The Commission Regulation for a new motor vehicle Block Exemption - Questions and Answers - Background information on press release IP/02/1073
European Commission - MEMO/02/174 17/07/2002
Brussels, 17 July 2002
The Commission Regulation for a new motor vehicle Block Exemption - Questions and Answers - Background information on press release IP/02/1073
What is a Block Exemption?
The EC Treaty lays down a basic rule, Article 81(1) banning agreements which have anti-competitive effects. Of course, many common agreements which are pro-competitive and benefit the consumer contain clauses which limit one or other of the parties' ability to compete, and the Treaty, in Article 81(3) therefore gives the Commission the power to exempt such agreements from the ban. Rather than read through every individual agreement notified to it, the Commission often through a regulation exempts a whole category of agreements, on condition that they respect certain requirements and so long as they do not contain "hard-core" restrictions. The new regulation for the motor vehicle sector is an example of such a "block exemption".
The new regulation applies Article 81(3) of the EC Treaty to certain types of motor vehicle distribution and servicing agreements, and replaces block exemption Regulation 1475/95, which came into force in 1995 and is due to expire on 30 September 2002.
How did the Commission elaborate its proposal?
The proposal was drawn up following an extensive process of fact-finding and consultation.
All relevant material concerning the review can be found on the Commission's Internet site at http://ec.europa.eu/competition/car_sector/distribution/
Why not just let the current Block Exemption Regulation 1475/95 expire?
During the review, the Commission considered a number of alternatives for legislative change. It was clear from an early stage that simply letting Regulation 1475/95 expire was not a realistic option. If the Commission allowed Regulation 1475/95 to lapse, the car sector would automatically fall under the general competition rules for distribution agreements (Commission Block Exemption Regulation for vertical restraints, Regulation 2790/99). While this general regulation is suitable for most economic sectors, the Commission concluded that it does not contain sufficient safeguards to remedy the problems which the evaluation report identified in the automobile sector. Additional safeguards were especially necessary because the Commission also identified what is referred to in the legal jargon as a "cumulative effect" in the motor vehicle sector. This may occur when a high percentage of goods are distributed using distribution networks which have near-identical features which are restrictive of competition.
The general competition rules for distribution agreements would also allow for a near-identical reproduction of the current system as far as sales of motor vehicles are concerned(4). Current rules allow for a combination of an exclusive sales territory and selectivity for dealers. This combination was identified in the evaluation report as one of the main competition problems stemming from the current regime. Moreover, the general competition rules for distribution agreements would not provide a satisfactory situation regarding competition in the repair sector, in particular as regards the supply of parts and the conditions under which independent repairers can run their business.
What is the nature of the proposed regime?
While the new regulation is stricter than its predecessor, it is less prescriptive. Carmakers may choose between an exclusive distribution system, where dealers are allocated a given territory, or a selective distribution system. If a selective distribution system is chosen, the carmaker may apply a combination of qualitative and quantitative criteria, or he may alternatively select his dealers according to purely qualitative criteria. If he chooses the latter option, he will not be able to place a ceiling on the number of dealers and any dealer who meets the criteria may join the network. In all selective systems, be they qualitative and/or quantitative, the manufacturer may require that sales are made only to final consumers and other members of the authorised network.
Will the Regulation lead to multi-brand sales outlets?
Although, under the current Regulation, dealers are in theory allowed to sell vehicles of more than one brand, in practice they rarely do so(5). Presently manufacturers may require dealers to sell other brands in separate premises, through a separate company, with separate management and a separate sales force, and in practice this makes multi-brand sales uneconomic. Studies have shown, however, that there is consumer demand for dealers to sell more than one brand, and the new regulation accordingly lifts most of the restrictions that are allowed under the current regulation, giving retailers (and ultimately consumers) a genuine choice. Car manufacturers may, however, protect their brand image by requiring their vehicles to be displayed in a "brand-specific" area of the showroom, similarly to what is done at motor-shows. Imposed brand specific sales personnel would not be allowed as it could represent a substantial additional cost and therefore put a brake to multi-branding development, unless it is decided by the dealer and the manufacturer pays all the additional costs. Finally, carmakers will be able to require a multi-brand dealer to source a minimum number of cars of their make, but this minimum may not exceed 30%.
What are the changes for the so-called "Intermediaries"?
