Speech by Mr. Mario MONTI
European Commissioner for Competition Policy
The new legal framework for car distribution
Ninth Annual European Automotive Conference: Car retailing at a crossroads
Hilton Hotel Brussels, February 6th 2003
This is the first real opportunity I have had to speak on this subject since the new block exemption came into force last October, and I am particularly grateful for the opportunity to do so before such a broad-based audience.
In the 19th Century, a respected scientist stated that no vehicle could possibly go past thirty miles per hour, since past this speed the driver would suffocate(1). Last year, some people were making similarly ominous predictions about the new block exemption. I am therefore glad to see that we are all still here now that the critical moment has passed, and that we can consider the implications of the Regulation in a more objective manner. Whatever you may think of the detail, you cannot escape the fact that the Regulation is now a reality, and it is a reality that I am determined will not be ignored.
These new rules were only adopted after an extremely thorough process of consultation, analysis and revision. Now that the Regulation is in force, the legal framework for car distribution in Europe is set for the next eight years.
A. Before I go on to speak about the competition agenda for this sector, I will first say a few words about the effects of the new regulation.
1. The new block exemption represents a fundamental move away from a distribution environment whose lines were rigidly laid down by regulation and by car manufacturers, towards a more balanced flexible system in which all operators have more scope to act pro-competitively. It offers an unprecedented opportunity for those who are willing to be imaginative in the way that they carry out their business and who are prepared to respond to consumer demand rather than conform to a single model. At the same time it reduces the opportunities for car manufacturers to abuse their powers, as we know has occurred in the past.
It also entails greater liberties: For example, all dealers in selective distribution systems will be able to take the initiative in marketing vehicles to consumers in other areas of the EU. Moreover, almost all of the previous restrictions on intermediaries have been lifted, allowing them to play a more active role in helping consumers get the car they want, at a more favourable price, from any dealer in the EU. I would also highlight the changes allowing dealers more freedom to sell more than one brand, and to sell vehicles without having to carry out repair and maintenance.
The new block exemption, aims to create more competition on the sales and servicing markets as well as on the markets for the supply of spare parts. We also aim to ensure that the Single Market functions properly for consumers just as it already does for carmakers, who can after all move vehicles and components easily across the EU's internal frontiers.
2. But let me correct a few misperceptions.
Firstly, while it is true that a Single Market will put pressure on price differentials, it does not mean that the Commission's aim is price harmonisation. The Commission has no mandate to act as price regulator, and in any event in a market economy it would be entirely inappropriate for us to seek to intervene in this way. Our aim as competition authority is simply to help the Single Market to work properly so consumers are able to take advantage of any price differentials that exist.
Secondly, the Commission aim is not to favour large dealerships over small ones. We all know that when it comes to quality of service and consumer satisfaction small dealers can be just as efficient as larger ones. By doing away with the location clause in 2005, our aim is simply to allow the most efficient dealers the chance to get closer to their customers, whether those customers are in a nearby town or in another Member State. Similarly, in opening up the repair networks, the Commission's intention is to break down the "closed shop" and to permit the best repairers to become authorised. We also wanted to allow dealers, including small dealers, whose contracts had been terminated, to be able to stay in business as repairers. In this way skill levels within the authorised repair network will be reinforced.
Thirdly, the Commission does not have a specific target as regards, for example, multi-brand dealerships, or authorised repair outlets. All that the Commission wishes to do is to create more opportunity all round we have no desire to force change on an unwilling dealer, repairer or indeed consumer.
3. The injection of competition brought about by the new block exemption will lead to a real Single Market in motor vehicles, to better customer service, and to more competitive prices in an area which currently accounts for around sixteen percent of the average household budget(2).
However, while the new block exemption will undoubtedly lead to widespread change, not all of this is going to happen overnight. Although the shackles of the old regulation have been taken off, the sector needs a while to loosen up its muscles before it sets about changing things. And in any event, when it happens, the change will not occur all in one go.
Many changes have however started to occur already; indeed some began well before the adoption of the Regulation. Intermediaries, for example, began to gear up their operations before the Regulation was adopted in anticipation of the coming changes.
Other changes are occurring now, during the one-year transitional period. For one thing, perhaps due to the publicity surrounding the new rules, we are seeing a surge in the numbers of consumers electing to buy their cars abroad.
While it is still far too early for us to take stock of the situation, since we are only four months into the transition period, there are many signs of further changes on the way.
New types of partnership are likely to spring up to take advantage of opportunities offered by the Regulation. For example, car manufacturers may team up with Internet operators, as has already happened in the UK with Rover and Virgin Cars. One may also expect that dealership structures will become more diverse. Some dealers will take advantage of their new-found freedom to sell more than one brand on the same site. While some may simply choose to combine back office operations for the brands that they already sell, others will decide that it suits their business to sell an additional brand from the same showroom. Certain manufacturers, notably Suzuki, are said to have chosen to use exclusive rather than selective distribution.
