European Commission proposes changes to block exemption in the car sector, February 2002

European Commission proposes changes to block exemption in the car sector, February 2002

The block exemption which has protected car manufacturers from normal competition rules since 1984 has been under scrutiny by the European Commission, which is now of the opinion that it has not been of benefit to consumers. Car distribution in the European Union is currently regulated by Block Exemption Regulation 1475/95, which expires on 30 September 2002. On 15 November 2000, the European Commission adopted an evaluation report on the Block Exemption, as required by the regulation. This was followed by an extensive review and consultation process which resulted in the European Commission's proposed changes being published on 5 February 2002.

Background

Article 81(1) of the Treaty establishing the European Community, formerly Article 85(1) of the Treaty of Rome, prevents agreements which limit or distort competition within the European Union, but exemptions can be made, under Article 81(3), formerly 85(3), if there are economic advantages to be gained by limiting competition. In 1984 a block exemption was granted to the motor vehicle distribution and service sector which allowed selective and exclusive arrangements between manufacturers and dealers. The justification given for this was that cars require expert maintenance and after-sales service and that free competition might lead to the collapse of a reliable and expert service network. This exemption was extended in 1995 by Commission Regulation (EC) No 1475/95 of 28 June 1995 on the application of Article 85(3) of the Treaty to certain categories of motor vehicle distribution and servicing agreements which also required the European Commission to draw up an assessment report by 31 December 2000, taking particular account of the impact of the authorised distribution system on product price differentials between Member States and on the quality of service to final consumers. As a result of this evaluation, the European Commission indicated that the current exemption from competition rules will not be allowed to continue in its present form after it expires in September 2002, as it has created problems and is not working in the best interests of consumers. It began to consider abandoning the block exemption on car retailing which has protected manufacturers from normal retailing rules for 20 years and proposing an overhaul that could force a radical restructuring of dealer groups, service provision and vehicle distribution across the industry and raise the prospect of lower prices.

• Consumers and prices

The European Commission's twice-yearly report on Car price differentials in the European Union has consistently revealed major differences in new car prices between Member States. A number of studies, conducted since consumer groups started voicing concern, suggest that different tax levels, exchange rates, dealer margins and the right-hand drive surcharge explain only a fraction of the differences between prices in different countries. In addition to receiving complaints from consumers about high prices in some Member States (particularly the UK), the European Commission has also received complaints about difficulties encountered in trying to buy a car in another Member State: finding a dealer willing to sell, long delays before delivery and excessive supplements for right-hand drives.

'Consumers are not benefiting from the single market in cars', said Dominique Forest of European Consumers' Group (BEUC).

The selective and exclusive distribution system that pertains under the block exemption rules has allowed market segmentation and price differences. Manufacturers select their network of dealers and oblige them to sell only to end-users; in return dealers benefit from an exclusive dealership within a defined territory. In principle, dealers could not refuse to sell to end-users from another country, but in practice dealers have been under pressure from manufacturers to discourage consumers from purchasing cars in another Member State. Selectivity gives manufacturers power over dealers in terms of sales policy for non-resident consumers, discounts and prices.

• The motor industry - quality and safety

The Society of Motor Manufacturers and Traders (SMMT) is strongly of the opinion that

consumer expectations of safety, reliability and durability can be best met by franchised dealers specialising in one make of car and that consumers want franchised dealers offering full after-sales care when buying a new car. The consumer wants the 'confidence he gets when dealing with a local franchised dealer that will be with him long after purchase.'

A report on attitudes to new car distribution was published in 2001 by Taylor Nelson Sofres, a market research company. In a press release about the report, published on 13 February 2001, Christopher Macgowan, Chief Executive of the SMMT, said:

'These findings fly in the face of reports that block exemption works against the consumer interest. Car buyers here and in the rest of Europe recognise that competition is strong and are not afraid to bargain hard for the best deal. They also understand the technical complexity of a unique product that is best served by a well-trained, dedicated sales and after-sales network. This report shows that consumers are keen for it to continue'.

The report is the result of research in five countries (France, Germany, Italy, Spain and the United Kingdom). In each country, consumers felt that selective and exclusive distribution best suited the technical complexity of motor vehicles. Strong competition between different makes of car was highlighted as a key benefit of the current system. The convenience of dealer networks was also felt to be important and over a third of buyers reported visiting at least two dealerships of the same make to research and negotiate the best possible deal.