Experience has shown that it is difficult for the individual consumer to buy a vehicle abroad. He or she may experience language problems, or may be unfamiliar or uneasy with the commercial environment in another Member State. Past regulations in this sector therefore made room for the consumer to use a representative, known in the jargon as an intermediary. Many of the operators that advertise on the Internet, such as Virgin Cars or OneSwoop, operate as intermediaries. So far, measures adopted by the Commission allow manufacturers to impose restrictions on the activities of these intermediaries, such as a rule that no intermediary is allowed to buy more than ten per cent of a dealer's total sales volume. These rules obviously hamper what is a perfectly legitimate trade, and they will in future be prohibited. The only rule that car manufacturers will be able to impose will be a requirement that the intermediary must produce a mandate from the consumer.
What about sales through supermarkets?
There has been speculation as to whether the Commission ought to somehow force car manufacturers to sell to supermarkets. In a free market economy, it is the general rule that manufacturers of goods may choose to whom they sell, and it is only in extreme circumstances that a competition authority could intervene to force a supplier of goods or services to sell to a certain individual or class of operator. The Commission acknowledges that such an extreme situation does not currently exist in the motor vehicle sector in Europe. It has accordingly opted for a set of flexible rules that allow manufacturers to choose whether they sell cars also to supermarkets(6).
During the lengthy and in-depth consultation process undertaken by the Commission, no supermarket or association speaking on their behalf ever directly expressed a desire to sell cars on a regular basis.
The available evidence shows moreover that if manufacturers were now forced to accept supermarkets into their distribution systems this could have a certain negative impact on manufacturers and distributors. Moreover, consumers do not appear to be much attracted by the idea of buying a car from a supermarket (cf. the Lademann study). On the other hand, it would not be true to say that the new regulation gives no business opportunities to supermarkets. A supermarket could become a dealer (mono or multi-brand) if it satisfies the same criteria laid down by the manufacturer as any other potential dealer and if the car manufacturer accepts it as such. For example, some manufacturers may chose supermarkets as their exclusive dealers in some areas of the EU. Some manufacturers that would implement only qualitative selective systems could not refuse supermarkets as authorised dealers, if supermarkets satisfy the same qualitative criteria as the other "conventional" dealers. If however a manufacturer implements quantitative selective systems (meaning that they limit the number of their dealers), a supermarket, even satisfying the qualitative criteria, could be refused the entry into the official network.
Supermarkets or other stores may of course always act as intermediaries for consumers, since the rules on intermediaries have been relaxed, and may also establish privileged relationships with dealers all over the Common Market. For instance, 'El Corte Inglés' has introduced this model in Spain and may develop it further.
Why is the Commission stopping short of requiring car makers to also sell to pure Internet operators?
The Commission's analysis tends to show that in the longer term alleged benefits for consumers would be outweighed by drawbacks: Internet distributors who sell vehicles exclusively over the Internet could be seen as free-riding on other distributors who have an obligation to invest in a showroom, demonstration vehicles and trained sales staff who give advice to consumers. Consumers, it might be argued, would take advantage of all of these facilities but would then turn to an Internet dealer for the actual purchase of their new vehicle. In view of these risks and the fact that a study carried out for DG Competition (the Lademann study) shows that consumers are not yet much attracted by the idea of buying a car from a pure Internet distributor, it seems - for the time being - inappropriate to force manufacturers to give them full and unconditional access to distribution networks.
It should be noted however that the new rules clarify that no dealer who meets the manufacturer's criteria may be restricted as to his ability to sell via the Internet, or in his use of an Internet referral site. The Internet is a low-cost medium and should in the medium term reduce both distribution costs and consumer prices.
Internet operators, similarly to supermarkets, could also act as an intermediary for consumers and could establish privileged relationships with dealers all over the Common Market.
Will the reorganisation of the link between sales and after-sales servicing really be in the consumer's interest?
Under the current regime, any dealer member of the network has an obligation to provide for sales and servicing of cars if the carmaker so requires. He cannot currently choose one or the other of the two activities, which restricts his business freedom considerably. Under the new regime, a distributor who wants to specialise in selling cars will have the choice between carrying out after-sales servicing himself or subcontracting it to one or more official repairers which are easily accessible for his consumers. This approach will ensure that the customers of each distributor will be able to turn to at least one official repairer and will be informed by the dealer of the location of this repairer before acquiring the car, and the distance between the sales outlet and the repair shop. Furthermore, under the new regime, the necessary infrastructure consisting of official repairers, which meet the quality standards of a manufacturer needed for the honouring of warranties and carrying out of recall operations and free servicing, will exist throughout Europe, just as it does today.
