July and although it
was late a 5% settlement discount was nevertheless allowed. Nel avers
that this was done in error. The payment due at the end of July was only
received on the 3 rd or 4 th of August and on this occasion the settlement
discount was given after Erasmus went to see Mr Moll, (“Moll”) the
Finance Director of Federal Mogul. This happened again at the end of
August and September.
41. The most that we can conclude from the evidence before us is that
Erasmus was indeed a tardy debtor. 31 Federal Mogul, on the other hand,
seems to have been a remarkably easy touch where credit was concerned
and this is verified both by the generous credit limit granted in the first
place and by Federal Mogul’s persistent reluctance to use the settlement
discount for the purpose for which it was expressly and solely intended,
namely to rein in tardy debtors. Instead they used an instrument – the
rebate – that, even on the respondent’s account, was determined by
multiple criteria but which the evidence and business sense suggest was,
in fact, wholly determined by purchase volumes.
in fact, wholly determined by purchase volumes.
42. However, in order to successfully sustain a prosecution under Section
5(2), the applicant must still establish that a minimum price was enforced
by the respondent against the complainant.
43. It is common practice in the industry to grant the customers of the
wholesale distributors a rebate of 35% thus ensuring a 12,5% margin for
those wholesalers who received the top rebate of 47,5%. 32 Erasmus
30 According to Erasmus he was given 45 days to pay for the order in respect of the second month of
trading. Mr Nel avers that that this is not true see transcript of 27 August, page 3639.
31 Erasmus’ version differs from this. According to him he and Taylor agreed to a credit facility of 60 days
on the first purchase, 45 days on the second purchase and from then onwards 30days see transcript of 26
August 2002 page 140. Taylor, in his answering affidavit, in par. 31.3 mentions that Erasmus requested
payment terms of 40 days, which was given for payments expected after September. However, he doesn’t
mention when Erasmus made this request .
32 See par.11.5, page 12 of Mr Nesidoni’s Filing Affidavit and confirmed by Van der Bijl on page 51 of
16
readily acknowledges that there were limited exceptions to this rule with
each wholesaler from time to time allowing special customers slightly
larger discounts. We are nevertheless satisfied that the convention in the
industry was that the price charged by the wholesalers to their retailer
customers equated to 35% of the Federal Mogul list price.
44. There was no need to monitor this particularly closely. The convention
appears to have been well established, pricing practices appear to have
been transparent, and there was a mere handful of distributors to monitor.
Nevertheless, ad hoc price meetings were held between the large
distributors and members of the Federal Mogul management. 33 One such
meeting was held on 28 May 1999. 34 Erasmus, Mr Hilt from StopIt
Friction, Mr Le Roux from Midas, Taylor and Van der Bijl attended the
meeting which took place at Erasmus’ request. According to Taylor
Erasmus had requested him to attend the meeting so that all the players
could discuss the ongoing price war. While van der Bijl, an active
participant in these meetings, denies that their purpose was to set the
resale price, he acknowledges that they were intended to ensure the
competitiveness of Ferodo in the market. Erasmus’ account portrays them
as meetings at which the pricing practices of the wholesalers were closely
scrutinized. Certainly, once the price war commenced, the wholesalers
utilised this forum to exhort Federal Mogul to discipline Midas. Taylor
acknowledges that the price war was discussed but claims that he was
only asked to act as facilitator at the meeting held on 28 th May 1999. He
denies however that he acted upon any requests. 35
45. Once again we have two conflicting factual accounts. We should note that
45. Once again we have two conflicting factual accounts. We should note that
the mere fact of the existence of the pricing convention lends credence to
Erasmus’ version .36 Indeed Taylor’s attempt to dismiss them as mere
gripe sessions is, when placed in context, incriminating, suggesting that
there was a convention and that the participants in the convention met, at
very least, to gripe about flouting of the convention. Erasmus testified that
Taylor communicated to the wholesalers the consequences of stepping
‘out of line’: ‘Barrie het net ges ê in die meetings vooraf waar ons
bymekaar gekom het, soos wat ek nounou ges ê het, he who steps out of
the Transcript of 26 August 2002.
