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Block Exemption:when will we know its future?

The current review of the European Union’s (EU) Block Exemption from EU competition law for the auto sector could lead to Eurocrats taking a tougher stance on links between dealers and carmakers.

Discussions on what linkages should be permitted between the various parts of the automobile supply chain have continued in earnest since May 2008.

In July a formal consultation paper was released by the European Commission.

Interested parties’ comments are now being examined.

The next step is an announcement of a new set of Block Exemption rules, with the commission empowered to make its own decision without reference to the European Parliament and the EU Council of Ministers.

Term of office

But when will that happen? The current commission term of office expired on November 1.

Competition commissioner Neelie Kroes, who will make the recommendation to the ruling College of Commissioners, is unlikely to be reappointed to her current post.

So will Kroes make the final decision, or leave it for her successor who may not be in place until the new year.

Regardless, a new Block Exemption system has to be announced by May 31, when the authorisation for the existing regulation expires.

There are few definite outcomes of the current review.

But one is the survival of some special rules allowing the maintenance of closer relationships with EU carmakers by auto dealers and after-market services than is allowed under standard EU competition law.

In its July paper, the commission accepted there is no benefit to forcing the auto sector into outright free competition.

The sector is far from bursting at the seams with demand requiring freedom to reach its full potential.

Indeed, the commission noted that the industry was “virtually unanimous that the sector should continue to benefit from a Block Exemption”.

Even then, any mandated loosening of the links within the EU auto supply chain would probably be delayed, according to the paper, with a new system for dealers postponed until May 2013.

The European Commission announced in July that it would preserve the existing EU Block Exemption system for primary sales until that date, protecting the auto sector from the standard application of EU competition rules.

However, it wants to bring in new rules for operating the aftermarket next May.

This delay will allow manufacturers to preserve current restrictive relationships with dealer networks.

Hit particularly hard

In its paper, the commission said care was needed because the “industry has been hit particularly hard by the recession”.

However, serious abuses of competition harming consumers still needed to be tackled: “The future regime should enable competition authorities to deploy their resources for the prosecution of the most serious breaches of competition rules,” said the paper.

So what possible reforms may come in 2013?

Brussels wants to focus on real competition problems, allowing the protection of auto sales markets with restrictive contracts until manufacturers grow national market shares above 30%.

But if market shares grow larger, then the commission could intervene to insist on more choice, using a reserve authority.

Brussels wants to further ease restrictions on dealers opening up new showrooms and sub-contracting aftersales.

The commission wants to ban manufacturers with more than 30% national market shares from insisting that warranties will only be honoured if motorists use authorised repairers.

It will also develop detailed rules impeding manufacturers from restricting competition within networks of authorised repairers.

And Brussels will develop detailed guidance saying when auto manufacturers can insist that only their parts can be used in repairs, rather than third party “matching quality” parts.

Some independent observers might think the commission is being conservative and cautious.

But UK dealer associations, such as the National Franchised Dealers Association (NFDA) and the Scottish Motor Trade Association (SMTA) do not support the idea.

Security to invest

“We want it to stay as it is and we want it to go a lot longer than three years. Members need security to invest and three years is not enough,” said Douglas Robertson, chief executive at the SMTA.

“After 2013 manufacturers will have more power over the dealerships,” Robertson explained.

“If the Block Exemption is done away with then, which it looks like will happen, dealers will lose some of their rights.”

These rights include provisions obliging manufacturers to justify ending a contract, the right to run multi-franchise dealerships and to sell
a dealership to another dealer within the franchise without the manufacturer’s permission.

If the Block Exemption is scrapped, manufacturers could use their muscle to have a final say over these decisions, said Robertson.

“I’d like to see more power remain with the dealers. But let’s be realistic, that’s unlikely to happen unless the commission has a radical change of mind.”

The NFDA expressed similar concerns in its response to the European Commission.

Playing into manufacturers’ hands

NFDA director Sue Robinson said: “The abandonment of sector-specific rules in favour of a looser system of general regulation will play directly into the hands of the most powerful market players, namely vehicle manufacturers.”

Robinson said the commission’s preference for applying general competition rules to the automotive sector would “signal a return to the types of market abuses seen in the automotive sector prior to the adoption of the Block Exemption, albeit achieved through more subtle means” and urged the commission to reconsider. 

Dealers themselves have also responded to the commission’s plan.
Ford dealers in the EU outlined in a joint document how taking away Block Exemption would “eliminate all dealer protection provisions and limit dealers’ ability to sell their business freely and openly”.

They said: “It would weaken dealers and strengthen manufacturers and destroy the delicate balance that currently exists between the two.”

The NFDA expressed its own concerns about the commission’s preference for implementing new sector-specific guidelines for aftersales.

In her response to the commission, Robinson wrote: “As far as the aftermarket is concerned, the NFDA believes that it should continue to benefit from sector-specific rules, although at this stage, it is difficult to see how a sector-specific aftermarket regulation would provide additional legal certainty, given the very substantial market shares of carmakers in those markets.”

As stated by the Independent Garage Association (IGA) in its own submission: “To review and reinforce automotive Block Exemption would be more productive than to disseminate the legislation where it might be overlooked or diluted.”

Other industry sectors are also fighting to save current regulations.
Toby Poston, head of communications at the British Vehicle Rental and Leasing Association (BVRLA), said if the independent aftersales market cannot compete against franchised garages, costs could rise for BVRLA’s members.

“Cars are getting more complicated, and independent repairers could be affected if they can’t get hold of technical data and equipment to service cars,” he said, noting leasers would then have to use franchised repairers.

The other concern for leasing and rental companies was maintenance of their ‘end-user status’ – basically warning manufacturers to stay away from the leasing companies’ customers.

“A lot of manufacturers offer the same services as we do, so our members want to remind manufacturers that we are their customer” Poston said.

It seems only the manufacturers welcome more competition.

General competition rules

The Society of Motor Manufacturers and Traders (SMMT) and the European Automotive Manufacturers Association (ACEA) said they favour implementing general competition rules in 2013.

But the SMMT said it is most concerned with how a new regulation would be implemented.

“We’re quite comfortable that any of the proposed changes will be acceptable, but it’s just a matter of having a smooth transition and making sure there’s enough notice,” said an SMMT spokesman.

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