In 1998 the Director General of Fair Trading (DGFT) undertook a preliminary investigation into aspects of the supply of new cars. This led to an announcement on 17 March 1999 that the market was not functioning properly, and that there was an imbalance of power between manufacturers and dealers that was distorting competition.

As a result of the DGFT's findings, a monopoly reference was made to the Competition Commission ("The Commission") under the Fair Trading Act 1973 (FTA).  The Commission's terms of reference were to determine whether there is a monopoly in the supply of new motor cars in the UK by manufacturers and importers and, if so, by virtue of which provisions of the FTA and in favour of what persons the monopoly exists.

The Commission's report was passed to the Department of Trade and Industry (DTI) in January 2000, and was published, along with Stephen Byers', the Secretary of State for Trade and Industry ("Secretary of State"), acceptance of the findings, on 10 April 2000.

Structure of this Report

The purpose of this report is to provide a brief summary and analysis of the Commission's principal findings and of the Secretary of State's response.

We first set out the recommendations made by the Commission and the Secretary of State's decisions; after considering background industry and  competition matters we then examine the main areas that were investigated by the Commission, as set out in its issue letter dated 25 June 1999, and summarise its analysis of them.

Finally, we present some thoughts for the future that the industry may need to address.

Usage of this report

This report is not intended to be a full summary of the Commission's findings from its investigation into the supply of new motor cars within the UK, and should not be relied upon as the basis for decision making in relation thereto and is not a substitute for appropriate professional advice.

It has been prepared by Deloitte & Touche who would be happy to advise further as appropriate.


Summary of Findings

Competition Commission Report

The Commission focussed particularly on the issue of price to the private customer and the imbalance of power between dealers and suppliers.  They conclude that the Selective and Exclusive Distribution ("SED") system, in spite of its benefits, operates against the public interest and that, whereas prices in the fleet market are generally at a competitive level, those for the private customer lack transparency and are some £1,100 too high for the average car, even after taking account of discounts, trade-ins and financing schemes.

The recommendations proposed by the Commission fall into two broad categories; those relating to practices that are covered by the EC Block Exemption, and remedies that are not subject to the exemption.

The main recommendations in relation to practices covered by the EC Block Exemption can be summarised as:

l                    suppliers should be prohibited from refusing to supply, on normal commercial terms, any party wishing to retail the supplier's new cars;

l                    retailers should be free to sell the supplier's brand of cars to resellers;

l                    suppliers should not be allowed to withhold supplies on grounds relating, for example, to the retailer's standards of presentation or facilities, the model ranges it is willing to sell, the provision of servicing or repair services and the selling of other makes of new car; and

l                    suppliers should not be allowed to grant exclusive territories.

The action which can be taken in respect of these practices is currently restricted due to the EC Block Exemption being in place until 30 September 2002.  The Commission left it for the Secretary of State to decide what action he can take in the light of EC Law.

Certain, more immediate, measures were also proposed by the Commission pending the possible abolition of the SED system.  The recommendations were that the Secretary of State should make orders under the FTA to prohibit suppliers from:

l                    discriminating by price between fleet customers and dealers which are willing to buy a stock of new cars outright;

l                    discriminating in the terms on which new cars are supplied to contract hire companies according to whether the companies' end-customers are fleet or private customers;

l                    seeking to control the prices at which dealers may advertise new cars; and

l                    making agreements which cause dealers to pre-register cars (and additionally suppliers should publish information about the supply of cars which they themselves have pre-registered).

Secretary of State's Decision

In response to the Commission's findings, on 10 April 2000, the Secretary of State announced that he would take steps to impose the Commission's recommendations not covered by the EC Block Exemption by Order under the FTA.  The Order would be made within two months from the date of the announcement.

The Secretary of State has not ruled out a ban on recommended retail prices if the other remedies need to be reinforced.

Concerning the more fundamental recommendations that are covered by the EC Block Exemption, the Secretary of State confirmed that he did believe them to be important changes, and that they were currently under discussion with the European Commission.

