Car industry at the crossroads

Date: 06/09/01

Motor dealers across the EU are bracing themselves for a shake-up as Competition Commissioner Mario Monti assesses alternatives to the 'block exemption' scheme which critics claim keeps showroom prices artificially high. Laurence Frost reports

A GLORIFIED cartel whose break-up is long overdue, or an industry with special needs? Europe's carmakers and dealers are bracing themselves for the crucial verdict.

Just months after ending the merger hopes of American aviation giants GE and Honeywell, EU competition chief Mario Monti is turning his attention to another mode of transport, and another kind of problem.

A large envelope was waiting in the in-tray as the trustbuster returned from his summer break. His interpretation of its contents - conservative or radical - will have serious consequences for the Union's €430-billion car industry.

The study by management consultants Arthur Andersen outlines five options for reforming the 'block exemption' that currently allows carmakers to keep an effective stranglehold on distribution.

Since its introduction in 1985, the exemption has enabled manufacturers to impose qualitative, quantitative and geographical restrictions on supply by selling their cars only through a limited number of dealers bound by strict franchise agreements.

The dealers are obliged to follow manufacturers' qualitative standards and instructions on the way cars are displayed and sold. They also agree to provide after-sales support and repair services, and are forbidden to sell other makes of car or advertise outside their localities.

In return for these pledges, the dealer receives the assurance that no other franchise will operate in the same area - a guarantee made possible by the 'quantitative' limits on dealerships allowed by the exemption.

Now consumer groups and internet retailers want the Commission to abolish or cut back the exemption, which they say has kept prices artificially high.

They want an end to the after-sales service obligation to allow high-volume, multi-brand supermarkets and online dealers to get in on the game. And they are pushing for measures to force manufacturers to share the information and software needed to repair cars or supply replacement parts.

But carmakers say the regime must be preserved beyond its expiry date of October 2002 if they are to continue providing the levels of service demanded by consumers, who want expert purchasing advice and local after-sales support.

Most observers agree that the days are numbered for the exemption in its current form - increasingly seen as a form of legalised cartel. "The tide is turning," says Alec Burnside, a competition lawyer with Linklaters & Alliance in Brussels. "The Commission's stance and body language is very clear - it's looking to cut back the block exemption."

That body language became clearer when the Commission recently unveiled figures showing that there had been little change in car price differences between EU countries over the past year. According to the annual report, Germany remains the most expensive eurozone market, with more than half the available models costing at least 20% more than they do elsewhere.

Monti seized on the findings, declaring that "manufacturers' behaviour will be fully taken into account later this year when I will present proposals for the future legal framework for motor vehicle distribution".

But industry points out that the pre-tax prices in the survey are not those paid by the majority of EU consumers. With countries such as Denmark and Greece placing large tax burdens on new cars - a Danish buyer pays a massive 218% in tax and duties - producers say they are forced to lower prices in these markets just to keep their vehicles affordable.

The manufacturers are stepping up efforts to persuade consumers that they are better off under the current regime. "Can you imagine what would happen if you bought a vehicle at a supermarket, drove off and found something was wrong?" says Dolf Lamerigts of the European Automobile Manufacturers' Association (ACEA). "The supermarket will not be familiar with the product - and it won't have the critical technical information it needs to repair your car."

It will, consumer groups retort, if the carmakers are forced to share it. European consumers' lobby BEUC believes an end to the after-sales support pact must be accompanied by measures to force manufacturers to licence on-board diagnostic software and car specifications. "The fact that you have more and more electronics in cars means you need to provide independent repairers with the means to handle them," says BEUC's economic advisor Dominique Forest. "Otherwise it's increasingly difficult to service cars safely." But carmakers are determined to fight such moves, which they hint could be open to legal challenge. "This would probably raise intellectual property issues," says Lamerigts. "How can you get back the investment you have put into technical development if you're forced to give these things away?"

ACEA has commissioned its own study of the reform options from Accenture, which unsurprisingly calls for only slight modifications to the block exemption.

Published today (6 September), the consultancy's report warns that a major shake-up of the existing system would harm competition and reduce the number of repair outlets.

And despite the competition chief's vocal warnings to the industry, Monti-watchers think it is unlikely he will go all the way. "I doubt that he's going to go for the free-for-all option," says Burnside. "That's just going to be too harsh a transition. A lot of people have got an awful lot of capital and social livelihood tied up in the present way of operating - I would have thought they have to be heading for one of the intermediate options."

One such possibility acknowledged in the Commission's brief for the Andersen study would allow carmakers to carry on setting qualitative standards for dealers, but would halt quantitative limits on the number of showrooms authorised to sell their cars, ending the geographical carve-up between them.

It is precisely this scenario that is "being discussed behind the curtain", according to Jürgen Creutzig, president of the European car dealers' lobby European Council for Motor Trades and Repairs (CECRA). "The Commission doesn't talk about it officially - they're waiting for the results of the enquiry," he says, "but there's no doubt qualitative selection would be allowed."

Creutzig says he understands that both studies confirm that abolition of the exemption would cost too many jobs to be considered as an immediate measure. "I fear for the future of 50% of the existing 120,000 authorised dealers in Europe [if the exemption is abolished]" he says. "These are all small and medium-sized companies, with around 15 million employees."

If, as seems likely, Monti does table a compromise somewhere between the status quo and a free-for-all, insiders suggest he may also seek an agreement from MEPs and member states that complete abolition will follow at the end of the next renewal period. This would put industry on enough notice to smooth the transition to free competition.

But the economic effects of such an 'intermediate option' are hard to predict. It could create even greater market imbalances than abolition, improving market access for a new generation of 'cherry-picking' independent dealers, while maintaining the constraints on established network dealers, who are forced to use their own resources to market less popular models.

Meanwhile, parts of the sector have already begun to move towards selling directly to consumers, which allows them - at the price of heavy investment in showrooms - to keep tighter control on distribution and marketing without any exemption from EU competition rules.

DaimlerChrysler terminated contracts with its 156 UK franchise dealers earlier this year, and is setting up its own showrooms across Europe.These already account for three-quarters of the company's sales in Germany. Fiat, Renault and Citroen also have a growing number of 'owned outlets' that contribute around half their total EU sales.

But with other big carmakers still hanging back, Monti's imminent decision could trigger a flurry of activity across the industry. CECRA says that Volkswagen, Audi, Porsche and Opel have so far pledged to stand by their franchise networks. "That strategy is based on the prolongation of the block exemption beyond 2002," says Creutzig. "If that doesn't happen, they'll change their minds overnight."

Motor dealers across the EU are bracing themselves for a shake-up as Competition Commissioner Mario Monti assesses alternatives to the 'block exemption' scheme which critics claim keeps showroom prices artificially high.