33See transcript of 26 August 2002 on page 5657 where van der Bijl refers to these price meetings.
34 See transcript of 28 August 2002, pages 1213 and Taylor’s answering affidavit paras 34.335.1 where
he refers to this May 28 th meeting.
35 See footnote 34.
36 See Commission’s Filing Affidavit, Annexure JNN5: par 10 of Erasmus’Affidavit and transcript of 26
August 2002 on page 171, where Erasmus discusses this.
17
line, ons kan sy afslag sny, of we’re going to put him on stop supply’ .37 It
is common cause that both van der Bijl and Taylor attempted to dissuade
Erasmus from participating in the price war. 38 Taylor avers that he did
this in order to ensure that Erasmus and the other distributors did not cut
their margins to commercially nonviable levels, although he does not
explain how he expected them to remain commercially viable with Midas
competing away their customer base.
46. However, we do not have to determine which of these accounts of the
price meetings is correct. We are satisfied – and this has never been
denied with any conviction – that the conventional 35% discount was well
known and this, coupled with evidence of sanction for violation of the
convention, is sufficient to secure a finding against the respondent.
47. Moreover, there is, in our view, clear evidence that the rebate was
reduced in response to Erasmus’ participation in the price war. This
evidence is contained in the meeting at Erasmus’ office on the 1 st of
October 1999 with Taylor and van der Bijl and in Moll’s letter to the
Commission of the 19 th of November 1999. 39 This version is corroborated
by a further exchange of correspondence between Erasmus, his attorneys
and Moll in late October regarding the possible reinstatement of the
rebate at the initial level.
48. The salient facts concerning the meeting of the 1 st of October 1999 are:
• A meeting between Federal Mogul and Midas took place on 6
September 1999, according to Taylor. Taylor, in his affidavit, 40 admits
that this meeting was held for the purpose of conducting a business
review with one of the first respondent’s larger distributors and where
the price war was also discussed. Reference is also made to such a
the price war was also discussed. Reference is also made to such a
meeting by Erasmus and by Van der Bijl who testified that he knew
that ‘they did address it (the price war) to try and put a lid on it to try
and get it back to normality’. 41
• Van der Bijl avers – and this has not been denied – that Taylor and Nel
37 Transcript of 26 th August 2002 on p171. .
38 See transcript of 26 August 2002 on page 59 and transcript of 28 August 2002, page 112.
39 See Annexure JNN12 of the Commission’s Filing Affidavit.
40 See Taylor’s affidavit on page 251 of the record, par. 35.1.
41 For Erasmus’ testimony in this regard see transcript of 26 August 2002 on page 176 and Van der Bijl
page 55 of the same transcript.
18
had a further meeting with Midas managers, to discuss the issues
relating to the price war, on the day before Federal Mogul took the
decision on the 30 th of September, at their regular end of the month
review meeting, to cut Erasmus’ rebate. 42
• Subsequent to the decision taken at a regular review meeting between
Federal Mogul executives on the 30 th September, Taylor phoned Van
der Bijl early on the following morning, the 1 st of October, and told him
that he was required to accompany Taylor to Erasmus’ office in order
to inform the latter of Federal Mogul’s decision to cut his rebate. Van
der Bijl avers – and this is not denied – that he remonstrated with
Taylor, expressing the view that it was not fair to punish a follower,
Erasmus, in the price war, while allowing the leader, Midas, to escape
unscathed. It is instructive that the question of Erasmus’ payment
record was apparently never raised in the disagreement between the
two Federal Mogul managers. Certainly, in van der Bijl’s recount of
this conversation he assumed that the reduction in the rebate arose
out of the price war and there is no evidence of Taylor disabusing him
of this.
