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Commission proposes enhancing competition in the market for replacement parts for cars: Frequently Asked Questions
Commission Européenne - MEMO/04/215 14/09/2004
Brussels, 14th September 2004
Commission proposes enhancing competition in the market for replacement parts for cars: Frequently Asked Questions
(see also IP/04/1101)
What does Directive 98/71 on the legal protection of designs do and what are its provisions on spare parts?
During the negotiation of the Directive, there was disagreement on the role of design protection in respect of “must match” spare parts for complex products - in other words spare parts which must, in order to be of use, exactly match in design the part they are replacing. A compromise – “the freeze plus solution” – was arrived at. As a result, Article 14 of the Directive stipulates that Member States shall maintain their existing laws on design protection for such spare parts, and may change those provisions only in a way that further opens the spare parts market, by allowing suppliers other than the makers of the original part to offer replacements. In other words, if at the time the Directive was adopted, a Member State limited design protection only to parts of a new car, then that Member State cannot move backwards by, extending the protection to the secondary market for replacement parts.
Which Member States do allow suppliers other than the maker of the original part to offer replacements?
Seven Member States out of the “old” fifteen (Belgium, Ireland, Italy, Luxembourg, the Netherlands, Spain and United Kingdom) have liberalised through the provision of a “repairs clause”, allowing design protection on new products but leaving the possibility for alternative parts in repair or replacement in the aftermarket.
Greece provides for a repairs clause combined with a term of protection of 5 years and a “fair and reasonable” remuneration. Two (Hungary and Latvia) of the new Member States have opened up the spare parts market.
What are the main objectives of the changes the Commission is proposing to the 1998 Directive?
The current situation, where nine Member States have opened up the spare parts market and sixteen continue to extend design protection to spare parts divides and distorts the Internal Market. Due to this fragmentation and the uncertainty about the development of the Community’s design regime, citizens are unsure whether the purchase of certain spare parts is lawful and in some Member States they are deprived of the chance to choose between competing spare parts. Parts producers, meanwhile, cannot use the economies of scale offered by a single market and are discouraged from investing and creating jobs.
This proposal therefore aims to harmonise the design protection regime in order to complete the Internal Market. In doing so it would increase legal certainty. Suppliers and consumers would know where they stand and be able to take full advantage of a uniform Internal Market for spare parts. That would increase competition, widen choice and reduce prices.
Which parts are covered by the proposal?
The modification of the Directive will only affect those spare parts in the secondary market which are protected by a design right based on novelty and individual character. In practice, this means the outside and visible parts (“crash” parts) such as bonnets, bumpers, doors, lamps, radiator grilles, windscreens and wings.
Parts that are not visible, like engine parts or mechanical parts, are not covered by the modification.
The objective of design protection is to grant exclusivity to those who have developed a new or original design – others cannot copy that design. In complex products such as cars, many different elements, each with its own design, are assembled together to comprise the finished product, which is sold as a new product in the market. The market for new products is the so-called “primary market” and the proposed modification would alter nothing in this area For example, if a car manufacturer and/or supplier of components enjoys protection for a particular design of headlamp, then other manufacturers or suppliers would still not be allowed to copy it for incorporation in a new vehicle.
However, during the lifetime of a vehicle it can suffer accidents, breakdowns or damage and parts may have to be replaced or repaired. The market for spare parts is referred to as the “secondary market”, or the “aftermarket”. Clearly, the part used for replacing, say, a car bonnet, door or a headlamp must, in its design, match exactly the original part, hence such parts are sometimes known as “must match” spare parts. But if the design of that part is fully protected from copying, independent parts manufacturers are also excluded from the secondary market. It is this situation that the proposal seeks to end.
Why make such a distinction between the primary and secondary market?
Clearly, those who develop new designs should benefit from sufficient protection to allow them to obtain a fair return on their investment. As far as car components are concerned, the Commission believes that protection in the primary market serves this purpose.
Given that a “must match” spare part by definition cannot be designed any other way, granting design protection in the secondary market amounts to a monopoly. That confers a disproportionate advantage on the holder of design rights and denies choice to consumers – it may also keep the price of replacement parts artificially high.
Would this proposed modification, by reducing car manufacturers’ revenue, force them to raise new car prices?
There is no reason to believe this measure would lead to an increase in prices of new cars. The effect of this proposal should not be over-estimated. Design protection in the secondary market is only one profit-generating tool in the hands of car producers.
Other elements like control over distribution channels or other intellectual property rights are as important. Some Member States also provide copyright protection and the Directive allows the accumulation of rights.
What is the difference in effect between copyright protection and design protection – if copyright protection remains, would anything really change for consumers?
Copyright is a legal term describing rights given to creators for their literary and artistic works. It includes every production in the literary, scientific and artistic domain. Copyright protects the intellectual effort of the creator of the work, from the moment of creation. Unlike design protection, copyright exists automatically without the creator needing to apply for registration.