Other findings show that the so-called 'sales and servicing link' is highly valued. Franchised dealer services are seen as part of the overall package when buying a new car. Consumers also recognise the role of manufacturers in maintaining high standards of dealer selection, training and after-sales care.

Some facts and figures in the report:

• 80 per cent of Europeans think that competition between brands is strong. In the UK the figure is 73 per cent. 76 per cent considered that competition has increased during the last decade;
• 59 per cent of Europeans and 55 per cent of UK customers prefer to service within the franchised network after expiry of the warranty;
• 71 per cent of all polled agree with the statement 'When I buy a car I also buy the dealership for maintenance of the brand';
• 90 per cent feel it is important that there is a local brand specific outlet in case of problems when travelling locally and abroad;
• 83 per cent polled agreed with the statement 'Getting the maintenance or repairs carried out by a garage of the same make, it is for me an additional guarantee';
• 35 per cent of Europeans visited at least two dealerships representing the make they bought. 71 per cent of UK customers negotiated on price.

Consumers rejected new car sales through supermarkets. They felt less confident about their ability to match franchised dealer standards, reporting negative feelings for quality of after-sales service, repair safety and provision of technical information.

The SMMT claims that,

• The market must be regulated to protect consumers;
• A network of franchised dealers guarantees standards and service levels;
• The internet is an important part of the distribution chain (for comparing technical and price information);
• Distribution rules have no impact on prices - variations are due to currency rates and national tax levels. If the UK accepted the euro and tax harmonisation there would be no difference.

The EU's Economic and Social Committee also decided that ending selective distribution systems for car sales was not the correct way forward. It was in favour of amending the regulation to improve the possibilities for intra-brand competition, dealer independence and the provision of technical information by manufacturers to independent repairers.

'The Committee feels that the way forward is to modify and prolong the block exemption rather than putting an end to the selective distribution system. The Committee favours confirming the special block exemption for motor-vehicle distribution, and urges the Commission to explore methods of amending and prolonging the current regulation. The primary aim of the new regulation should be to raise the overall level of competition in order to improve consumer choice and the operation of the single market. In order to achieve these objectives, the new regulation should have a practical impact in providing greater protection for dealers and promoting the SMEs operating in the European car sector'.
Press Release CES/01/64 (31.05.01)

Christoph Konrad, MEP and member of the Economic and Monetary Affairs Committee of the European Parliament called for an end to the agreements which restricts dealers to only one make of vehicle, and compels them to offer after-sales servicing. Consumers' groups and independent retailers say the rules are an obstacle to healthy price competition between car makers, and between each brand's dealers. Internet retailers and supermarkets believe they can cut prices if they stock more than one brand, and if dealers are forced to drop the servicing requirement. Although the Konrad proposals would allow dealers to advertise outside their geographical zones and on the Internet, they stop short of abolishing restrictions on the number and type of dealerships. Online retailers say these limits keep them out of the market, by denying them the chance to buy directly from manufacturers.

Review and assessment of 1475/95

Regulation No 1475/95 on motor vehicle distribution required the European Commission to draw up an assessment report by 31 December 2000, taking particular account of the impact of the authorised distribution system on product price differentials between Member States and on the quality of service to final consumers.

To assist it in this assessment, the European Commission sent out in September 1999 questionnaires to more than a hundred parties involved in the motor vehicle distribution trade, including consumer associations, dealers, independent repairers, independent importers, spare-part producers, firms which sell through the Internet and all the motor vehicle manufacturers. The survey was intended to provide the European Commission with the information it needed to assess price differentials and service quality for consumers and the questionnaires were intended to provide three types of information:

• recent developments in the motor vehicle distribution trade
• whether the objectives set out in the Regulation have been achieved
• whether technical developments in motor vehicles and new marketing and distribution methods (Internet, hypermarkets) do not call into question the very basis of a specific regulation for the motor vehicle distribution trade. In this context, the Commission wished to check whether the "natural" link between the distribution of new vehicles and the provision of after-sales service still exists.