• It is common cause that Taylor opened the meeting by accusing
Erasmus of participation in the price war. Erasmus called in a member
of his sales staff, Ms. Cindy Esterhuysen, and asked her to produce
sales records that would establish his innocence. Esterhuysen
confirmed that she had done as instructed – she produced the
documentation required and it established that Erasmus had charged
the customers in question at the conventional 35% of Federal Mogul’s
list price. 43 Taylor informed Erasmus that he nevertheless had
instructions to inform him that his rebate was to be cut to 40% with
immediate effect. Taylor suggests that the discussion of the price war
immediate effect. Taylor suggests that the discussion of the price war
was simply a preliminary discussion of business issues before getting
down to the real purpose of the meeting. Mr. Brassey insists that
raising this issue was consistent with the explanation offered by the
respondent for cutting the rebate – Erasmus’ margins, and hence his
ability to pay his debts timeously, were under threat as a result of his
participation in the price war. Hence, respondent’s counsel argues, it
made sense for the meeting to commence with a discussion of the
price war. 44
42 See his witness statement made on 15 August 2002, page 8 par 17.
43 Transcript of 27 August 2002, page 2
44 Note that this latter explanation was advanced by respondent’s legal counsel. Taylor, the respondent’s
witness who actually testified as to this meeting simply portrayed the discussion of the price war and the
19
• The 1 st October was the day on which payment for Erasmus’ August
purchases was due. Not only does there not seem to have been any
discussion of Erasmus’ tardy payment record at the meeting – unless,
of course, one accepts the explanation that discussion of the price war
was in reality discussion of the debt – but Taylor departed without any
attempt to collect the money owing to Federal Mogul. Indeed, as will be
elaborated below, within a few days of this meeting Federal Mogul
received and processed the largest order that it had ever received from
Erasmus despite the fact that he had still not paid his account. We find
this quite extraordinary – it belies the concern that Taylor’s
overwhelming concern was with Erasmus’ creditworthiness.
• There was also a clear indication from Taylor that the reduction in the
rebate would not be of a lengthy duration, not, in other words, of the
sort of duration required to reestablish Erasmus’ creditworthiness or to
reduce his purchases to a level Federal Mogul would consider
sustainable. This is elaborated below.
49. It is our firm view that the meeting of the 1 st October is sufficient to
establish the complainant’s contention that his rebate was cut because of
his participation in the price war. However, there is a second piece of
evidence that lends further credence to this view. We refer to the letter
addressed to the Commission by Moll, the respondent’s financial director.
50. On the 12 th November 1999, the Commission addressed a letter to Nel. 45
This letter, entitled ‘alleged anticompetitive conduct by Federal Mogul
Aftermarket Southern Africa (Pty) Ltd’, laid out the complaint received by
the Commission from Pee Dee Wholesalers (Pty) Ltd. It informed the
respondent that the complainant’s allegation ‘might constitute a
respondent that the complainant’s allegation ‘might constitute a
contravention of the Act’ and requested Federal Mogul to assist the
Commission with its enquiries by furnishing specified information including
‘the company pricing and/or marketing strategy’, the ‘criteria for giving
discounts’, ‘the rationale for decreasing the discount offered to Pee Dee
by Federal Mogul’, and ‘any business or/and public interest justification for
the above conduct’.
51. It appears that Nel was out of the country when this letter was received
and Moll, a senior executive, perceiving the urgency of the request – the
question of Erasmus’ alleged involvement therein as mere preliminary chatter.
45 See Annexure LSD 4 page 8081 of the record.
20
Commission explicitly requested a response by no later than the 19 th
November – took it upon himself to address the Commission’s queries.
This he did in a letter addressed to the Commission on the 19 th
November.46
52. Moll’s letter is revealing. It is also, we believe, particularly and refreshingly
candid, drafted without prior legal advice and based entirely upon the
working knowledge of a senior member of the respondent’s staff. 47
53. In response to the Commission’s request for an explanation of ‘the
rationale for decreasing the discount offered to Pee Dee by Federal
Mogul’, Moll wrote:
‘The discount originally offered to Pee Dee was as a result of them trading
as part of the P&D group which qualified them for a discount based on the
volumes which would have been purchased by this group. After
discussion with Pee Dee, it was clarified that Pee Dee was not part of
P&D Wholesalers cc (confirmed by P&D Wholesalers cc) and therefore
would not enjoy the volume discounts applicable to a group of that size.
Conditions of supply were based on the credit application, suggesting that
the companies were connected. Pee Dee entered into a price war
situation, which disrupted the market, causing problems for other
FederalMogul users.’ (our emphasis).