The difference between the new regime and today's system is that some of the official repairers would in the future not sell new vehicles. This is however already the case today: for example Audi, VW and Ford have a network of official repairers (e.g. the Audi service centres in Germany and Belgium or the Ford service outlets) which also carry out this type of repairs. No problems regarding this arrangement have been brought to the attention of the Commission's services.
Moreover, under the new regime, independent repairers may qualify to become official repairers if they fulfil carmakers' criteria, which will improve service to consumers and territorial coverage. Also, dealers who have their dealership terminated will be able to stay as official repairers of the make.
This will avoid the risk of loss of technical expertise from the market and will help to maintain a dense coverage of service points.
What is the expected impact of the new rules in the repair sector?
In addition to all advantages related to the reorganisation of the link between sales and after-sales activity as explained above, the impact will be significant for independent repairers, and also regarding supply of original spare parts. First of all, every repairer satisfying the manufacturer's criteria may become an official repairer, thereby increasing the number of competing undertakings. Independent repairers, as under the current regime, will still have access to spare parts, but access to technical information, software and reprogramming, tools, diagnostic equipment, garage equipment and training is further broadened. Access to technical information is made more convenient for a specific need, e.g. the assistance offered by motor clubs and other roadside breakdown services. The principle is that such access must be given on non-discriminatory terms to both the authorised and all other repairers: if the former have to pay for a specific software or share the cost of a training course, the latter should be quoted the same price.
Independent repairers, even those qualified that wish not to become authorised repairers, will thus be able to compete on the same level with authorised repairers, thereby allowing them to keep pace with technological evolution. There are currently more than 100.000 independent repairers in the EU: they constitute a considerable competitive pressure towards authorised networks that hold 50% market share of all repairs (and even 80% for cars under 4 years). These are impressive market shares justifying stricter conditions on the repair market.
Similarly, parts producers will have better access both to the authorised and independent repairer. These producers manufacture 80% of all components and parts of a new car, while the car manufacturer produces only 20%. Under the new regulation, parts producers will be allowed to place their logo, along with the car manufacturer's logo, on the original spare part sold to the vehicle manufacturer. The part producer could also sell the same part with his own logo without losing the characterisation of "original spare part", either to the authorised repairers or to the independent repairers. Usually those parts are cheaper than the same parts supplied by the vehicle manufacturer. To conclude, the new regulation injects more competition between authorised repairers, between authorised and independent repairers, and between the vehicle manufacturer and the part manufacturer for the supply of original spare parts. Eventually, this increased competition should result in more competitive prices for the consumer and for increased quality of the after-sales services.
What is the expected impact of the new rules on employment in the sector?
The regulation is not expected to have any direct discernible net effect on employment in this sector, which is ultimately driven by the profitability of the retail and after-sales markets.
Most manufacturers are already implementing programmes to cut costs and rationalise distribution networks in the EC. The trend which began under the current Regulation 1475/95 is expected to continue into the future, with industry analysts predicting that the number of official network dealers will diminish by between 20-25% by 2010, regardless of the competition rules applicable to the sector.
The regulation offers former dealers the opportunity to become official repairers within the manufacturers' network. In practice, no ceiling can be imposed on the number of repairers which fulfil the qualitative criteria for joining the network, and that allows former dealers to continue to operate within the network as authorised repairers. In this way, the regulation should at least partly compensate the expected decrease in dealer numbers. Those who currently operate as independent repairers may also find this opportunity attractive, even though qualifying as a member of a manufacturer's network may necessitate a certain level of investment in tooling, personnel and training.
Moreover, by enabling independent repairers to keep pace with technological developments, the regulation may indirectly preserve or even increase employment, by encouraging such repairers to consolidate their position on the market.
The new rules create the conditions for at least a preservation of employment in the after-sales sector, which occupies far more people than the sales sector, thereby compensating the current trends of sales networks rationalisation initiated by the carmakers.
Does the Commission expect retail prices to decrease as a consequence of the new rules?
The European Commission is not a price-fixing authority. The only task of the Commission in terms of prices is to ensure that conditions exist on the market to allow satisfactory and undistorted competition. This implies also that consumers must have the right to buy wherever within the Single Market they find it most advantageous.