The Report on the evaluation of Regulation (EC) No 1475/95 of 28 June 1995 on the application of Article 85(3) [now 81(3)] of the Treaty to certain categories of motor vehicle distribution and servicing agreements was adopted by the European Commission on 15 November 2000. It gave a thorough factual analysis of the current regime for motor vehicle distribution and servicing, but did not contain any proposals for the future. In particular, the evaluation report examined whether or not the assumptions on which this regulation was based are still valid and whether the objectives that it pursued have been met. It concluded that the 1995 Block Exemption had only achieved some of the aims that the European Commission had in mind when it renewed its permission to use selective and exclusive distribution networks for the distribution of motor vehicles and that some of the assumptions upon which the regulation was based were now questionable. Certain problems identified were:

• Consumers do not derive a fair share of benefits from the system
• Consumers find it difficult to make use of their Single Market right to take advantage of price differentials between Member States
• Competition between dealers is not strong enough
• Dealers are too dependent on car manufacturers

In December two further studies, commissioned from independent consultants, were published:

• Car price differentials in the European Union: an economic analysis, by Hans Degryse and Frank Verboven (K.U. Leuven and C.E.P.R); and
• The natural link between sales and services, by Autopolis.

All interested parties active on the automotive market were invited to comment on the evaluation report and the two studies, and, when more than 65 contributions had been received, the European Commission organised a public hearing: Public hearing of 13-14 February 2001 on motor vehicle distribution - speaking notes and presentation slides.

It provided an opportunity to express views orally and to meet the other stakeholders. The event brought together a wide range of interest groups involved in the automotive market, including consumers, in order to give the European Commission, as well as the parties attending, a more complete understanding of the different points of view regarding the future of car distribution in the European Union. More than 320 participants attended this hearing organised by the Directorate General for Competition. Participants represented approximately 120 national or European-wide organisations and individual undertakings, among them ACEA (European Automobile Manufacturers Association) JAMA (Japanese Automobile Manufacturers Association), CECRA (Conseil Européen du Commerce et de la Réparation Automobiles) and BEUC (European Consumers' Organisations). For certain groups (manufacturers, dealers, independent repairers and consumers in particular), the most representative professional organisation, normally the European federation, was allocated an overall speaking time to share out between its member companies and/or organisations. This approach aimed where possible to provide each group with the opportunity to present a joint, more structured and detailed position.

The first day provided the opportunity to have a general discussion on the report, and was organised as a forum for free exchange of views between the groups concerned. The second day of the hearing consisted of two more technical, structured sessions on specific themes. In the morning, contributions concentrated on a regulatory system that would best ensure workable competition in the after-sales service market. In this regard, a number of specific issues were addressed, including access to the technical information necessary for the repair and maintenance of motor vehicles. In the afternoon, speakers expressed their views on what would be the most effective way to ensure workable competition in the market for the sale of new motor vehicles. In this respect, obstacles to parallel imports, and the need to meet the objectives of the Internal Market, were two of the many subjects discussed.

The European Commission also put out a tender for a third, wide-ranging study to examine the potential impact of five possible regulatory scenarios on all relevant parties. The contract for the study was subsequently awarded to Andersen and its Study on the impact of possible future legislative scenarios for motor vehicle distribution on all parties concerned was published in December 2001.

The five legislative scenarios analysed are:

• A system in which independent car distributors have the right to purchase new vehicles from manufacturers or their official distribution networks (the so-called "free for all" scenario);
• An exclusive distribution system in which the manufacturer agrees to sell new vehicles only to a single distributor within a well-defined territory;
• A selective distribution system based only on qualitative criteria;
• A selective distribution system based on qualitative and quantitative criteria, with no territorial exclusivity;
• A selective distribution system based on qualitative and quantitative criteria with limited territorial exclusivity in which active and passive sales in other territories are unrestrained.

The specific issues that may influence each scenario are:

• the link between sales of new motor vehicles and after-sales services;
• multi-branding for sales and after-sales services;
• access to technical information for independent repairers;
• distribution of original spare parts;
• dealer remuneration;
• allocation of vehicles (and particularly the "first come first served" principle);
• direct sales;
• the role of intermediaries;
• the availability clause.

The in-depth report that resulted from this study allowed the European Commission to obtain the information that it needed to assess the economic effects that several alternative legislative regimes may have on the competitive structure of the market and particularly on all current market players, on new entrants (or would-be entrants) and on consumers. The study analysed the impact on four areas of competition: competition between different makes, competition between players representing the same make, competition in after-sales servicing and European market integration. The study does not contain any proposal for any future regime. This condition was a pre-requisite for the study and was set out in the terms of reference.

Latest proposals

In drafting its proposals for a future motor vehicle distribution system, the European Commission took into account the evaluation report, the three studies, views expressed at the hearing as well as comments received from interested third parties. Its proposal for a new regime were announced, on 5 February 2002, in two press releases: Putting the consumer in the driver's seat - the Commission proposes a bold reform of car sales rules (IP/02/196) and The Commission's draft for a new motor vehicle Block Exemption Regulation - questions and answers (MEMO/02/18).