The Secretary of State went on to say that, due to the complicated legal and other factors that surround this issue, the process would take at least a year, although in the mean time he would be pressing the European Commission to enforce the existing EC Block Exemption rules vigorously to ensure that:

l                    dealers are free to import new cars from dealers in the franchised network in other EC member states; and

l                    private buyers are not obstructed if they wish to buy abroad for import into the UK.

Industry / Competition Background

Definition of market

In order to assess whether there is a monopoly within a market, it is first necessary to define the characteristics of the market being examined.  This definition is based on both the geographical market and the definition of the product.

Concerning the geographical market, although suppliers do tend to source vehicles for a number of countries from a single factory, overall both the suppliers and consumers consider the relevant market to be the UK.  This is an opinion endorsed by the Commission.

As regards products, the potential distinct markets are the type of car (small, medium-sized or large), the customer (fleet or private), and the age of car (new or used).  The conclusion of the Commission was that there are distinct markets for new and used cars, with the overlaps in the other markets (e.g. a high specification small car can cost more than a low specification medium sized car) meaning that they can be considered a single market, albeit with segmentation by customer category.  They recognised the blurring of the definition caused by pre-registration (and other nearly new cars) but decided to concentrate only on new cars.

Market Concentration 

Having defined the appropriate market the Commission's terms of reference involved considering whether a monopoly existed in the supply of new cars in the UK.

Under the FTA two types of monopoly can exist:

l                    a scale monopoly, where one company has greater than 25% of the market; and

l                    a complex monopoly, where two or more unconnected companies supplying more than 25% of the market conduct their business (whether by agreement or not) in such a way as to prevent, restrict or distort competition in connection with the supply of goods.

The Commission calculated that, in 1999, Ford had the largest share of the market (21%), and the top six supplier groups together held 79%. Furthermore, the Commission report states that there are 18 companies whose brands account for more than 1% of the total supply of new cars.

Given the definition of a scale monopoly, the Commission concluded that the absence of any one company with a market share of over 25% meant that a scale monopoly did not exist

Since the SED system is used by almost all the principal suppliers to the UK market, in spite of detailed variations in the individual dealer agreements that they have, the Commission did however determine that a complex monopoly does exist.  Some suppliers argued that some of the practices were permitted by the Block Exemption and hence should not be subject to a finding under the FTA, and did not "prevent, restrict or distort competition" or if they did were essential for the promotion of competition in a more meaningful sense.  The monopoly was found to operate in respect of 17 companies that supplied more than 1% of the market, Daewoo being excluded because of its unique distribution system.

In marked contrast to suppliers, no dealer, or dealer group, has a significant share of the market (in 1998, the largest dealer's turnover was less than 3% of the total turnover of franchised dealers).

Profitability of Suppliers/Dealers

The existence of monopoly power in a market is traditionally accompanied by the dominant company, or companies, being able to earn excess profits.

In the case of the 17 suppliers mentioned above, the Commission was not able to assess their profit levels in the UK market due to the existence of international trade and the related distortions to profit figures caused by transfer pricing.  They did, however, state that suppliers' (global) declared profit margins are low.  Transfer pricing causes distortions since the transfer price is usually based upon the list price in the ultimate country of sale.  An inference is drawn that, in spite of possibly slightly higher distribution costs in the UK, the higher list prices in the UK result in suppliers making relatively higher margins in the UK than elsewhere.  The Commission did not accept that it was appropriate to make any allowance for Right Hand Drive ("RHD") costs in assessing relative profitably. 

As an indication of profit margins achieved, however, published UK results for 1998 show that, with the exception of BMW and Rover, the 14 companies looked at with manufacturing facilities in the UK or who imported into the UK had an operating margin between 0.6% and 4.1%.  BMW had a margin of 12.5% and Rover a loss of 7.7%.