54. In response to the Commission’s request for ‘any other information that
may be off assistance to the Commission in this regard’ Moll wrote:
‘The complainant left the business of one of our other customers,
where he was a senior employee. On the basis of attracting new
business FederalMogul agreed to supply him, but it soon
transpired that his focus was his previous employer’s customer
base.’
‘Whilst this is acceptable:
46 See Annexure LSD6 page 8487 of the record.
base.’
‘Whilst this is acceptable:
46 See Annexure LSD6 page 8487 of the record.
47 Note that Moll had been present at the debtors meeting at the end of September at which the decision to
cut Erasmus’ rebate was apparently discussed. Note too that, despite the fact that upon Nel’s return he was
shown the Commission’s letter and Moll’s reply, no attempt was made to disavow it – this was only done
in the papers filed for the hearing of the complaint. Indeed, although Moll claimed that Nel was ‘…so
unhappy with the contents of that letter that he was going to refer it to legal advice’, Nel himself testified
that ‘in fact I read the letter afterwards, after, and upon my return and by and large I was fairly, reasonably
happy with our response. There was no reason for me to outrightly reject it’ and that Moll had, in Nel’s
estimation, responded ‘…honestly and as he saw it at that point in time based on the knowledge that he
had.’
21
The price war that Pee Dee embarked on was causing other
customers to follow suit and reduced gross margins to 12%.
Several appeals were made with the complainant to adjust
his pricing as the margins attainable were insufficient to
conduct business effectively. In terms of free enterprise, it
was unacceptable to FederalMogul as his appointment as a
distributor was to attract new business and grow our market
share.
The complainant’s payment record has been erratic and has
consistently requested extension on his credit terms. In
October he failed to meet an extended deadline for payment
resulting in him being put on stop supply and we have
subsequently had to obtain a court order to uplift unpaid for
inventory’
The salient aspects of Moll’s response to the Commission’s queries are:
In the paragraph explaining why the rebate was cut, Moll
explains that the initial discount was based on the assumed
relationship with P&D Natal and the volumes that were
consequently attributed to the combined operation. We have
already dealt with this. When, at the end of the paragraph,
Moll turns to rationalising the reduction of the rebate he
states quite unambiguously that Pee Dee ‘ entered into a
price war situation, which disrupted the market, causing
problems for other Federal Mogul users’;
Read together with the second extract cited it is clear that
the ‘other Federal Mogul user(s)’ for whom Pee Dee’s action
was ‘causing problems’ was in fact Midas, because despite
the fact that, avers Moll, Federal Mogul had appointed
Erasmus to attract new business ‘…it soon transpired that
his focus was his previous employer’s customer base ’;
Moll’s letter corroborates the evidence already on record that
attempts had been made to dissuade Erasmus from
attempts had been made to dissuade Erasmus from
participating in the price war, or, in Moll’s words, ‘ to adjust
his pricing ’, and;
The retribution exacted by FederalMogul for Erasmus’
‘erratic’ payment record was, in fact, the termination, in
22
October, of his supply – ‘in October he failed to meet an
extended deadline for payment resulting in him being put on
stop supply …’
55. Moll was naturally crossexamined at some length by the Commission.
He proved to be a highly defensive, evasive and implausible witness.
Consider, for example, the following exchanges between Mr. Alan
Coetzee, the Commission’s legal counsel, and Moll: 48
Mr. Coetzee: …what did you mean with the words ‘which disrupted
the market?
Mr. Moll: Disrupting payment to me on account. It indicates a
possible situation of late payment, cash flow problems.
Mr Coetzee: But the word market then…
Mr. Moll: Market is the general market.
Mr. Coetzee: General market. And how would the late payment by
a client affect other Federal Mogul users?
Mr. Moll: Well then all, Federal Mogul’s probably not the right word
there, its Ferodo users would be involved in the price war. Brake
pad purchases, customers, people involved in the brake pad
market.
Mr. Coetzee: But reading that sentence as it is written there the
price war disrupts the market and this disruption in the market is
the concern to other Federal Mogul users so my question to you is,
how would the disruption in the market affect the other users?