The first area where we will see substantial changes and which is perhaps the most important for the consumer is servicing and repair. Under the new regulation, manufacturers will no longer be able to set limits on the numbers of authorised repairers or stipulate where they must set up shop. This means that many dealers whose contracts have been terminated will be able to stay within the carmakers' networks as authorised repairers. Furthermore, independent repair shops will also be able to join the network, so long as they meet the basic quality criteria. This should improve the quality of service, since manufacturers will now have to set quality standards specific to repair. At the same time, it will reinforce the density of the authorised networks, which are currently being depleted by network re-organisations.
The independent repair sector represents a valuable lower-cost alternative for the consumer, but over the past few years has been increasingly squeezed out by a lack of access to the technical information and diagnostic equipment necessary to repair today's cars. This should change under the new rules, which give independent repairers a broad right of access to technical information, tools, equipment and training.
Consumers are also likely to become more aware as to the real origins of the spare parts used to repair their vehicles, and will have more say as to what spare parts are used and where they come from.
The discussions we are having with distributors and consultants show that the new rules are likely to lead to the development of a new distribution channel for spare parts. Vehicle manufacturers have traditionally only distributed parts through their dealer network. However, carmakers will almost always have high market shares for spare parts for the vehicles they produce, and under the new regulation they will therefore only be able to apply quality-based criteria to those they select to distribute these parts. As a result, they will also have to supply such parts to any independent spare part distributor that meets these criteria.
B. I will now move on to discuss the Commission's competition agenda for this sector.
It is obviously important to ensure that the change from the old regime to the new occurs as smoothly as possible indeed, it is for this reason that the regulation provides for a transition period. I am equally determined, however, to ensure that the change is real, and that reform will not be diverted from its path.
1. Like all of you, I would like the new regime to get off to a trouble-free start. Once the Block Exemption was adopted last July, officials in my department immediately began work on an explanatory brochure, intended to complement the Regulation, and to give all players, including consumers, a degree of guidance as to their rights and obligations.
At the same time, officials have been speaking at various events, in order to present the changes to as wide an audience as possible. They have also been on hand to assist where consumers, dealers, repairers or other operators do not fully appreciate some of the implications of the new rules. One example of this came just before Christmas when we were faced with a large number of complaints from members of Audi's repair network. At a meeting with Audi, DG Competition made it plain that Audi's contracts with its service network were not covered by the old block exemption. Audi could not benefit from the transitional regime which applies to contracts compatible with Regulation 1475/95. Audi was therefore obliged to comply with the new Regulation as of 1 October 2002, and to put in place a system based purely on quality criteria.
As a result, Audi agreed that until new contracts were available, it would keep on or reinstate a great number of the dealers whose contracts it had terminated, who would therefore be able to carry on within the network as authorised repairers. I am pleased to say that at the same time VW also accepted this solution for its other brands, and that Opel took the same stance earlier in the autumn. We are also in contact with several other manufacturers, which will be required to make the same changes, in order to bring their systems in line with the new Regulation. Clearly, if this kind of solution can be arrived at quickly, this is better for all concerned than the outcome that might be reached through more, shall we say, traditional enforcement action.
2. I should caution you that just as I was determined to see this reform through, I am equally determined to see that it works. This regulation will not be like some kind of concept vehicle that looks very pretty, but has no real use in practice. Put bluntly, where we detect problems, we can and will act vigorously to enforce the rules. In the past, we have done so in areas such as price fixing and export bans. We will be equally tough when it comes to the new freedoms offered by the block exemption, and will react decisively if there is any attempt to prevent their proper implementation. In line with the recent modernisation of EC competition law, enforcement will be carried out in close co-operation with the national competition authorities.
There are several areas that we are going to keep a particularly close eye on. The first I would mention is cross-border trade and the Single Market. It is simply unacceptable that large numbers of consumers have to wait months on end to have their vehicle delivered, simply because they come from another Member State. Unfortunately, this kind of delay seems to be on the increase. Such delays not only have important consequences for the consumers themselves; they also affect those who help consumers to buy a car abroad. Intermediaries are a key tool for bringing about a truly Single Market. Plainly, however, such firms only have a viable business model if they can obtain vehicles on behalf of their customers without excessive delays.
Another area that we are already scrutinising concerns the setting of appropriate quality criteria and the appointment of authorised repairers who meet those criteria. Clearly such quality criteria must be proportionate and must be directly related to the quality of the service being performed. Quality criteria that have no function other than to limit the number of operators that can meet them are clearly not genuine quality criteria, and are therefore not permissible.