In the case of dealers the sales relate primarily to the UK although the figures for the profitability of new car sales are slightly distorted by the existence of trade-ins and financing arrangements.  As a general indication, however, dealers' average net operating margin for 1998 was 1.8%, with new car sales showing a departmental profit margin of 3.9%.  Overall returns on assets employed were about 15% in 1997 and 1998 which was similar to service companies in the economy generally although they had been much lower in the previous years.  The Commission found the profitability of dealers to be modest.

Overall, although distorted, these figures do indicate that neither suppliers nor dealers are making excessive profits.

EC law and Block Exemptions

In addition to UK law, EC law has to be considered when looking at whether a monopoly exists in a specific market.

In a similar way to Chapter 1 of the UK Competition Act 1998, Article 81(1) of the EC Treaty (formerly Article 85(1)) prohibits agreements which may prevent, restrict or distort competition. 

The EC Treaty does, however, in Article 81(3) allow exemptions to be granted if the agreement fulfils certain criteria relating primarily to the improvement of production or distribution, or promoting technical or economic progress.  Further the EC Treaty also allows for Block Exemptions, which encompass all agreements in the same category.

In December 1984, a Block Exemption was created for certain categories of motor vehicle distribution agreements.  This was modified and renewed for a further 7 years in 1995.  Consequently, a number of the areas covered by the Commission's report, and SEDs in particular, are covered by an EC Block Exemption that, while subject to a review prior to 31 December 2000, will not end until 30 September 2002.

It is argued that there is a possibility that the Secretary of State has the power to unilaterally withdraw the benefits of the Block Exemption in the UK but he has chosen not to exercise this power, at least pending discussions with the EU.

The Commission points out that, following the current review process, the existing Block Exemption will not necessarily be succeeded by another similar exemption specific to motor car distribution (if it is succeeded at all).  The European Commission has recently adopted a new block exemption regulation applying to almost all types of vertical agreements (e.g. agreements between suppliers and retailers).  In principle the car industry could rely on this but there is provision for the exemption to be declared inapplicable where over 50% of a market is covered by parallel networks of similar such vertical agreements.

The UK Competition Act 1998

The UK Competition Act 1998 became effective on 1 March 2000.  It is therefore now the relevant legislation when considering competition issues affecting trade within the UK to the extent that it is not caught by EU Law.  This Act replaces the majority of equivalent legislation in previous Acts and is intended to both simplify the legislation and also to introduce much tougher sanctions for genuinely harmful anti-competitive conduct.  It is designed to parallel Articles 81 and 82 (formerly Articles 85 and 86) of the EC Treaty.  This Act provides the OFT with enhanced new powers of investigation, and has two main features:

l                    prohibition of conduct which amounts to an abuse of a dominant position.  (Note, there is no prohibition on simply holding a dominant position, which could in certain circumstances be up to 40% market share.)

l                    prohibition of agreements between undertakings which have the object or effect of preventing, restricting or distorting competition.  As with the EC Treaty there is the possibility of exemptions being granted.  Agreements between companies within a single economic unit are not caught within this prohibition.

In conjunction with its enhanced powers of investigation, the new Act also allows the OFT to impose significantly larger penalties on companies found to be in breach of the new rules.  These penalties can be as much as 10 per cent of turnover in the relevant markets and can go back up to three years.

Main Issues listed in "Issue Letter" and Conclusions Thereon

On 25 June 1999, as part of its ongoing investigation, the Commission produced a list of key issues (which was made public) in order to obtain comment and views from car suppliers.  In this section of the report we consider each of these issues and show how they were developed by the Commission, and the conclusions that were reached.

The Selective & Exclusive Distribution system ("The SED system")

As the name suggests, there are two main characteristics of the SED system, i.e. selective and exclusive distribution rights.  Selective distribution rights normally means that a supplier will undertake to sell only to approved dealers.  Exclusivity generally relates to both the supplier and retailer, with the supplier agreeing to supply to only one dealer in a specified area, and the dealer agreeing to controls over which, where, and/or how it sells products from other suppliers.