Mr. Moll: It’s….a price war would affect all the players in that
market.
Mr. Coetzee: And how would that be problematic.
Mr. Moll: They would be, there would be cutting of prices in that
market.
Mr. Coetzee: And would that be a concern to Federal Mogul or
48 See Transcript, 28 August 2002, pages 72 and 80, respectively.
23
would that be a concern to the users?
Mr. Moll: I don’t know. I couldn’t answer you. It would be a concern
from the creditor’s point of view, yes.
And further:
Mr. Coetzee : How did you understand that the appeals to adjust his
pricing would contribute to his credit or payment, to his payment of
the account?
Mr. Moll: Well the appeals would be to improve his cash flow and
therefore to pay his account.
Mr. Coetzee: But here in this letter you saying ‘several appeals
were made to adjust his pricing’?
Mr. Moll: I can’t really comment further on my wording there but
my intention was that to improve his cash flow, to sustain his
business. Unsustainable business would affect his cash flow.
56. Moll’s difficulties are considerable. His efforts to cast some of the highly
incriminating remarks contained in his letter as expressing an intent to
force Erasmus to trade at a lower level and so improve his cash flow and,
thus, his creditworthiness, are clumsy and disingenuous. However, this
has not discouraged Nel from repeating this argument.
57. Nel’s account reveals that it is not only the evidence that conflicts with the
respondent’s version, but so too does business logic. On Moll and Nel’s
version the company had concluded that the extent to which margins had
been cut in the price war was increasing the credit risk entailed in
supplying Pee Dee Gauteng. In these circumstances the supplier
responded, or so they would have us believe, by taking action designed to
cut Erasmus’ margins further. This approach would, if anything, predict a
higher level of trading – thin margins are only profitably sustainable at very
high volumes, at volumes that generate high cash flows. For example, a
large grocery chain can sustain the notoriously low margins that enable it
to price competitively because of the volumes at which it trades; the
to price competitively because of the volumes at which it trades; the
corner caf é, on the other hand, charges higher prices because volumes
are low and high margins are required to generate sufficient cash flow. 49
49 Indeed, so implausible are Nel’s arguments that he is finally left to advance the truly ridiculous
proposition that the intention of the rebate cut was to force Erasmus to market a greater share of the product
of Federal Mogul’s competitors.. This is the first – and may well be the last – occasion on which we have
24
58. In this context it is interesting to note that immediately after his rebate was
cut Erasmus placed, and Federal Mogul executed, the largest order ever
placed by Pee Dee with Federal Mogul. This transaction in fact resulted in
Pee Dee exceeding its agreed credit limit. The respondent has attempted
to cast this as an error on its part and fraud on the part of Erasmus who
never paid for these goods.
59. However, if error it be, then it was an error of the most startling
dimensions. Nel would have us believe that there was massive concern at
board and senior executive level regarding Erasmus creditworthiness.
Urgent and unusual steps were then taken with the express intent, we are
told, of forcing Erasmus to trade at a lower level. However, despite the
senior executives’ apparent preoccupation with this problem, despite the
fact that they were careful to communicate their decision to cut the rebate
to their operational staff 50, they managed, a mere four days after they had
cut his rebate allegedly because of his tardy payment record and poor
creditworthiness, to allow him to make an order that exceeded his credit
limit. At the stage when this unusually large October order was executed
Erasmus had not even paid the considerable sum due to Federal Mogul
on the 1 st October.
60. This may be an error. But on a balance of probabilities, a more likely
explanation is that the reduction in the rebate was never intended to force
Erasmus to trade at a lower level or to improve his payment record and
so, despite the executives’ assiduous attention to their dealings with
Erasmus, these aspects of the relationship were not monitored. This is
because the reduction was not concerned with these matters. It was
rather intended to convey a short, sharp message to those involved or
prospectively involved in the price war with Midas. The entry of Pee Dee
prospectively involved in the price war with Midas. The entry of Pee Dee
into Gauteng had achieved its purpose – it had finally woken up Midas
which was now trading robustly, albeit that it had been compelled to break
the rules of the game by resorting to price cuts in order to restore the
status quo ante in which they were Federal Mogul’s largest customer for,
inter alia, Ferodo products.
