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Block exemption: when will we know what the future holds?

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 in the relationship between dealers and manufacturers.

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, these were ramped up with the release of a formal consultation paper from the European Commission.

Interested parties had until September 25 to make comments; they are now being examined by the Commission’s directorate general for competition.

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.

But when will that happen?

The current Commission term of office expired on November 1.

The current 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 wait until her successor is in place?

This may be the New Year, (because of some outstanding constitutional issues, the current Commission may stay on as a caretaker for two months).

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 specific outcomes of the current review – but one is the survival of some special rules allowing the maintenance of closer relationships with EU car makers by auto dealers and aftermarkets 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 mandated for most EU economic industries, banning restricted dealership networks.

Europe’s auto sector is far from bursting at the seams with demand requiring freedom to reach its full potential.

Indeed, in consultation thus far, the Commission noted that the EU auto 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 the paper, with any new system for dealers postponed until May 2013.

The European Commission announced in July it would preserve the existing European Union (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 auto manufacturers to preserve current restrictive relationships with dealer networks.

In its paper, the commission said care was needed because the “industry has been hit particularly hard” by the recession, “mainly because it was already suffering from structural overcapacities”.

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.

This would involve Brussels using a reserve authority and, “to enhance legal certainty,” guidelines would be drafted saying “when single-branding obligations foreclose new entrants and lead to anti-competitive effects,” the Commission can step in and insist on free competition.

Regarding how dealers actually work with their suppliers, Brussels wants to further ease restrictions on dealers opening up new showrooms and sub-contracting after-sales.

As for the aftermarket reforms that the Commission wants in place next year – it wants to ban manufacturers commanding 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 some UK dealer associations, such as the National Franchised Dealers Association (NFDA) and the Scottish Motor Trade Association (SMTA) do not support the idea.

“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, 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, and the free market rules under the EU’s general competition regulations, manufacturers could use their muscle to have a final say over these decisions, says Robertson - a situation he finds inappropriate in today’s market.

“How can anyone seek, for example, finance to assist in running their business, when they are not in control of the future of that business.

“Lenders would not be happy at the situation and quite rightly so,” he said.

“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.

“The safest way to preserve the improvements in competition (and resulting consumer welfare) seen in the European automotive sector over recent years, is through the renewal of the Motor Vehicle Block Exemption (MVBE) in respect of both new car sales and the aftermarket,” read the opening comments of NFDA director Sue Robinson’s executive summary.

“The abandonment of sector-specific rules in favour of a looser system of general regulation (even if accompanied by 'soft law' guidelines) 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 MVBE, 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 the block exemption would “eliminate all dealer protection provisions and limit dealers' ability to sell their business freely and openly.

The dealer said: “It would weaken dealers and strengthen manufacturers, and thus destroy the delicate balance that currently exists between the two.

“More and more small and medium-size dealers would exit the market, with severe limitations for geographical sales and service coverage, and with consequent implications for retail prices.”

But despite dismay among dealers, Peter Cooke, Buckingham University’s KPMG Professor of Automotive Management, predicted the current regulations will be scrapped.

“I think the block exemption for all intents and purposes will go away. It will be a more competitive market, and it will depend on the strength of the brand to be competitive,” he said.

Although this may be problematic for some dealers, Cooke said more competition could be an asset.

“It benefits the better organised dealers. I can see a certain dichotomy where you will get strong dealers putting a number of franchises on one site.

“I think it will also strengthen family dealerships, who have established personal relationships and have very loyal clients,” he said.

“There’s no such thing as a bad car on the market these days, so there will be more and more importance placed on the relationship between buyers and dealers.”

Given that the Commission split the block exemption review into two divisions, separating dealers and manufacturers from the aftersales market, repair personnel have a different view of what they want to see.

“We and other people in the independent after market have devised our own opinion,” said Brian Spratt, chief executive of the Automotive Distribution Federation (ADF) in the UK.

“Of the four options laid out by the Commission, the first two we say are unsuitable for our market.”

He explained they would like to see a regulation somewhere between Brussels’ ‘option 3’, which would adopt sector-specific regulations in the form of guidelines, and ‘option 4’, which is basically a total renewal of current regulations.

“What we’re trying to achieve is that the new regulation gives people in the independent after market some legal certainty.

“There is a great danger that the Commission would go for a fairly loose regulation, giving big car companies and franchised outlets the opportunity to run rings around us,” he said.

In his response to the Commission’s policy paper in July, Spratt wrote on behalf of UK’s aftermarket sector: “It is hoped that any replacement measures introduced by the Commission recognise the tendency of vehicle manufacturers to attempt to use their considerable resources to neutralise the independent sector’s activities, which, consequently, can result in a very palpable consumer detriment through lack of choice, inconvenience and monopoly pricing.”

Spratt said they can only hope the Commission will take the after market’s opinions into account.

“We’ve reasoned the thing out. We don’t think we’re asking for anything unreasonable,” he said.

The NFDA expressed its own concerns about the Commission’s preference for implementing new sector-specific guidelines for the after sales market.

In her response to the Commission, NFDA director Sue Robinson wrote: “As far as the aftermarket is concerned, the NFDA believes that aftermarkets 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 VMs 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.

“It’s more expensive to have a car serviced at a franchised repair shop, because it looks better to have an official stamp in your log book.”

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.

“They want to get closer to our customers and one day seduce them away. It’s not a legal requirement we’re asking for so much as we’re trying to make sure the manufacturers remember that.”

It seems only the manufacturers welcome more competition.

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

“The two regulations are not so fundamentally different, but there are two or three main differences,” said Marc Greven, ACEA’s head of legal affairs.

“The biggest difference is that in the general exemption you have no provisions protecting dealers from termination of agreements by the manufacturer.”

This means manufacturers would no longer have to justify ending a dealer’s contract.

Furthermore, dealers could not sell competing brands in the same showroom or sell franchises to other dealers without the manufacturers’ permission.

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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