SED systems, due to their effect on competition, are prima facie prohibited under Article 81 of the EC Treaty.  However, as described above, they are allowed in the new car market due to the EC Block Exemption.  Various reasons have been put forward for why a SED system was developed in the car industry, but the most commonly stated reason was to allow suppliers to influence the quality of the ongoing maintenance of their end product, by ensuring that a small, concentrated number of dealers had the requisite technical expertise, and quality, to back up their products.

Car distribution therefore developed into an industry with complex interdependent relationships between each supplier and its dealers, based heavily on a SED system.

In June 1999, the Commission provisionally concluded that, given the above relationships, the 17 suppliers in the UK new car industry were part of a complex monopoly, and that practices related to the SED system were among the main reasons for arriving at this conclusion, including:

l                    refusing to supply new cars to resellers in the UK which are not dealers in the supplier's franchised network thereby preventing new entrants to the market place;

l                    allocating exclusive territories to dealers and entering into agreements with the individual dealers not to supply new cars to any other dealer (with exceptions in some cases) within the dealer's territory;

l                    entering into agreements with dealers that, either in the agreement or related documents, impose on the dealer one or more of the following restrictions or obligations:

*                     preventing the dealer from supplying the supplier's new cars to resellers which are not dealers in the supplier's franchised network;

*                     preventing the dealer advertising directly to customers outside his territory;

*                     preventing the dealer from selling other supplier's new cars from the same premises, or under the same management, or under the same legal entity as they sell the supplier's cars;

*                     requiring the dealer to offer servicing and repair services for the supplier's make of cars; and

*                     requiring the dealer to achieve specified standards relating to presentation, facilities and other aspects of its business;

l                    publishing RRPs;

l                    pre-registering new cars before supplying them to dealers or purchasers; and

l                    paying bonuses and other incentives to, imposing conditions on, and agreeing targets with, dealers on the basis of the number of new cars supplied to dealers that are registered in a specified period.

Suppliers on the whole did not challenge the above findings that there was a complex monopoly, although a number argued either that it was allowed under the EC Block Exemption, that the above practices did not prevent, restrict or distort competition, or that they did not partake in the specific practices detailed above.  They also pointed to the benefits provided including, for example, technical assistance and training, national advertising and the holding of stock until the dealer has made a sale.

Dealers' views on the agreements that they are required to sign under the SED system were that, while they supported most aspects, they considered that suppliers had too much power to determine the way dealerships were run.  For example, they felt constrained to accept unrealistic sales targets.  The agreements should in fact be negotiated, although only 6% of dealers said they were able to negotiate the terms and conditions of their agreement to any significant degree.

Linked to the power of the suppliers to dictate agreement terms is the question of the way in which dealers are financially rewarded.  In general, the dealer's profit is made up of a dealer margin and supplier bonuses.  Since its first survey in 1992, the Commission has noted a change in the mix of dealers' profit, with a fall in dealer margins, and an increase in the importance of bonuses (the average dealer margin for the top 6 suppliers in 1999 was 7.6%, and the average maximum total bonus 5.7%).

Overall, the Commission considers that, even given its advantages, the SED system has helped cause an inequality of power between suppliers and dealers, which is against the public interest.  Furthermore, they consider that the effects of the individual practices reinforce each other and thus the adverse effects arising from the cumulation of the practices are greater than the sum of the individual adverse effects.

One practice that is not objected to is that of preventing a retailer from modifying new cars without the supplier's consent unless specifically requested by a customer.

Prices 

Closely linked to the question of whether a complex monopoly exists is the question of the effect that the features of the monopoly will have on the price paid by the end consumer.

In its issue statement dated 25 June 1999, the Commission set out a number of areas which might have a bearing on this price, comprising:

l                    RRPs;

l                    bundling;

l                    price comparisons with other EU states;

l                    bonuses to dealers;

l                    dealer discounts to customers;

l                    lack of volume discounts to dealers;

l                    pre-registration of cars;

l                    discounts to fleet customers; and

l                    dealers' costs.

Although list prices (RRPs) provide a useful starting point for the examination of prices the Commission recognised that most customers do not pay either the full list or on-the-road price because they receive discounts of one form or another, including trade-in allowances and financial package benefits.

