11/1/1998
Washington Way: The Prebate Program Is A Threat To Remanufacturing.
By Mike Conlon
Imagine the following news item on August 1, 2001: "Today XYZ Corp., a major automobile parts supplier, announced that it will offer a 10% rebate on each of its new vehicle parts if the purchaser will agree to sign an agreement not to resell the part but to either return it to XYZ Corp. or scrap it after using it. XYZ’s plan is similar to those announced by other major automobile parts suppliers."
The idea of an OE manufacturer offering to sell a part for a lower price if the part’s use is limited to a single life cycle sounds far-fetched doesn’t it? However, if such a plan actually existed, it could substantially affect the availability of cores and change both the method of operation and the independence of most rebuilders throughout the country. Well, unfortunately, similar rebates are already being offered in another industry.
Lexmark International Group, Inc., a manufacturer of toner cartridges for printers, is already marketing some of its cartridges with this incentive. It offers the cartridges at one price without any strings attached, but at a $30 discount if the consumer agrees to discard the used cartridge or return it to Lexmark after use.
Lexmark calls this its "prebate" program. Under the prebate program the purchaser may not really be "buying" the cartridge at all, but rather only buying a license to use it. Lexmark claims that the primary purpose of the prebate program is to increase returns to Lexmark for its own remanufacturing program. Preliminary sales figures for the cartridges subject to the prebate program show that seven out of every eight cartridges are being sold at the discounted prebate price and, therefore, are subject to the single-use restriction imposed by the company
Toner cartridge remanufacturers are naturally upset by this course of events, especially since industry leader Hewlett-Packard has instituted a similar program for some of its cartridges. It is probably too soon to fully assess the impact on these remanufacturers, but they firmly believe that the prebate program has only one primary goal – to put them out of business.
Lexmark’s prebate idea is clever. By offering an up front discount instead of a rebate (or core charge) the company is giving the consumer an incentive to assist Lexmark in its attempt to monopolize the market in its own cartridges. And Lexmark doesn’t really care whether the cartridge is returned by the consumer to them or not, just as long as it is not reused.
If it is returned, it can be remanufactured or scrapped at Lexmark’s sole discretion. If the cartridge isn’t returned, it’s just one more core that won’t be remanufactured and won’t compete with Lexmark’s new cartridges.
A lot of high caliber legal talent has speculated that the prebate idea is illegal. Some of these experts feel that because Lexmark controls the market for its own cartridges, the program is pure and simple monopolization under federal antitrust law.
Others speculate that the prebate program is an illegal "tying arrangement." This means that Lexmark, because it controls the market for new cartridges for its printers, is using that control to force the customer to purchase one item. In other words, it’s an agreement to use the product only once by tying it to the purchase of another item, i.e., the cartridge itself.
Finally, other commentators say that the prebate is an unfair trade practice, but without explaining exactly what makes it unfair. However, to my knowledge, no major lawsuit has yet been filed challenging the prebate program.
Court challenges to the prebate idea will probably happen, but it is premature to speculate on whether they will be successful in stopping Lexmark’s prebate plan, or even if such decisions would prevent another company from adopting a similar but possibly legal prebate plan.
Changes to federal or state law may be required to subvert the prebate idea completely. On the federal level, antitrust law could be clarified to make prebates illegal or to at least provide that they are strong evidence of monopolistic activity. States could amend their laws to outlaw prebates altogether as unfair trade practices. To date, though, no such legislation has been proposed.
Indirect attacks may also be helpful. Because an argument can be made that prebates are a way to prevent the reuse and recycling of products, environmentalists should be concerned about the prebate idea spreading to other industries. In response, federal waste disposal laws could be strengthened to prevent any business activity (including prebates) which would limit a product to only one use. However, such a law might not preclude a prebate program if the program required that the item had to be returned to the manufacturer rather than merely being discarded, as long as the manufacturer had a viable remanufacturing program.
Another method of attack is to create disincentives for prebate products in the marketplace. Such an approach is being taken by one champion of the remanufacturer’s cause, New York State Assemblyman Joseph Morelle. Last spring, Morelle, who is chairman of the Committee on Small Business, held a hearing to address the Lexmark prebate issue. After the hearing, the assemblyman introduced a bill in the New York legislature which would prevent the state of New York from purchasing any product whose manufacturer placed restrictions on the remanufacturing of the product.
The bill passed the New York Assembly in June by a vote of 146-1, but the current legislative term ended before the New York State Senate could consider it. Morelle intends to re-introduce the bill in 1999, but manufacturers like Lexmark, who want to monopolize the market for its products, are starting to react to the bill and it may meet more opposition this time around.
The Morelle bill may need some adjustments to make it workable for vehicle parts remanufacturing. For example, the bill currently defines "remanufactured" as the process where a commodity is restored to its original specifications. Many rebuilt vehicle parts must be remanufactured to slightly different specifications to work properly or more efficiently. Other parts cannot be rebuilt to original specifications due to OEM specifications not being made available to rebuilders. Consequently, this definition would prevent many otherwise well-made rebuilt products from being considered by New York purchasing agents.
Because of this language and other concerns with the bill, representatives for vehicle parts rebuilders have talked with New York toner cartridge remanufacturers and will be meeting with Assemblyman Morelle in the near future to discuss changes that will improve the bill. Meanwhile, cartridge remanufacturers in other states such as California and Texas are mobilizing to have their state legislatures pass similar bills.
The prebate program is a threat to remanufacturing. But by working with toner cartridge remanufacturers and others affected by this troublesome concept, vehicle parts rebuilders can effectively fight this blatantly anti-remanufacturing idea.