A design right protects the appearance of the whole or part of a product resulting from the features of (in particular) the lines, contours, colours, shape, texture and/or materials of the product itself and/or its ornamentation, to the extent that it is new and has individual character. Protection is granted upon registration.
In some Member States (notably France), spare parts can be protected under copyright, though this applies only if the part concerned fulfils the conditions for "copyrightability" (generally speaking "originality"). Under these circumstances, the removal of design protection would not prevent vehicle manufacturers from using copyright, where applicable, to oppose the production of spare parts by others – though litigation could ensue as the absence of the need for registration means it is not always clear whether or not copyright exists or has been infringed.
Given that copyright protection may also exist, along with other means (trade marks, after-sales service, tightly controlled distribution networks, etc.) used by vehicle manufacturers to protect their monopoly power, the removal of design protection for spare parts would not necessarily completely open the aftermarket in spare parts, all over the EU.
However, it would be a very significant step forward, without which full market opening could not happen and which would of itself open up a big chunk of the market and provide benefits for consumers.
Would removing design protection for spare parts not discourage manufacturers from investing in research and innovation?
No. The rewards from exclusive rights in the primary market are quite sufficient to encourage investment in design. The appearance of a new car is an important factor in customers’ decisions on which models to purchase and that provides enough incentive for manufacturers to innovate. The reward achieved by a protected design, for the right holder, will depend on to what extent consumers believe that design to be an added value and to what extent they are willing to buy, or pay a higher price for, the product using the protected design, compared to similar products that do not use it.
The choice of all subsequently purchased visible spare parts by all subsequent owners of a car is dictated by the initial choice when the car was purchased new, as those spare parts must match the design of the original. It is disproportionate that manufacturers should continue to reap the reward of design protection, without competition, throughout the life of a car.
Are any products other than vehicles covered by this proposed modification?
This proposal applies to any sector where the replacement and repair of visible components of complex products is at stake. The scope of application of the Directive is not limited to any particular sector and the legal solutions suggested are not “sector-specific”.
However, the automotive aftermarket is without doubt the sector for which these factors are most relevant, for the following reasons:
Other sectors for which there is a repair sector are for instance, domestic electrical appliances, sanitary appliances, motorbikes and watches. However the removal of design protection might have only very minor impact on these.
The 1998 Directive on the protection of designs foresees a revision of the Directive four years after the deadline for implementation, in October 2005. Why is the Commission proposing a revision well over a year early?
The Commission believes this is the right time to introduce a “repairs clause”, in other words a provision that suppliers, other than those who supply and hold design rights over a part for a new car, should be able to supply, as a replacement part, a component using an identical design. This is the right time because it has proved impossible to reach a voluntary agreement within the industry itself.
Change will benefit consumers. It is also a logical consequence of the “Monti package” of changes to the competition rules (Block Exemption Regulation) for car dealerships (see IP/02/1073 and MEMO/02/174), which has opened up competition in the retail market for new cars and is leading to reductions in the differences between new car prices in different Member States.
The Commission is not bound by the timetable for possible revisions mentioned in Article 18 of the 1998 Directive. It can propose a modification of any Directive at any time and is making this proposal after a full consultation exercise.
Why did the Commission delay the adoption of this proposal over the summer?
The proposal was originally on the Commission’s agenda in June 2004. However, vehicle manufacturers’ groups came forward with a new submission shortly before the Commission was due to deal with the item. Despite the fact that the official deadline for responses to consultation had expired and in the interests of fairness and of achieving the best solution for consumers and others, the Commission decided to postpone its consideration of this agenda item until September, so that the manufacturers’ submission could be analysed and taken into account.
The Block Exemption Regulation already opened up the spare part market, so what is the added value of this proposal?
The Block Exemption Regulation (EC 1400/2002), on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle industry, has resolved some legal issues regarding the distribution of spare parts and in principle ensures effective competition in the market for repair and maintenance services, among other things by allowing users to choose between competing spare parts and by not allowing a vehicle manufacturer to hinder its parts suppliers from selling spare parts of matching quality from an independent manufacturer.
But as long as the protection of designs covers spare parts, in practice that means nullifying certain sections of the Regulation as far as that market is concerned, thus allowing distortions to competition to continue. If the design of spare parts continues to be protected, the parts supplier cannot supply the aftermarket on its own, an authorised car dealer cannot bypass “its” vehicle manufacturer and buy spare parts directly from the producer, the independent repairer cannot choose between competing visible spare parts and competition in the repair market is eliminated.
The current proposal would therefore in practice allow the Block Exemption Regulation to apply fully in the spare parts market.