The Commission did note that suppliers made no claim to set prices in a way which closely reflected  costs.  Rather, they appear to pitch list prices at the same general level as their competitors for equivalent cars and seek to compete on grounds of marketing, product quality, specification, temporary offers etc. rather than price.

The Commission's report looks at what has happened to car prices over recent years.  This shows that average on-the-road prices for new cars (i.e. before customer discounts) had actually fallen by 6.5% in real terms between January 1996 and November 1999.  This figure includes an allowance for specification changes but the Commission recognises that price trends for individual models can vary widely from this average.

Even given this fall in real prices, the traditionally held view is that UK prices are still significantly higher than many countries in the rest of Europe.  The European Commission figures from its May 1999 survey showed that:

l                    the UK had the highest price for 59 of the 71 model variants included;

l                    the UK price for 49 of the 71 model variants was at least 40% higher than the cheapest country ;

l                    the UK price for 58 of the 71 model variants was at least 20% higher than the cheapest country if the three countries with the highest tax rate - Denmark, Finland and Greece - are excluded;

l                    the lowest percentage price differences between the UK and other countries tended to be for prestige brands.

Review of the November 1999 survey showed results that do not differ significantly from the findings detailed above.

The Commission focussed on pre-tax prices because they are the prices set by manufacturers.  They noted that manufacturers could afford to pursue the policy of setting pre-tax prices low in high tax countries only because the countries with the highest levels of tax accounted for only a very small proportion of EU demand.  They also rejected the argument that the strength of the pound versus the Euro contributed to the higher UK prices; indeed, they concluded that this should have had the effect of reducing UK prices relative to the rest of Europe.  They also concluded that there was little support for the contention that UK buyers benefited to a greater extent than their continental counterparts from discounts and other financial benefits, although discounts may be a little lower and financial benefits a little higher in the UK.  Finally, they saw no reason to make any allowance for differing residual values.

They concluded that the persistence of the price differences between the UK and continental Europe, in spite of fluctuations in exchange rates and other factors, shows that the supposed EC single market is not working as such in the car sector and that the UK market is not  fully competitive.

The Commission's report notes that there are a number of costs that would be incurred by individual UK customers buying abroad which are not reflected in these surveys but still notes that arbitrage of this nature has occurred at a lower level than might be expected as a result of even the net price differential.  Part of the reason for this is attributed to the way in which the SED system operates.

Given the apparent higher prices in the UK market, and having considered and discarded explanations put forward from suppliers that distribution costs are higher in the UK and that Right Hand Drive ("RHD")cars are more expensive, the Commission concludes that manufacturers will have earned greater profits from sales in the UK than from sales in other countries.

The Commission focuses on four main practices which it suggests should be prohibited (see section on summary of Commission's findings above) and which are discussed below.  On the whole, these align with the areas in the issue statement detailed above (apart from the control of the price at which cars can be advertised, which is linked to dealer agreements).

One area, which was picked up on by the press, was the difference in the discounts on the list price available to fleet customers, who are often supplied directly from the manufacturer, (estimated as between 17 and 38 per cent) compared to those available to private customers supplied through a dealer (estimated as between 7.5 and 8 per cent in 1998). 

The assessment of the Commission, having taken into account the explanations of the suppliers, was that this differential was due to the weaker negotiating power of dealers, as opposed to the level of discounts in the fleet sector being uncompetitive.  Consequently the report concludes that dealers willing to buy a stock of new cars outright (as opposed to under sale or return) should receive the same discounts as fleet buyers.

The same argument is also put forward by the Commission, and accepted by the Secretary of State, for contract hire companies who wish to supply private customers as opposed to fleet customers being able to get the same level of discounts.

With regard to the practice of suppliers setting RRPs, they concluded that, on balance and in spite of a number of potential benefits to the consumer, it is against the public interest and results in prices being higher than would otherwise be the case.  However, the Secretary of State decided against its abolition at this  stage.