61. However, a number of other distributors, including Erasmus, who had, as
a result of offering a superior service, prospered at Midas’ expense, were
not willing to return their hardwon gains to Midas. Accordingly, they
been asked to accept that the objective of a given strategy was to encourage the customer at whom it was
directed, a customer, moreover, who everyone acknowledges to be a particularly gifted trader, to support
the competitors!
50 The purchases made in early October were at the reduced discount decided on a few days earlier.
25
resisted Midas’ price cuts by responding, albeit reluctantly, in the same
currency, the currency that some dub ‘price war’ but which others, of less
melodramatic inclination, identify as ‘competition’. But Federal Mogul was
having none of this. The rejuvenated Midas was going to be given the
opportunity to regain ‘its’ lost customers and Erasmus and the others,
having provided the necessary prod to Midas, were expected to focus their
attention on winning new custom from among Ferodo’s competitors rather
than from raiding the customer base of Federal Mogul’s most important
client. It is common cause that Federal Mogul attempted to discourage
Erasmus and the other distributors from their efforts to match or better
Midas’s price. When their exhortations failed they imposed the most
powerful sanction available to them: they increased the price (reduced the
rebate) of their product.
62. There are, in fact, strong indications that both Erasmus and, more
important, Federal Mogul, understood that the reduction in the rebate
would be of a short duration, of considerably shorter duration, that is, than
the time needed to establish lower trading levels or even to restore
creditworthiness.
63. Consider Taylor’s testimony regarding the meeting of the 1 st October, the
meeting at which Erasmus was informed of the reduction in his rebate: 51
Mr. Taylor : …I said Koos I’m sorry, but the decision our Board has
taken is that your discount is going to be reduced to forty percent
(40%). Naturally there was a bit of stunned silence and I think
rather in shock he said well for how long? I said actually I don’t
know. I said you need to go and reflect on this and decide how
you’re going to conduct your business. I said I don’t even know,
we didn’t cross that bridge, but I undertook to phone him back later
we didn’t cross that bridge, but I undertook to phone him back later
in the day which I did, regarding the question of how long.
Mr. Manoim: And how did you answer the ‘how long’ question?
Mr. Taylor: I said to him when I phoned him back that we hadn’t
discussed that and the decision was certainly not permanent, but it
would need to be reevaluated after we’d got ourselves through the
current predicament.
64. This is further borne out by another exchange of correspondence involving
Federal Mogul, Erasmus and Erasmus’ attorneys. On the 27 th October –
51 See Transcript, 28 August 2002, pages 128129.
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a mere 27 days after Federal Mogul informed Erasmus of the reduction in
his rebate – Moll addressed a letter to attorneys representing Erasmus.
This letter states
‘I have had discussions with Mr. Nel regarding your client’s
complaint. We are willing to discuss the restoration of the original
discount to your client and would request a meeting with him to
discuss this matter’
65. On the following day Erasmus addressed the following facsimile to Moll:
‘A note to confirm our teleconversation of the 27/10/99 and avoid
any misunderstandings.’
‘In accordance with your fax dated 27 th October indicating your
willingness to discuss restoring my discount, you confirmed that
you would liase with Mr. Nell (sic) and Mr. Taylor and contact me
back with a view of setting up the proposed meeting at P&D’s
offices with the mentioned two gentlemen A.S.A.P.
66. Moll was asked under crossexamination to explain what motivated this
apparent change of heart. His response is a model of evasion, being
mostly taken up with a rather irrelevant effort to distinguish between being
willing to restore the discount and being willing to discuss restoring the
discount.