What is the Commission’s response to the car industry’s claim that this proposal has been put forward in the absence of a full impact assessment and against the conclusions of the limited impact assessment carried out?
This is not the case. The industry refers to a study contracted out in 2003, which reflects solely the opinion of the contractor and was never intended as an extended impact assessment.
The Commission has prepared an extended impact assessment, in line with Commission guidelines, taking into account the results of the study and all the data received from industry and other interested parties during the whole period of consultation dating back to 1999. This overall assessment fully justifies the option chosen.
Does this modification not go against the spirit of Directive 98/71 on the protection of designs?
On the contrary. The objective of the Directive is to strike the right balance between, on the one hand the advantages that the design protection provides to undertakings, and on the other hand, the interests of customers and the smooth functioning of the Internal Market, where goods move freely and competition is not distorted. That is precisely what the Commission’s proposed modifications are intended to achieve.
In line with the Directive and in order to overcome the obstacles which arose to harmonisation when it was being negotiated, the Commission has tried to arrive at a voluntary agreement among the various parties involved in the spare parts market, on the free use of spare parts for repair purposes and their protection. As a first step, a questionnaire was sent out in November 1999 and on the basis of the responses received, a series of bilateral meetings with interested parties took place from October to November 2000. The major interest in pursuing this exercise was to make lower prices - at equivalent quality - available to the consumer.
But it proved impossible to reach such a voluntary agreement. Commissioner Bolkestein therefore informed the Council and the European Parliament in August 2003 of the Commission’s intention to follow instead the regulatory approach and propose a modification of article 14 of the Directive.
Would abolishing design protection for spare parts not endanger safety?
No. Design protection covers the appearance of a product, not its technical qualities, and is neutral to safety, which is covered by many other detailed and stringent EU rules.
Currently, if the design of a bumper is not protected because it does not fulfil the requirement of novelty, it does not mean that it is less safe than a bumper that is protected just because it uses a design no-one has used before.
The key point is that both the design-protected bumper and the non-protected one are each subject to the same technical rules, for example under Directive 2001/95/EC on general product safety as well as under many Directives regulating the construction and functioning of motor vehicles. Those Directives, which are nothing to do with the one on design protection, will continue to apply in full to all spare parts, whether protected by design rights or not, and regardless of whether they are supplied by the car manufacturer or by someone else.
Will car manufacturers receive any compensation or remuneration for the loss of these rights – if so what?
A system of remuneration was one of the options analysed in the impact study. Under this option, third party producers of must-match parts for the second market would pay an agreed royalty to original equipment manufacturers and/or vehicle manufacturers.
This option would be administratively costly and extremely complex and cumbersome to implement. The determination of a fair royalty fee remains uncertain and reflects a legal licensing situation. How would a fair royalty be calculated, who would be in charge of collecting the royalty and how would royalties be distributed to right owners? It also assumes that design protection for spare parts exists in the secondary market, which is already not the case in some Member States and thus in those Member States would imply the reintroduction of design protection, contrary to the spirit of the Directive and the “freeze plus” clause.
How will disputes be settled?
As for Directive 98/71, dispute settlement will be covered by national laws.
What is the average cost to the car producer for the design of a new car model?
According to the figures available for the car industry, the total R+D expenditure of a vehicle manufacturer on average is about 4.2 % of sales.
2.8 % of the value of sales is represented by R+D efforts devoted to areas such as mechanical engineering (engine, power train, safety, electronic systems), fuel economy, environment, transport and navigation systems.
1.4 % of the value of sales goes to “design” work in general: 0.7 % to components and materials such as the interior décor (armatures, upholstery), paintwork or alloy wheels and only 0.7 % to the outer visible parts which are subject to design protection and which would be affected by the proposed modification to the Directive.
In other words, 0.7% of a vehicle manufacturer’s turnover on average is spent on developing the body design of new car models.
What is the average design cost paid by the consumer per car?
According to the figures available to the Commission, the cost of body design on average does not exceed 50/60 euro per car, or 0.4% of the price of the car, including post-manufacturing costs such as the margin for the dealer selling the car. This is what the consumer pays for the design, as a proportion of the overall cost of the car
What is the current share of the spare parts market for car manufacturers and independent producers of spare parts?
Estimates for the annual volume of the total EU market in automotive replacement parts range from € 42 billion to € 45 billion. It is estimated that vehicle manufacturers’ share of the whole spare parts market amounts to about 50% - 55%, the remaining 45% - 50% being supplied by the so-called “independent” aftermarket (IAM).
But the proposal does not affect the whole aftermarket. Instead it is confined to those vehicle parts which can be subject to design protection, i.e. to body-integrated visible parts for which there is a certain amount of demand for replacement and repair: body panels (such as bumpers, wings and bonnets), lighting and automotive glass.