The other main area focused on by the Commission and Secretary of State is the practice of pre-registration of cars by suppliers and dealers.  Apart from the accepted reason for pre-registration of end-of-series cars for technical reasons, there are three main reasons for this practice, being:

l                    it allows the suppliers to sell the cars at a lower price, without having to lower list prices, as they are not technically new cars;

l                    part of dealers' bonuses is commonly related to the number of cars registered in the period (as opposed to sold), so they register cars early to obtain the bonus; and

l                    suppliers offer dealers reduced prices if they agree to register cars by a given date.

The Commission concludes that the practice of pre-registration is against the public interest with the adverse effect that it causes prices to private customers to be higher than they otherwise would be.  However the only remedy the Secretary of State is able to Order under the FTA is that suppliers are prohibited from making agreements (i.e. bonuses and reduced prices on old cars if the dealer registers them within a given period) that cause dealers to pre-register cars.  The Secretary of State is not, however, able under the FTA to prevent suppliers from pre-registering cars themselves, although he has determined that suppliers should be required to regularly publish information on how many pre-registered cars they have supplied in order to improve price transparency.

The Commission looked at various other areas that potentially had an effect on the operation of the market.  These areas included suppliers:

l                    requiring dealers to achieve minimum standards relating to presentation, facilities and other aspects of the business;

l                    allocating exclusive territories to dealers;

l                    requiring dealers to sell the full model range; and

l                    prohibiting dealers from selling other brands from the same premises.

Having considered the suppliers' arguments, the overall conclusion on all the above areas was that they operate against the public interest and have the adverse effect of causing prices of new cars to be higher than they otherwise would be.

The issue of "bundling" was not really expanded upon by the Commission.  They noted that it added to the lack of transparency of pricing but concluded that it was not a serious distortion of competition and therefore did not make any recommendations in this respect.

Dealers' sourcing of cars in other EU countries (Parallel imports)

As previously mentioned, both consumers and suppliers consider the relevant market for new cars to be the UK.  This is supported by data supplied by HM Customs and Excise that shows parallel imports in 1998 as representing less than 1% of the cars registered in the UK, and less than 2% of private customer registrations.

This is particularly low, given that in a survey by the Commission 11% of respondents said they would buy a car abroad if the prices were 10% lower than in the UK, and 45% if they were 20% lower.

Although it is specifically mentioned in the EC Block Exemption that suppliers must supply RHD cars to dealers in LHD countries, one of the reasons most commonly used to explain the low level of imports from EC member states is the problems connected with obtaining a RHD car.  These include:

l                    under the EC Block Exemption suppliers can make an extra charge for the RHD option on top of the price usually given to a LHD dealer;

l                    delays in delivery times as LHD dealers do not stock RHD cars;

l                    high deposits required by LHD dealers for RHD cars, as they are harder  to resell;

l                    the fact that a continental dealer will immediately know that a request for a RHD car is not for use in his territory and may wish to avoid upsetting his relationship with the supplier by responding to it; and

l                    UK buyers are likely to receive a poor price for trading in RHD cars to dealers in LHD countries.

Other factors which relate to dealers, and are linked to the SED system, are that, commonly, sales of cars obtained from other EC member states do not count towards the sales targets the dealers require in order to qualify for their bonuses, and that dealers are generally worried about harming the relationships with their suppliers.

Overall, while stating that the suppliers told them that they did comply with the rules of the EC Block Exemption on facilitating parallel trade (under the Block Exemption they can require that cars are only imported for individual named customers, not in bulk), the Commission concludes that they have not been able to fully investigate the issue as any action to obstruct parallel imports is likely to take place abroad and it is the responsibility of the EC to police the EC Block Exemption.  The Commission does, however, recommend that the OFT and the EC continue to monitor the prices across EC member states in the future, and the Secretary of State adds that he will be pressing the EC to enforce that part of the Block Exemption ensuring dealers and private buyers are free to import new cars from dealers in the manufacturers franchised network in other EC member states.

