Competition Bureau submission to the consultation on the socio-economic and environmental study on remanufacturing and other value-retention processes in Canada

Competition in the circular economy

November 3, 2021

Table of Contents

Overview

The Competition Bureau (“Bureau”) is pleased to make this submission to Environment and Climate Change Canada (“ECCC”) on its consultation on the 2021 Socio-economic and environmental study of the Canadian remanufacturing sector and other value-retention processes in the context of a circular economy (“Study”).

In short, the Bureau recommends that a national strategy be adopted that embraces competition in aftermarket services. A national strategy that removes barriers to businesses’ entry and expansion in the remanufacturing and other value-retention processes sectors, especially for independent businesses, would provide consumers with greater choice and lower prices. This could provide purchasers or users with either a cost-effective extension of their products’ life or an as-new-or-better product with a full new life – in the case of remanufacturing. In either case, measures aimed at enhancing competition in aftermarket services could further the objectives of a Canada-wide Strategy and Action Plan on Zero Plastic Waste.

Introduction

The Bureau applauds ECCC for commissioning the Study as a first step toward the implementation of a Canada-wide Strategy and Action Plan on Zero Plastic Waste, through the development of a national strategy to encourage the remanufacturing and other value-retention processes (“VRPs”) in Canada.

VRPs are defined as “activities, typically production-type activities, that enable the completion of, and/or potentially extend a product’s service life beyond traditional expected service life. These processes include arranging direct reuse, repair, refurbishment, comprehensive refurbishment and remanufacturing.”^{Footnote 1} A national strategy for removing barriers to the development of VRPs in Canada could promote competition, especially for VRPs undertaken by independent businesses — that is, organizations or businesses not affiliated with original equipment manufacturers (“OEMs”).

The Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace. As part of its mandate, the Bureau promotes and advocates for the benefits of competition based on the guiding principle that competition is the best way to improve choice, lower prices and spur innovation in the Canadian economy.

Increasing evidence of the negative impact of plastic pollution on human health and the environment^{Footnote 2} supports the case for VRPs as offering social, economic and environmental opportunities that could also promote pro-competitive benefits.

For each of the targeted sectors, the Study identifies barriers to greater uptake of VRP activities and proposes a strategy to overcome such barriers. As some of those barriers prevent or deter the entry or expansion of businesses in VRP activities, the Bureau is of the opinion that the implementation of a national strategy aimed at removing or lessening those barriers could result in greater choice and competition in VPRs activities and benefit Canadian consumers and businesses.

Drawing from the lessons learned in the Bureau’s advocacy work related to the “right to repair,”^{Footnote 3}this submission highlights how a pro-competitive national strategy can benefit

1. independent businesses in strengthening their ability to compete in aftermarkets, and
2. customers or consumers in broadening their choices.

The national strategy should promote independent businesses’ ability to compete

Markets that allow businesses with VRP activities to compete effectively, by challenging the price and service offerings of incumbents, are likely to produce significantly better outcomes for purchasers than those that do not. In competitive markets, OEMs, authorized dealers and independent businesses would be expected to compete more vigorously with respect to the provision of products or services, whether new or related to VRPs.

As mentioned in the Study, the competitive dynamics between independent businesses and OEMs are central when considering VRP products and services.^{Footnote 4} For example, independent businesses do not necessarily have access to the design specifications of original equipment. Typically, they expend substantial effort to reverse engineer designs before rebuilding. This requires a particular engineering skill set, often hard-won by time-served engineers and technicians.^{Footnote 5} This is particularly true as products become more complex.^{Footnote 6}

In its 2018 report, the United Nations Environment Programme’s International Resource Panel (“IRP”) noted that the desire of OEMs to prevent competition from VRP products and third-party VRP producers is one of several key factors impeding the growth of VRPs.^{Footnote 7} That report noted that OEMs hold the greatest power within the full service life VRP system, as they are the owners of the intellectual property, product design specifications and locational information for obtaining the product or part needed for VRP activities.^{Footnote 8} Competitive OEMs wishing to limit third-party activity in the market have been known to withhold these important types of information, ultimately preventing more comprehensive VRPs from developing.^{Footnote 9}

In 2017, the Australian Competition and Consumer Commission (“ACCC”) completed a market study of the automobile industry that revealed competition issues, especially in relation to access to tools, replacement parts and the information required to perform repair work.^{Footnote 10} Earlier this year, the ACCC completed a market study of agricultural machinery, which confirmed these same competition issues, as well as the challenges related to the operation of some agriculture machinery with non-OEM replacement parts.^{Footnote 11}