Proper competition on the market, however, is generally an important factor to prevent unjustified price levels and price differentials. In this respect, bi-annual car price reports(7) issued by the Commission identify price differentials which may indicate a lack of competition or market-partitioning that goes beyond the effects of the different levels of car taxation across the EU. The new regulation aims to create the market conditions which will lead to a reduction of the existing high price differentials that are due to the rigidities of the current distribution systems in the European Union and to more competitive prices on the sales and after-sales markets.
Moreover, it is important to remember that competition takes place on other grounds as well. For instance, product quality and diversity are major elements of competition in the car industry today. Last but not least, such elements also have a high priority for consumers.
Will pre-tax price harmonisation across the EU occur as a result of the new rules?
Some car manufacturers did not wait for the new regulation to harmonise retail prices across the EU. This happens merely for high segment cars (Mercedes, some BMWs, Porsche) in the euro zone. If there is a trend towards harmonisation, nobody can predict at which level this convergence will occur (at actual, higher or lower levels than actually). This will depend on the level of effective competition between the various brands. If, as car manufacturers affirm it, competition between them is fierce on prices and innovation, potential convergence should lead to prices below the actual average prices across the EU. Price increases should also be difficult under effective competition, unless these increases are agreed or concerted between the car manufacturers. On the other hand, regarding price increases in countries with high car taxes such as Denmark, Finland, Greece or Ireland, carmakers will take into account the risk of losing local market share, or reduced demand for new cars. Again, if there is substantial competition between brands, price increases should not occur in the long term as a consequence of the new rules, unless they are agreed or concerted between the car manufacturers. If there are agreements or concerted practices in view to increase prices, these would be contrary to competition rules and would be sanctioned by the Commission.
What about concentration of dealerships and effects on prices
Most carmakers are already rationalising their distribution network: they did not await the new rules to diminish the number of dealers(8).Concentration levels at the retail level across the euro zone are extremely low. For example, in France, which is a country where the concentration level is one of the highest in the EU, the highest market share held by a single undertaking is 2.3% (this undertaking operates several dealerships of various brands). The two other countries with the highest concentration levels are Portugal and Spain. Germany and Austria are the countries where the concentration levels are the lowest. Consequently, there is no doubt that retail markets across the euro zone are as a starting point extremely fragmented.
Regarding the distributorship size, a distributor in the EU sells on average 300 cars per year. There is potentially scope for economies of scale at the retail level that could be passed on to consumers. Moreover there does not seem to be a correlation between concentration and higher prices. Although France is one the "highest" concentrated market, the prices are in the average of euro zone prices. Prices in Portugal and Spain, the two most concentrated market, are the lowest in the euro zone.
Prices in Germany and Austria, the most fragmented markets, are the highest in the euro zone. If across the EU the number of dealer should fall by 30% in 2010 (that is 5-10% more than the 25% decrease of sales dealers that is generally predicted, also in a study commissioned by the car industry(9)), the concentration would reach the actual levels of Spain and Portugal. Moreover, car manufacturers may impose maximum retail prices if they feel that dealers are abusing their local market power.
What is the location clause and how does it function?
The location clause is a provision whereby a car manufacturer may control where a distributor will establish its sales or delivery outlet(s). Subject to the manufacturer policy regarding territorial coverage, it also guarantees existing distributors that no other competing distributor will establish close to his own premises any competing sales or delivery outlet. Location clauses restrict competition between dealers of the same brand. They allow for a near-identical reproduction of the current distribution system of motor vehicles which combines territorial protection and selectivity. The Commission's evaluation report on the current regime applicable to motor vehicle distribution identified this combination as the main negative restriction hindering substantially competition between dealers. Therefore the new regulation prohibits the use of such location clauses by the manufacturers whenever selective distribution is implemented (where sales are permitted only to final consumers and other authorised members of the network set up by the manufacturer, and therefore prohibited to independent operators). This applies to both passenger cars and light commercial vehicles. The new regulation provides therefore that existing distributors in a selective system may not be prohibited from opening secondary sales or delivery outlets anywhere in the EU. Such additional premises will, however, have to comply with the manufacturer's criteria for the area concerned so that there is competition on a level playing field between established dealers and potential newcomers: A Belgian dealer from the Ardennes wishing to set up a showroom on Paris' Champs Elysées will have to abide by the rules set by the manufacturer for this prime location.
Under exclusive distribution, the manufacturer keeps de facto a control on the place of establishment of his distributors, as he allocates exclusive sales territories. But under this type of distribution, the authorised distributors are free to sell to independent car resellers (including supermarkets and internet operators) and these independent operators are able to trigger arbitrage between the exclusively allocated territories and across the EU. The situation is therefore different than under the current regime.