Specifications

The issue of specifications relates to whether the preference in the UK in general, and in the fleet market in particular, for higher specification cars reduces consumer choice and leads to higher prices being paid in the UK.

Concerning the UK as a whole, although preference for higher specification cars was mentioned by some suppliers as an explanation for why cars are not imported from outside the UK, it was mentioned by very few respondents in the Commission's consumer survey.

The issue of specification is not mentioned in any significant fashion in the report, and the issue of the difference in specifications overall does not appear to be seen as a major issue by the Commission.

Voluntary export requirements (VERs)

From 1975 up to the end of 1999 Japanese manufacturers agreed to restrict the number of cars being imported to the UK to 7% of total registrations.  This did not include cars manufactured by Japanese suppliers within the EC, and significantly the three largest Japanese manufacturers have increased sales (in 1999 15% of total registrations were by Japanese suppliers) by supplying from assembly plants in the UK.

Notwithstanding the fact that the Japanese suppliers have a smaller share of the market in the UK than they have in most of the other EC member states, for the reason above, neither Japanese nor other suppliers consider that the abolition of VERs will have a significant effect on competition in the UK market, an opinion endorsed by the Commission (to the extent that there is an effect it is likely to increase competition).

Grey imports

Grey imports differ from parallel imports in that they are imported into the UK from outside of the EC by parties other than the manufacturers or their associated national sales companies. 

Up to March 2000 the trade in new grey market cars has been low as, due to the lack of an EC conformity certificate, the car requires approval under the SVA scheme only 50 per model of which were given a year.  The system has now changed, with the limits gradually being lifted but with stricter technical standards being implemented in their place.

The British Independent Motor Traders Association, which represents independent car retailers, many of which are involved with grey market imports, has stated that it does not consider that there will be a significant increase in grey market imports once the limits are raised, due to the stricter technical standards.  This opinion is shared by the Commission.

Warranty terms

Under the SED agreement dealers are often required to carry out work under the warranty sold with new cars.  The issue raised in the issue statement was whether, by forcing customers to use a specified garage for warranted repair work, the supplier was causing the customer to pay more for servicing than he/she would do if not tied to a range of specified garages.

The suppliers, in general, counter this argument by stating that the motive for specifying which garages the customer uses stems from a desire to protect the safety, security and public relation of the product, not for extra profit.

The Commission has not concluded whether or not they consider this practice to be anti-competitive, but they do recommend that the practice of requiring dealers to also provide servicing facilities should cease.

Other matters - employment and environment

The automotive industry in the UK - which includes the production of commercial vehicles, parts and other products besides cars - employs some 225,000 people.  A further 570,000 are employed in the sale, maintenance and repair of motor vehicles.  The Commission considers that, irrespective of the future of the SED system, there will be a net reduction in employment in car retailing in the future.

These facts, in conjunction with the recent developments between Rover and BMW, highlight the importance of taking into account any employment issues that may rise from any decisions made by the Commission and the Secretary of State. 

To this end, the Commission has considered what they see as the two opposite effects on employment of keeping the SED system and having higher wholesale prices, namely:

l                    they will provide extra revenue benefit to suppliers, enabling them to maintain jobs in a sector where there is considered to be excess capacity, and

l                    they will lead to higher retail prices, therefore reducing demand.

While inclined to consider the second of these two factors the stronger, given the international nature of car sales, the Commission concludes that it is not able to identify any clear net effect (in either direction) on employment in the UK automotive industry as a result of the practices investigated.  As such, this implies that employment is not a factor that has affected the recommendations of the Commission.  In announcing his decision the Secretary of State stated that he thought that lower prices would lead to increased demand (and hence, presumably, more jobs).

Concerning environmental considerations, the Commission agrees with the Department of the Environment, Transport and the Regions that, while important issues which may be affected by the Commission's recommendations, they should be pursued in ways other than by the preservation of uncompetitive markets which keep prices high.

Future developments - Internet

Despite the rapid growth of Internet car sales in the USA, and the fact that several Internet car brokers have now set up in the UK, the majority of suppliers consider that the Internet would primarily be used for information on cars, as opposed to their purchase.

