Briefing Paper: Automotive. The Commission's Impact Assessment - Will competition stall?

Transcription

1 Briefing Paper: Automotive The Commission's Impact Assessment -

2 The European Commission is proposing to extend the Motor Vehicle Block Exemption (MVBE) until 31 May 2013 for new vehicle sales. This regulation, which has helped promote competition in Europe's automotive sector, has been in operation since On the plus side, the sector will benefit from continued regulatory certainty in the short to medium term. The extension should also enable dealers (and their funders) to consider their longer-term franchise and investment commitments in light of any new terms and rewards proposed by manufacturers over the next few years. However, the Commission has recommended that after 31 May 2013, new vehicle sales should be regulated under a general (i.e. looser) block exemption, with sector-specific guidelines. This article sets out what impact this change could have on authorised dealers and consumers. It also considers whether the granting of greater control to vehicle manufacturers over dealer networks, which is implicit in the MVBE's eventual demise, will create difficulties for those manufacturers that seek to capitalise on this control. Weaker regulation and enforcement? General regulation will weaken the chances of private enforcement of competition law by smaller businesses (i.e. dealers), which are unable and/or unwilling to sustain the uncertainty and cost of enforcing their rights under a looser system of regulation. Consumers will suffer as a result of a less effective system of enforcement. Indeed, the absence of any 'checks and balances' in the distribution chain may lead to more consumer complaints and necessitate greater regulator involvement in the long term. It is hoped that the formulation of sector-specific guidelines will provide some counterbalance to the eventual loss of the MVBE, however, the fact remains that a general regulation will inevitably provide a safeharbour for a wider range of restrictive behaviour. In any event, it is essential that the guidelines set out, in a clear and robust manner (with detailed examples), the types of restrictive behaviour that are unlikely to be acceptable in the context of motor vehicle distribution. Increased potential for abuse / reduced incentive to invest? Manufacturers are likely to acquire much greater control over dealer networks. For example, there will be no regulatory obligation on manufacturers in future to: give dealers (in most circumstances) a minimum of two years' notice of termination for open-ended agreements or, for fixed-term agreements, a minimum term of five years; issue detailed, objective and transparent reasons explaining why the manufacturer is terminating a particular dealer; permit dealers to refer disputes to an independent expert; or

3 allow dealers to sell their franchises to other dealers within their network. The removal of these rights is likely, in practice, to make dealers more dependent on the goodwill of the main brands that they represent. Where dealers might previously have sought to challenge the behaviour of manufacturers (knowing that their position was, to some degree, protected from arbitrary retaliation), such dealers may now be less inclined to aggravate manufacturers. Pressure on dealers to 'toe-the-line' could harm consumers in number of different ways. At its most extreme (and in breach of basic competition laws), dealers might be discouraged from discounting vehicles or supplying overseas consumers with righthand/left-hand drive vehicles unless, in each case, the manufacturer were happy for the dealer to do so. In any event, less contractual security for dealers could well mean that their lenders will demand enhanced financial security, thereby undermining the viability of the dealership or, at the very least, driving up prices. Either way, the positive trend towards lower prices for consumers across the EU as a whole over recent years might not be sustained. Alternatively, in light of excessive controls and little reward, dealers (or their funders) may be reluctant to invest significantly in their franchises in future. This might result in a more basic level of service for consumers or, ultimately, the removal of the affected sales point by the manufacturer, thereby forcing consumers to travel further afield. It is perhaps naive to expect manufacturers to relax (even artificially-high) standards purely because the sector comes to be regulated under a general block exemption; on the contrary, certain manufacturers may seize the opportunity, particularly for sites that might be multi-franchised, to expand or increase their requirements so that dealers develop a greater dependence on the relevant manufacturer's brand. Less choice and higher prices? Manufacturers will be entitled to restrict multi-branding. In most circumstances, a manufacturer will not be prevented from insisting that dealers choosing to remain within its network only represent its brand(s). This is bad news for consumers on the basis that: Multi-branding improves consumer choice. If a manufacturer insists on sole representation at a dealership, other brands must be sold from alternative premises, which are not easily available in view of space and cost constraints. In areas where a standalone franchise might not be viable (e.g. rural areas), multi-branding allows dealers to maximise the use of their facilities and spread their costs, with each franchise making a contribution to the costs of the dealership (thereby keeping costs down) rather than one franchise having to shoulder the whole burden. This enables the dealer to maintain its presence (and greater choice) within its local community. It follows that restrictions on multi-branding will lead to less choice for consumers (as dealers are unable to take on new franchises or forced to discontinue existing secondary franchises). To the extent that dealers are forced to single-brand and/or duplicate sites and facilities, this will increase costs and prices. If a dealer is forced to exit a particular market because, say, restrictions on multi-branding prevent it from being a viable outlet, this may also have a negative impact on consumers in terms of after-sales (as servicing and parts distribution is often attached to local dealerships). Some dealerships operate effectively as solus dealerships, however, the dealer should have the ultimate right to choose in order to best meet the needs of consumers in the dealer's area. If certain manufacturers insist that their dealers revert to solus