Do the new rules apply equally to trucks, buses, coaches, light commercial vehicles and passenger cars?
Although the new rules apply equally for all these motor vehicles both for sales and after-sales provisions, manufacturers will be allowed to implement location clauses for trucks, buses and coaches. In practice, it means that those dealers should obtain the manufacturer's consent prior to opening a secondary sales outlet or repair shop.
Will there be any detrimental effect on the geographic coverage across the EU?
Manufacturers keep always full control on the first place of establishment of a car dealer. An existing dealer cannot close his primary outlet and move across the EU, without losing his accreditation as authorised member of the manufacturer's distribution network. Geographic coverage can also be attained without problems if manufacturers implement exclusive distribution systems (allocation of exclusive sales territory, like for many other products requiring after-sales servicing, for example agricultural tractors). The geographic coverage degree depends therefore mainly upon the manufacturer's decision. For example, many car manufacturers did in the past or are currently restructuring their dealership networks with a view to reducing the number of dealers across the EU. Car manufacturers may also decide, it they so wish, to compensate low sales volumes in low sales areas by granting special conditions in order to keep the dealers in such areas. Multi-branding will also contribute to the viability of dealerships in low sales or remote areas. As far as repair outlets are concerned, the manufacturer can no longer control their number. Any repairer satisfying the qualitative criteria set by the manufacturer can become a member of the authorised network. Even if he does not want to become an authorised repairer, the provisions of the new regulation on access to parts, technical information, tools and training are creating the conditions for independent repairers to remain in business and still compete with the authorised networks. This element contributes at least to the preservation of the actual geographic coverage.
Combination of selective and exclusive distribution across the EU
Although car manufacturers will no longer be allowed to combine exclusive sales territories and selective distribution for a single dealer, they can decide to implement exclusive distribution in one market and selective distribution in another. This could make sense where the manufacturer's objectives differ between various Member States. The new regulation contains nevertheless safeguards in order to prevent a situation where the use of parallel systems leads to a partitioning of the Single Market.
(1)A recent series of decisions imposing fines on Volkswagen (2 fines, 90 and 31 million €), Opel (43 million €) and DaimlerChrysler (72 million €) underlines that the car manufacturers have not always respected the current regulation, and have tried to prevent consumers from benefiting from the Single Market. These decisions are all available on the Commissions Internet site (see next page).
(2)The Sales-Service link, by Autopolis, Price Differentials in the EU: an Economic Analysis by Prof. Verboven and Degryse, Study of the impact of legislative scenarios about motor vehicle distribution, Andersen, and Customer Preferences for existing and potential Sales and Servicing Alternatives in Automobile Distribution, Dr Lademann. These studies are available at DG Competition Internet site (see next page).
(3) See Commission press release IP/02/196 and MEMO/08/18 of 5 February 2002.
(4) Indeed, Commission Block Exemption Regulation for vertical restraints, Regulation 2790/99, allows the so-called "location clauses" which give the right to manufacturers to decide whether a dealer may establish premises in a given area, thereby re-introducing a scope for territoriality.
(5)Although in sparsely-populated areas such as Scandinavia the practice is common. It should also be noted that many dealers in Europe sell more than one brand from the same manufacturer.
(6)The Commission also took into account the findings of the Andersen and Lademann studies, according to which there was not currently much consumer demand for supermarket or Internet sales.
(7) See Commission press release IP/02/305 of 25 February 2002. The next car price report will be published at the end of July 2002 on the Competition Directorate-general website at HYPERLINK http://ec.europa.eu/competition/car_sector/ http://ec.europa.eu/competition/car_sector/.
(8) Some examples: Honda (from 500 to 250 dealers in Germany), Opel (from 890 to 730 dealers in Germany in 2002; in 2004 Opel wants only 470 dealers in Germany), Renault (from 2169 in 1999 to 1818 main dealers in Europe in 2001), Renault/Nissan (from 600 Renault and 700 Nissan dealers in Germany, Renault intends to keep only 250 main dealers), Mercedes in France (from 100 dealers in 2000 to 50-60 dealers in the future), Lancia in Germany (from 149 to 100 dealers in 2002), Audi in Germany (before 2000, 900 dealers out of network)
(9) "Study on the Impact of Legislative Scenarios on Motor Vehicle Distribution", commissioned by ACEA from Accenture, September 2001