The size of this submarket is estimated to account for approximately 25% of the total aftermarket or € 9-11 billion annually. This figure is shared between vehicle manufacturers and the independent sector: roughly 77% or about € 7.5 billion can be attributed to body panels, 12% or about € 1.2 billion to lighting and 11% or somewhat more than € 1 billion to automotive glass.
There is some dispute how this market is shared. Vehicle manufacturers assert that their share of the replacement body panel market can be as low as 55-60% in some markets. By contrast market data offered by independent manufacturers (ECAR) suggest that 95% of body panels sold in the EU are original equipment, leaving only a 5% share for independent manufacturers.
For lighting, the market share of the car industry is estimated by itself at 40% - 50%, by ECAR at 65%. For automotive glass, the industry says it has 30% - 40% of the market, though ECAR maintains the figure is nearer 70 %.
The assessment of the Commission, in very approximate terms, is that the market share of vehicle manufacturers in the market which is affected by design protection oscillates around 85%.
Would removing design protection mean that production would be moved outside the EU and there would be job cuts ?
There is no evidence for this – indeed the EU economy could expect to gain. Removing design protection in the secondary market would enhance potential competition and have an effect on producers of spare parts and the channels through which they are distributed and sold. New players may emerge at any stage of the value chain or existing players may change role.
A shift from car manufacturers and licensed original part suppliers to independent producers is to be expected, the extent and net effect of which are hard to estimate. The car industry has claimed that up to 50,000 jobs might be lost, 32,400 of which are in the EU. This figure, however, has been estimated by extrapolating to the whole industry the possible impact on a manufacturer which currently has a high market share. If any job losses within car manufacturers did indeed occur, this effect would be offset by the creation of new jobs by independent producers.
Indeed, it is likely that there would be a net increase in jobs, as a result of growth in the overall market for spare parts. The increased production itself will necessarily generate new jobs. There would probably also be a positive net employment impact in the distribution sector, due to the increased sales of spare parts. In general, the growth of the market as a whole will more than compensate for the adverse impact on those companies that currently enjoy monopoly power in the spare parts sector.
What is more, the modification to the Directive would mean that EU parts manufacturers could produce anywhere in the EU parts for supplying important export markets (USA, South America, Russia and Ukraine). That would increase employment in the EU, not shift it abroad.
Conversely, about 15 % of the cars on EU roads are cars imported from abroad. These imports include inter alia Japanese, Korean and US makes, but also cars produced by EU vehicle makers in the US and elsewhere. Parts for these cars are almost exclusively produced in Japan, Korea, Taiwan and the US. All the foreign vehicle makers at issue have registered car component designs in the EU and will continue to do so.
This way they control the EU market (to the benefit of their domestic employment). Under the modified Directive, EU parts manufacturers would be able to produce spare parts for these imported cars in the EU, thus generating further jobs for European workers.
While no precise figures are available, indications are that about 25% of parts for the aftermarket are currently sourced by car manufacturers from overseas, with EU independent producers kept out of the market. These parts are sometimes referred to as “hidden imports”. Again, if design protection in the aftermarket were removed, EU parts manufacturers would be able to participate in this business, generating new jobs in the EU.
However, according to the car industry’s statements, the parts that would be most affected by this proposal (metal sheet parts) are currently almost exclusively produced by vehicle manufacturers inside the EU and not in third countries. The car industry itself says that vehicle manufacturers will in any event continue to produce these parts as close as possible to their assembly plants due to the high logistics costs involved. There is no reason therefore to fear relocation of production to places outside the EU.
Would more competition in the spare parts market bring down prices for the final consumer?
It should do so, although it is very difficult to estimate by exactly how much. The Commission’s figures suggest a 6-10% premium is being paid for the spare parts covered by this proposal in EU Member States which allow design protection. Experience in other industries that have been opened up to competition – for example air transport, energy, telecommunications - suggests that more competition would mean that the prices of spare parts would eventually fall - along with the cost of insurance premiums, as spare parts represent a substantial proportion of the cost of claims for vehicle insurers. The extent of this would depend on the way the market adjusted to new conditions. Even if there are many intermediaries between automotive supply and the final consumer, the final consumer could expect to benefit from the ending of an effective monopoly, in terms of choice, price, improved distribution and availability of parts etc.
Is this the “thin end of the wedge”, part of a generalised undermining of industrial property protection in the name of competition?
No. The Commission’s other initiatives in this field, notably the system for the registration of Community designs (see IP/01/1803, MEMO/03/77) and the proposed Community Patent, demonstrate very clearly that is not the case and that the Commission views industrial property rights in general and design protection in particular as crucial to ensuring a fair reward for invention and innovation and to making Europe more competitive. Design protection on new cars would be retained under the proposal. But we should not allow that primary monopoly to dictate how consumers can repair their cars or buy spare parts in the aftermarket.