4 sites, they may prejudice the long-term survival of certain sites and their representation in that area. Other concerns The ability of manufacturers, under a system of general regulation, to restrict the location of additional sales and delivery points outside of a dealer's locale, will also limit potential competition in the sale of vehicles of that particular brand. To the extent that dealer networks diminish, consumers will have to travel further afield to test drive and purchase vehicles. Furthermore, the absence of any express 'availability' clause means that certain manufacturers might choose unilaterally to refuse to supply right-hand/lefthand drive specification vehicles to dealers who seek to supply consumers in other EU countries. Conclusions Clearly, it is impossible to attribute all of the improvements in competition in the automotive sector since 2003 to the MVBE alone (whether in terms of encouraging lower prices or facilitating new market entry). However, competition has undoubtedly improved since the MVBE's inception. Accordingly, the Commission is taking a real risk in discounting the MVBE's value to the point where the Commission feels that it is no longer justifiable after May Indeed, in the absence of the MVBE, the Commission cannot be certain that the improvements in competition in the sector seen over recent years will be sustained. On the contrary, as highlighted above, there is a real risk that certain of the advantages that consumers have benefitted from over recent years will be lost. Regardless of what additional controls manufacturers may be entitled to impose on their networks under a system of general regulation, the long-term winners may well be those manufacturers who: engage early on in constructive discussions with their dealer networks giving dealers time to prepare for any post MVBE changes in terms or standards (albeit there is no regulatory imperative for such changes); and listen to their networks and make provision for concerns raised by dealers in any new contracts (whether permitting multi-branding, maintaining the right of sale, developing clearer and objective margins or removing unnecessary standards). Any manufacturer that ignores these considerations - insisting on excessive controls over and investment by its network - risks alienating its dealers and those that fund them. Unless, in such circumstances, the quid pro quo offered by the manufacturer is an unbeatable brand, a range of market leading products and healthy margins, its long-term prospects may be bleak regardless of its rights under any general regulation. In terms of next steps, dealers and their representative bodies should, regardless of any criticism that can levied at the Impact Assessment, focus their efforts on helping the Commission to develop detailed sectorspecific guidelines. Indeed, whilst their status is still uncertain, it is expected that these guidelines will carry greater weight than the Commission's past 'Explanatory Brochure' for the automotive sector hence, their potential usefulness to dealers should not be underestimated. Interested parties should send their contributions to the Commission by 25 September 2009 or contact Miles Trower, who is assisting with a wider response to the Commission. (NB. A separate briefing paper focusing on after-sales in light of the Impact Assessment will follow)

5 Contacts Simon Neill Commercial Partner Simon Neill is head of Osborne Clarke's competition practice, where he specialises in competition (antitrust), regulatory and EU law. Simon advises on the full range of competition and regulatory issues arising under UK and EC merger control laws; the Competition Act 1998 and Articles 81 and 82 of the EC Treaty; utilities regulation; state aids; and procurement laws. Simon's practice involves advising companies on the competition law aspects of their commercial arrangements and activities; seeking merger control clearances for public takeovers, private acquisitions and joint ventures; acting in cartel and individual company investigations by competition authorities and sector regulators. Simon read anthropology and law at Pembroke College, Cambridge. He then trained with Freshfields, specialising in competition law shortly after qualifying in His subsequent experience includes two years spent in Freshfields' Brussels office ( ). After a short period at Norton Rose, Simon joined Osborne Clarke as a partner in May t f simon.neill@osborneclarke.com Andrew Braithwaite Commercial Consultant Andrew's experience covers a wide range of non-contentious IP and IT transactions and technology issues. As well as technology industry experience going back 20 years, Andrew has experience advising TV producers, sports property owners, franchisors and brand owners. He has given particular specialist advice over 20 years to the high-tech industries such as computer software, semiconductors and internet, and advice to e-commerce operators. Andrew handles a range of IP licensing transactions including trade marks and merchandising, sponsorship and TV production. He has advised leading brand owners like Mulberry, Morgan and Ryder Cup. He has acted as the sole legal adviser to the PGA for the past ten years, handling all its commercial affairs, including media rights, trade marks and merchandising for, among other things, Ryder Cup 1997, 2001 and Andrew qualified into the intellectual property team at Finers in He was subsequently a Partner, then joined Beachcroft Wansbroughs to head their commercial team in 1989 and joined Osborne Clarke in 1997 to head the Bristol IP and IT team. t f andrew.braithwaite@osborneclarke.com Miles Trower Commercial Senior Associate Miles regularly advises on all aspects of both UK and EC competition law. He has experience of advising on and making UK and EC merger filings as well as coordinating notifications on a wider international basis. Miles also has extensive experience of reviewing, drafting and negotiating a wide range of commercial agreements. Miles specialises in the area of motor vehicle distribution and after-sales operations. He regularly advises national car dealer associations (including the RMI National Franchised Dealers Association and seven national dealer councils) on block exemption matters as well as on dealer, repairer, parts and stocking finance agreements. He also acts for a number of leading automotive equipment suppliers. Miles joined Osborne Clarke in 1999 and qualified as a solicitor in Before joining Osborne Clarke, Miles worked inhouse in France for a large manufacturing company and for Jordans in the UK as a company legal adviser. t f miles.trower@osborneclarke.com