Dealers fear worst over new car sales laws

Date: 06/02/03

By Karen Carstens

IT MAY be too early to tell what effects last year's landmark block exemption regulation will have on the automotive industry as a whole, but some car dealers fear they may be driven out of business by the new rules.

Although the changes are designed to break the carmakers' stranglehold over retail sales by liberalising how new cars are sold and serviced in the EU, manufacturers were given a one-year period of grace to adapt to the system.

At present carmakers can drop a franchised dealer without giving a detailed reason, but from 30 September 2003, they must provide a valid explanation.

Consequently, there is a tremendous amount of refranchising going on as manufacturers try to consolidate their dealership networks ahead of the deadline.

The dealers fear that manufacturers will increasingly seek to own the bricks and mortar of a showroom and put their own tenant in to run it.

Alan Pulham, director of the UK's National Franchise Dealers Association, said manufacturers were "insidiously moving into the retail distribution process by questionable methods and actions.

"They are culling the dealers and using the one year they have to manipulate things and nullify the benefits in the new regulations."

One tactic used by manufacturers is to persuade dealers to sell large shareholdings in their businesses to the carmakers they represent, claimed Pulham.

"Manufacturers are securing their representations in town and city and expect a dealer to get into a level of debt where he would be respectful and then has no choice to do anything else.

"It may not be his choice to expand but it is being forced upon him. It takes away his free will as an entrepreneur. It is nullified."

British MEP Malcolm Harbour, a former car engineer and sales director with Rover, said: "There should be much clearer guidelines for dealers as to what their rights really are."

However, Harbour believes there are more than enough dealers in most member states and the trend has been downward anyhow.

In the UK, for instance, the total number of franchised dealers has fallen from 22,000 in 1970 to 6,000 today.

PricewaterhouseCoopers (PwC), the global accountancy firm, estimates that figure could fall to 4,000 within a decade as franchise dealers grapple with the rapidly changing business landscape.

A German car industry representative echoed this view, pointing out there are "too many" dealerships across Europe - nearly twice as many per car sold as in the United States - but this consolidation process was just a "side effect" of the block exemption ruling.

"The dealers in Europe are selling too few cars to survive on sales alone," he said.

"They make up for the difference in revenues from service."

In the past, servicing and repair has typically accounted for 60% of dealer profits, but the block exemption reforms mean dealers will come under increasing competition from repair specialists.

Rob Hunt, head of PwC's business recovery services automotive group, said: "These are worrying times for many franchised dealers. Margins are notoriously tight.

"Throw in the uncertainty caused by the implementation of the new block exemption legislation, and there is a shadow hanging over the sector.

"Any dealers ignoring the threat need only look at the fate of the traditional corner shop in the face of the rise of the supermarket chains."

A dealer will typically make only 1-3% percent on new car sales, and smaller dealers will probably feel the pressures most acutely.

It may be too early to tell what effects the 2002 landmark block exemption regulation will have on the automotive industry as a whole, but some car dealers fear they may be driven out of business by the new rules.