In 2019, the United States Federal Trade Commission (“FTC”) convened a workshop on repair restrictions and sought input from consumers, independent businesses, manufacturers and others.^{Footnote 12} Through this workshop, the FTC gathered evidence that manufacturers and sellers may be, without reasonable justification, restricting competition for repair services in numerous ways.^{Footnote 13} These restrictions include:

• imposing physical restrictions;
• restricting the availability of parts, manuals, diagnostic software and tools to manufacturers’ authorized repair networks;
• using designs that make independent repairs less safe;
• limiting the availability of telematics information (i.e., information on the operation and status of a vehicle that is collected by a system contained in the vehicle and wirelessly relayed to a central location, often the manufacturer or dealer of the vehicle);
• asserting patent rights and enforcement of trademarks in an unlawful, overbroad manner;
• disparaging non-OEM parts and independent repair;
• using unjustified software locks, digital rights management and technical protection measures; and
• imposing restrictive end user licence agreements.^{Footnote 14}

Addressing these issues involves actions at various levels, including law enforcement,^{Footnote 15} as well as legislative and regulatory changes at the federal, provincial and territorial levels^{Footnote 16}. Indeed, barriers to the ability of independent businesses to compete in VRP activities could be reduced by changes such as the one currently contemplated by Innovation, Science and Economic Development Canada (“ISED”) with respect to the copyright framework^{Footnote 17} or that in Quebec with respect to consumer protection law.^{Footnote 18}

As such, the Bureau welcomes that this study acknowledges the federal government’s important role with respect to VRPs, as well as the need for a highly coordinated or harmonized approach between Canadian jurisdictions.^{Footnote 19}

In addition to the competitive dynamics between independent businesses and OEMs, it is worth mentioning the central role of small and medium-sized enterprises (“SMEs”) in driving innovation and providing consumers with competition and choice for aftermarket services.^{Footnote 20} The Study notes the importance of actively supporting SMEs in delivering objectives that are environmentally and economically desirable from Canada’s national viewpoint,^{Footnote 21} especially in the recovery from the pandemic.

Finally, the Bureau acknowledges that OEMs may have legitimate reasons to restrict access for aftermarket services. Those reasons could be concerns related to innovation, reliability, security and privacy for example^{Footnote 22}. Considering how serious those concerns could be, they should be supported by evidence and not be used as a cloak to shield businesses from competition.

The national strategy should empower consumers

Competitive markets empower consumers by allowing them to choose the products and services that best meet their needs, at a price they are willing to pay.^{Footnote 23}

A national strategy that removes barriers to businesses’ entry and expansion in VRPs, especially for independent businesses, could provide consumers with greater choices and lower prices.

Competitive markets could increase consumers’ choices between new products and those that underwent VRPs. As mentioned in the Study, VRPs could provide purchasers or users with either a cost-effective extension of their product’s life or an as-new-or-better product with a full new life — in the case of remanufacturing.^{Footnote 24}

A wide variety of product and service options can particularly benefit consumers and businesses. For repair services, for example, they could choose between self-repair and their preferred third-party repair services. This could be particularly beneficial for consumers and businesses in rural and remote areas that may face long wait times and greater difficulty accessing an OEM’s authorized repairer compared with those in urban areas.^{Footnote 25}

The IRP report notes that VRPs make significant cost reductions possible, since a large share of the costs to the producer are offset by the reduced requirement for new input materials and associated processing costs.^{Footnote 26} As such, lower-priced VRP products or services could create potential new customers and consumer segments, at different levels for each different VRP, in particular with customers whose budget constraints may previously have prevented such engagement.^{Footnote 27}

Finally, competition in VRPs would allow consumers to make informed choices and hold businesses accountable.^{Footnote 28} For that reason, the Bureau encourages measures that promote better access to accurate information on certain relevant aspects of goods for which businesses could compete.^{Footnote 29}

Conclusion

The Bureau looks forward to the forthcoming proposals that will be submitted in the national strategy to encourage the development of VRPs in Canada. As highlighted above, measures aimed at addressing barriers to entry and enhancing competition for aftermarket services would provide consumers with greater choice and lower prices. This could provide purchasers or users with either a cost-effective extension of their products’ life or an as-new-or-better product with a full new life – in the case of remanufacturing. In either case, measures aimed at enhancing competition in aftermarket services could further the objectives of a Canada-wide Action Plan on Zero Plastic Waste.

The Bureau works with regulators and policymakers to ensure their policy goals can be achieved while maximizing the intensity of competition. The Bureau has designed a Competition Assessment Toolkit to assist policymakers in identifying competition issues at an early stage, and then making use of the resources available to them — including the Bureau — to tailor policies appropriately to maximize the benefits of competition to the economy.