We are also determined to ensure that the opportunities and choices offered to dealers and repairers are real and exercisable. Any attempt to use inducements or indirect means to prevent those dealers who wish to do so from taking on additional brands or sub-contracting maintenance and repair to another repairer in the network is also likely to attract attention from the Commission. We are equally firm in our determination to ensure that independent operators have a real access to technical information. ACEA, the association of European motor vehicle manufacturers, has repeatedly assured the Commission that such access will be given, and it therefore surprises me that, to judge from the feedback we are getting from independent repairers, some manufacturers are dragging their feet over this.
It is also surprising that many of the contacts we have had with lawyers and consultants relate to ideas for keeping as much of the old system in place as possible, rather than ideas for benefiting from the changes.
There are two points I would like to make here. The first is that many of these ideas involve indirect restrictions, and if any of these are ever implemented, I can assure you that we will not hesitate to intervene. The second point is a more fundamental one, and has little to do with law, but a lot to do with competition, and I might say with common sense. The firms who reap the most benefits from change are rarely those who try to fight against it. Instead, the major beneficiaries of change are usually those that adapt quickly, preferably in ways that competitors have not foreseen. Economists call this the first mover advantage. In my view, if car distribution is indeed at a crossroads, as the theme of this conference would have us believe, those who take the lead are unlikely to be those who remain stuck in reverse gear. The leaders will be those who have read the map in advance and who keep an eye on the road signs.
3. Regulation is not all about shaking the big stick. While certain operators may take exception to some of the elements of the block exemption, it is nevertheless obvious that the advantages that this Europe-wide legislation bestows on the sector far outweigh any disadvantages. This is moreover true for the manufacturer, just as it is for the consumer.
Unlike the competition rules, the vehicle tax rules currently vary across Europe to an extent which is not compatible with a Single Market. In particular, the fact that such differences exist makes it difficult for citizens who move abroad with their cars. Differing rules also have a negative impact on industry, which has to take the various national systems into account when devising different technical specifications for different Member States. Moreover, variations in the rules do not sufficiently take account of environmental concerns. In a nutshell, wide differences in tax rules make the Single Market less transparent and less efficient in this key area. Four months ago, the Commission therefore tabled a comprehensive strategy on car taxation in the Single Market, with a view to obtaining feedback from the Council, from the Parliament and from interested stakeholders. Although there can be no guarantees on the final outcome, since tax is obviously an area where the Member States have a much greater say, the Commission will resolutely work to make vehicle taxation far more straightforward as a result by this initiative.
Back in May 2000, I made a speech here in Brussels in which I argued that the consumer should be put in the driver's seat. Although this was, I admit, provocative, it was meant to jump-start the debate on block exemption reform. In order to understand the aims of the reform better and to measure its success, it is perhaps instructive to look at what I meant by referring to the consumer in this way.
I will not enter into the debate as to whether it is the consumer, the carmaker, or the marketing man who is the motor for change on the manufacturing side. On the distribution side, however, I would suggest that up to now the consumer has had little say in the way that he can buy his vehicle. Instead, this has been chosen for him by car manufacturers and by over-restrictive regulation. The consumer could, as Henry Ford would say, have any colour he wanted, so long as it was black.
In other areas, the consumer has proven himself to be a very competent master of his own destiny, and I see no reason to fear putting him behind the wheel as far as car distribution is concerned. It should not be for the Commission or for the manufacturer to act as back seat driver and seek to dictate to all consumers how they must buy and service their vehicles. If consumers wish, for example, to have their vehicle serviced by the dealer from whom they purchased it, fine let them do it.
If on the other hand they want to buy their vehicle over the Internet, through an intermediary, or from another country, why should we stand in their way? This regulation is all about diversity and choice. It encourages innovation, but does not force it upon an unwilling consumer. It also offers new business opportunities to dealers, spare part suppliers, and new entrants, but does not oblige them to act in any particular way.
To use motoring language, our current agenda is therefore to encourage the consumer to get used to his new vehicle, by providing him and other road users with adequate information. At the same time, we will also keep a sharp eye out for anyone trying to force him off the road. While we will certainly monitor elements such as multi-branding, car price differentials, and the degree to which sales is separated from servicing, these are not to be seen as an end in themselves. Our true aim is to give the consumer a fair share of the benefits arising from the new regime, as required by the Treaty, and to give him more freedom to decide how and where he wants to buy and service his vehicle.
(1) DR Dionysus Lardner (1793-1859), Professor of Natural Philosophy and Astronomy at University College, London
(2) Source = ICDP (consultants)