The European Commission explained:

'The new draft regulation aims to remedy the competition problems identified in the Commission's 2000 evaluation report on the current competition regime. It is designed to increase competition and bring tangible benefits to European consumers for both vehicle sales and servicing. The regulation will open the way to greater use of new distribution techniques such as Internet sales. It will lead to more competition between dealers, make cross-border purchases of new vehicles significantly easier, and lead to greater price competition. Consumers will be better informed and it will be easier to compare cars and associated services offered by dealers. Car owners will have easier access to after-sales servicing, potentially at lower prices. The quality of vehicle servicing and repairs will be fully maintained. With regard to all these aspects, the driving theme that has inspired the draft regulation is that the consumer's interests must be put first'.
Press Release IP/02/196

The block exemption has not been abandoned as the Commission concluded that normal competition rules for distribution agreements do not contain sufficient safeguards to remedy the problems identified in the evaluation report, and that a stricter - although more flexible -regime for the car sector is necessary. Principal features of the proposed changes are:

• Manufacturers may choose between exclusive distribution, where each dealer is allocated a sales territory, or selective distribution, where dealers are selected according to a set of criteria;
• Dealers may choose to sell more than one brand;
• Consumers will find it easier to purchase a cheaper car from any EU country, especially through the use of intermediaries;
• Dealers may choose whether they wish to carry out after-sales service themselves or contract it out;
• Dealers may opt to become official repairers and not retailers;
• Manufacturers wishing to terminate an agreement with a dealer must give clear written reasons for doing so;
• Manufacturers may choose whether they wish to sell to supermarkets, which may become dealers or intermediaries;
• Manufacturers are not obliged to sell to Internet distributors, although no dealer who meets the manufacturer's criteria may be restricted from using the Internet.

As to whether the new Regulation will result in lower prices, the European Commission said,

(it) 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 price levels and price differentials that cannot be justified. In this respect, bi-annual car price reports issued by the Commission identify price differentials which may indicate a lack of competition or market-partitioning. The new regulation aims to create the market conditions which will lead to a reduction of the existing high price differentials in the European Union and to more competitive prices on the sales and after-sales markets.
Press Release MEMO/02/18

The draft regulation will be submitted to the Advisory Committee on Restrictive Practices and Dominant Positions, consisting of representatives from the Member States, at the beginning of March. It will also be sent to the Economic and Social Committee and the European Parliament. It will then be published in the Official Journal in order to give all interested parties the possibility to comment. After written comments from all interested parties, and following a second consultation of Member States (via the Advisory Committee), the draft will be finalised and submitted to the Commission for adoption. It will come into force on 1 October 2002, although there will be a transition period (probably one year) during which all existing distribution agreements will have to be brought into line with the new rules.

Further information within European Sources Online

European Sources Online: Topic Guide:

• The competition policy of the European Union. September 2000.

European Sources Online: In Focus

• New car prices still differ substantially across the European Union, July 2000. 16 July 2000

European Sources Online: European Voice
	28.06.01:	Spoils shared in war of the showrooms
	26.07.01:	Car pricing study labelled 'unfair' by manufacturers
	06.09.01:	Car industry at the crossroads
	13.09.01:	Branson attacks call for seven-year wait to end block exemption
	13.12.01:	Car sales study clears the way for reform
	17.01.02:	Showroom revolution may backfire
	14.02.02:	Carmakers to face fines if they thwart reform with price hikes [link available shortly]
European Sources Online: Financial Times
	28.02.01:	Rules of engagement all set for change: European distribution and block exemption
	26.06.01:	Car sales reform prompts warnings
	24.07.01:	Monti warns carmakers on prices
	06.09.01:	Report tries to head off EU car sales reforms
	07.09.01:	Brussels plans to free up car market
	07.09.01:	Blocked out
	10.09.01:	The EU's car-tel
	03.12.01:	Call for reform of EU rules on new car sales
	11.12.01:	Call to overhaul Europe's car retail market
	10.01.02:	Brussels moves to end carmakers' exemption from competition rules
	15.01.02:	Brussels car sales plan 'threat' to small dealers
	16.01.02:	Peugeot chairman warns EU on car sales changes [FT.com]
	18.01.02:	Brussels' plans for car retailing irks Germans [FT.com]
	29.01.02:	Industry attacks EC's shake-up for car dealers [FT.com]
	04.02.02:	Discord over Monti's reform plan for car sales [FT.com]
	05.02.02:	US carmakers' powers cut under new EU proposals [FT.com]
	05.02.02:	EU reform plan to throw open car sales could see prices drop [FT.com]
	06.02.02:	A rough ride for Europe's carmakers: price harmonisation and the liberalisation of dealer networks will put pressure on the automotive industry [FT.com]
	06.02.02:	Monti pushes through car sales shake-up [FT.com]