67. Once again the unfortunate Moll’s difficulties are easily appreciated
because this exchange of correspondence is a further indication that the
intent of the rebate cut was not to force Erasmus to reduce his trading
levels – per definition this objective cannot have been achieved at the
stage that they expressed their willingness to restore the rebate. In fact,
at that stage Erasmus, who was still on ‘stop supply’, had not yet settled
the amount owing to Federal Mogul as of the 1 st October and he had
received a large additional volume of stock in the first week of October for
which he had not paid. 52 And yet Moll ‘requests’, on behalf of Nel, a
which he had not paid. 52 And yet Moll ‘requests’, on behalf of Nel, a
meeting with Erasmus to ‘discuss the restoration of the original discount’,
with nary a mention of ‘creditworthiness’ or ‘trading levels’.
68. We can only conclude that the reduction in the rebate was intended to
illustrate to Erasmus and other actual or wouldbe trangressors the
52 Although much of the stock delivered after the 1 st October had already been repossessed.
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consequences of not playing by the rules. What was required of Erasmus
was some evidence of his willingness to adhere to the pricing conventions
in the industry – we infer that this is the ‘conduct’ that Taylor cryptically
asked Erasmus to ‘reflect on’ when they met on the 1 st October.
69. The respondent has made much of the fact that Pee Dee has been
singled out for retribution when it is common cause that Midas had
initiated the price war and it appears, moreover, that other distributors
(additional, that is, to Pee Dee) participated therein. Why then take action
against Pee Dee? Why not act against Midas?
70. It is not clear that this question has to be resolved, although it is already
largely answered. We have already outlined the elements of the practice
of resale price maintenance – an understanding regarding the pricing
conventions governing the activities at issue; and a credible sanction in
place to enforce it. It is not clear that a finding on a section 5(2) violation
requires that the choice of the precise target of the sanction be explained.
Had Federal Mogul chosen to ‘make an example’ of Midas or, for that
matter, any of the other participants, it would have been equally culpable
of contravening Section 5(2) of the Act. Strictly speaking, this is not our
concern – our concern is not with the harm suffered by Erasmus, but,
rather, with the harm inflicted on the competitive process.
71. However, the respondent implicitly suggests that if we are unable to
isolate a motive for making Erasmus a scapegoat for his involvement in
the price war, then there must be some other reason for the rebate cut
inflicted on Erasmus alone. The respondent effectively contends that, in
the absence of an explanation related directly to the price war for why
the absence of an explanation related directly to the price war for why
Federal Mogul singled out Pee Dee for retribution, we should infer that the
true motives underlying Federal Mogul’s action were rooted in Erasmus’
trading levels and creditworthiness.
72. It is nevertheless clear why Federal Mogul would not have acted against
Midas, just as it is clear why Erasmus was the preferred target for
retribution.
73. Midas was Federal Mogul’s largest customer, not merely of the latter’s
friction products division but of the range of products supplied by the
respondent. Moreover, Midas’ status as a ‘fullline’ wholesaler squared
neatly with Federal Mogul’s strategic direction as mapped out by its US
shareholders and executed by the new CEO of its South African
operation, Nel. Recall Nel’s testimony in which he outlined how he had
been instructed by his shareholder to combine the four South African
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businesses into one, and how a pillar of Nel’s approach to this task was a
reduction in the number of the distributors of his company’s products. It
requires no great insight to conclude that a fullline wholesaler like Midas
as opposed to a singleproduct specialist like Pee Dee was the natural
complement to Nel’s strategy. Federal Mogul’s new strategic direction
dictated that its longterm interest lay with Midas.
74. The problem, of course, was that Midas, or, at very least, its friction
products division, was floundering and losing market share to Federal
Mogul’s competitors. This had to be addressed urgently, an imperative
that was clearly perceived by Taylor, if not necessarily by Nel himself.
Enter then Erasmus, a skilled trader with wide experience of the Gauteng
market.
75. Erasmus was, from the point of view of Federal Mogul’s immediate
interest, a heavensent opportunity. He immediately made a significant
contribution towards arresting the decline in Ferodo sales as evidenced by
the rapid ascent of his new business. However, contrary to Federal
Mogul’s stated preference, he did not confine his efforts to regaining
business lost by Midas, but he also took business away from his erstwhile
employer – recall both Moll and Taylor’s disquiet at the fact that Erasmus
did not confine himself, in Moll’s words, to ‘attracting new business’, but
that he also encroached on ‘his previous employer’s customer base’.