Further information can be seen in these external links:
(long-term access cannot be guaranteed)

EU Institutions

• European Commission: DG Competition
• Homepage
• Car sector
• Distribution of motor vehicles
• Car price differentials in the European Union
• Car manufacturers hotlines - information centres for car buyers
• Commission Regulation (EC) No 1475/95 of 28 June 1995 on the application of Article 85(3) of the Treaty to certain categories of motor vehicle distribution and servicing agreements
• Explanatory brochure on Regulation 1475/95
• Report on the evaluation of Regulation (EC) No 1475/95 of 28 June 1995 on the application of Article 85(3) [now 81(3)] of the Treaty to certain categories of motor vehicle distribution and servicing agreements. November 2000.
• Car price differentials in the European Union: an economic analysis. Hans Degryse and Frank Verboven (K.U. Leuven and C.E.P.R). November 2000.
• The natural link between sales and services. Autopolis. November 2000.
• Public hearing of 13-14 February 2001 on motor vehicle distribution - speaking notes and presentation slides
• Customer preferences for existing and potential sales and servicing alternatives in automotive distribution. Dr Lademann & Partner. December 2001.
• Study on the impact of possible future legislative scenarios for motor vehicle distribution on all parties concerned. Andersen. December 2001

European Commission: DG Press and Communication
	15.11.00:	Commission adopts evaluation report on motor vehicle distribution and servicing under Regulation 1475/95
	14.02.01:	Commission hearing discusses the future of car distribution in the EU
	19.02.01:	Car prices in the European Union: still no clear trend towards a substantial reduction of price differentials
	31.05.01:	Ending selective distribution systems for car sales not the correct way forward says European ESC
	23.07.01:	Car price differentials in the European Union remain high, in particular in the high volume segments
	10.12.01:	Commission publishes a study on the future of car distribution
	05.02.01:	The Commission's draft for a new motor vehicle Block Exemption Regulation - questions and answers
	05.02.01:	Putting the consumer in the driver's seat - the Commission proposes a bold reform of car sales rules
	14.02.02:	E-Commerce and car distribution (SPEECH/02/68)

European Commission: DG Press and Communication: EUR-LEX

• Treaty establishing the European Community, Article 81 (3), formerly Article 85 (3) of the Treaty of Rome.

European Parliament

• Committee on Economic and Monetary Affairs
• Public Hearing on the future of car distribution in Europe, 11 September 2001
• Agenda
• Questionnaire
• Position papers of the experts

National organisations

United Kingdom: Office of Fair Trading (OFT)

• Report on alleged breaches of the Supply of New Cars Order 2000, Article 2(1)
• Press releases
  • OFT publishes report into new car discounts and gives views on EC block exemption (29.01.02)

Non-governmental Organisations

Auto Body Projects (ABP)

• Homepage
• Block exemption: the RMI [Retail Motor Industry Federation] answers the motor industry's questions

Autopolis

• Homepage
• The block exemption and the European aftermarket
• Summary of the Autopolis report on the sales-service link
• 09.07.01: EU advisors publish controversial report on the block exemption.
• 05.02.02: Commission's proposals "make sense" says Autopolis

Automobile Association (AA)

• Homepage
• News
• Imported cars - buying an import
• Buying a car on the internet
• AA Buyacar launches on the web

European Automobile Manufacturers Association (ACEA)

Society of Motor Manufacturers and Traders - SMMT

News organisations

BBC News Online

	23.07.01:	EU: cars cost most in the UK
	23.07.01:	Q&A: Rip-off car prices
	08.08.01:	The soaring cost of running a car
	07.09.01:	EU overhauls car market
	17.01.02:	EU plan to push down car prices
	05.02.01:	European car market set for shake-up
	05.02.01:	Brussels shakes up car market

Further and subsequent information on the subject of this In Focus can be found by an 'Advanced Search' in European Sources Online by inserting 'block exemption' in the keyword field.

Freda Carroll
KnowEurope Researcher
Compiled: 9 February 2002

The block exemption which has protected car manufacturers from normal competition rules since 1984 has been under scrutiny by the European Commission, culminating in the proposal of a number of changes on 5 February 2002.