From his recent experience in the leadership of Midas’ friction products
business, Erasmus understood, like no other, the shortcomings in Midas’
competitive offering. He offered to the market what Midas was unable or
unwilling to provide and so won market share from his much larger and
better established competitor.
better established competitor.
76. By challenging Midas in this way Erasmus provided the necessary
competitive fillip to his underperforming competitor, Midas. Midas
responded by decreasing the price of Ferodo products in a clear, and,
from the perspective of those interested in promoting competition,
perfectly legitimate effort to regain lost market share and to prevent further
erosion of its customer base.
77. Erasmus and the other Gauteng wholesalers were deeply offended by
Midas’ actions. They had played by the rules – in their efforts to compete
with Midas they had not initiated a price war but had simply offered better
service. However, Midas responded by initiating a price war. Erasmus
and his colleagues prevailed on Taylor to restore order. But by this time
the shortterm problems encountered by Federal Mogul occasioned by
Midas’ travails were rapidly receding. Midas, which for all the reasons
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outlined above, was Federal Mogul’s preferred interlocutor, was
reasserting itself. No doubt Midas, once it had secured its existing
customer base and regained its lost market share, would raise its price
thus restoring order to pricing in the industry. Calm would then be
restored to the friction products realm – prices would be stable and Midas
would be top dog. Erasmus and his colleagues would be provided with
incentives to go out into the market and win new business for Ferodo,
Midas’ share having been effectively ruled out of their bounds.
78. Accordingly, the only response that Taylor was willing to make to the
entreaties of Erasmus and others was to exhort them to desist from
participating in the price war, to desist, in other words, from competition
with Midas. Eventually Erasmus and, it appears, certain other distributors,
responded to Midas’ price cutting strategy by cutting their own prices.
Erasmus clearly played a leading role in this. He had gained most
immediately from Midas’ underperformance. He had already proved
himself eminently capable of taking business away from Midas without
resorting to the expedient of price competition. To now permit him to cut
prices not only renewed the threat to Midas but may have also sounded
the death knell on orderly pricing in the friction products business.
79. For all these reasons Erasmus was the obvious rogue that Federal Mogul
had to discipline if calm was to be restored. Federal Mogul did not
necessarily wish to drive him from the market altogether and so they did
not attempt to withhold supply even though his tardy payment record may
have afforded them the opportunity to do so. Instead, Federal Mogul cut
Erasmus’ rebate, effectively rendering it impossible for him to increase the
Erasmus’ rebate, effectively rendering it impossible for him to increase the
rebate that he, Erasmus, offered to his own customers. In so doing
Federal Mogul would be signalling to the other participants or wouldbe
participants in the price war that this sort of conduct had no place in the
longterm future of the business. And they would be confirming to Midas
(and to the other wholesalers) that, in terms of Nel’s longterm strategic
vision, it, Midas, was the preferred partner of Federal Mogul.
Conclusion and Finding
80. We find, then, that the distribution of Ferodo products was governed by a
wellknown and clearly understood convention regarding pricing. In terms
of this understanding wholesalers made Ferodo products available to their
customers at a price equivalent to 35% of the Federal Mogul Aftermarket
list price. Moreover, it has been established that periodic meetings, the
socalled ‘pricemeetings’, were held, involving both Federal Mogul and
the wholesalers of Ferodo products for the purpose of monitoring
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compliance with this understanding. It was, furthermore, understood that if
the rebate that the wholesalers granted their customers was not
maintained in accordance with this understanding, that this conduct would
invite a form of sanction from Federal Mogul. Finally, on the evidence
before us we are persuaded that, in order to enforce this understanding
regarding pricing, Federal Mogul increased the price at which Ferodo
products were made available to the complainant in this matter.
81. We, accordingly, find that the first respondent has acted in contravention
of Section 5(2) of the Competition Act.
28 January 2003
D. Lewis Date
Concurring: M. Moerane and N. Manoim
Attorney for Respondent:Clarke S Smith of Woodhead Bigby & Irving
Counsel for respondent:Jerome Wilson and Martin Brassey
For Competition Commission: Allen Coetzee
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