Over recent months, however, certain suppliers have also started to sell through the Internet, and in some case offer prices up to £1,000 lower than the list price.

The Commission considers that, while they agree with the suppliers assessment of how customers are likely to use the Internet, it should be allowed to develop in such a way as to allow those consumers who want to pay a lower price (but with less additional services, such as dealer advice, trade-ins etc.) to do so.

The Commission does not make any further recommendations on how to achieve this other than those concerning the SED system and pricing already discussed.

Action Required Now - the Notice and Order

As previously mentioned in the section detailing the Secretary of State's decisions, he has proposed to impose a number of the Commission's suggestions not covered by the Block Exemption by way of an Order under the FTA.

A Notice of this Order was published on 10 April 2000, and the Secretary of State announced that he intended to make the order within 2 months of this date.  By law, interested parties have the opportunity to comment on these proposals.  These comments are invited by 19 May 2000.

Areas in which comments may be appropriate include:

l                    how, in what format and with what frequency should suppliers inform dealers of:

*                     the terms on which they are prepared to deal, reflecting the terms given to fleet customers;

*                     prices charged to dealers;

*                     information on volume discounts on sales to dealers by model variant; and

*                     information regarding terms and prices offered to fleet customers.

l                    how policing should be undertaken of such requirements as:

*                     suppliers not withholding supply, or offering preferential terms, on grounds relating to the prices advertised by dealers; and

*                     suppliers not paying bonuses or other incentives (or disincentives) by reference to the number of cars registered by a dealer in a given period;

l                    how and with what frequency suppliers should publish information about sales and quantities of pre-registered cars; and

l                    how terms such as "supplier", "dealer", "fleet customer" and "contract hire company" should be defined.

Some Thoughts for the Future

In this section we set out some questions that the industry will need to consider and address arising out of the Commission's report.

l                    To a considerable extent the principal potential changes that might affect the distribution of new cars in the UK market have been simply postponed for 18 months pending the EU's review of the Block Exemption and the Secretary of State's negotiations with the EU.  To what extent should the industry plan now for the eventual abolition of the SED system?  What exemptions might be allowed to remain in place?  Will these be for all suppliers or only the smaller ones jointly having less than 50% of the market?

l                    What will happen to prices over the next few months?  Since the Commission found that neither suppliers nor dealers were making unreasonable profits will there simply be a "levelling-out" of prices with fleet prices in the UK moving up and retail prices coming down a little?  Will transfer prices be adjusted to bring continental prices up whilst UK prices come down?  The next EU Prices Survey is due in May; have prices already come down?  How fast will it happen?

l                    How many dealers are large enough and have strong enough balance sheets to take advantage of the discounts which are only available for outright purchase?

l                    How will the market react in the event that larger dealers are able to offer significant discounts to customers whereas the smaller ones cannot?

l                    If dealers can buy on the same terms as fleet buyers will they also be able to take advantage of buy-back guarantees by passing them on to their customers?

l                    Although some consolidation has occurred within the dealer market place in recent years how much more rapidly might this occur in future in order to take advantage of the volume discounts?  Until the SED system is abolished, will suppliers permit such mergers/acquisitions?  Will buying co-operatives develop instead?

l                    Will the fact that bonuses for pre-registration and the achievement of sales targets are not permitted simply result in an increase in the margins retained by dealers?  Will additional stock holding costs for those dealers that buy outright lead to an erosion of price reductions passed onto customers?

l                    What will be the impact on the residual values and will there be increased volatility of such values?  Will any such volatility influence the confidence, and as such habits, of new car buyers?

l                    How radical will be the shake-up that is likely to occur in the whole distribution chain over the next few years?  How will that be affected by e-commerce?  Will car supermarkets develop successfully?  What about specialists in e.g. 4WD or small cars?  Will Internet buyers simply collect their cars from a manufacturer's distribution point?

l                    How far will suppliers move down the distribution chain in order to take advantage of the profit opportunities in the retail arena, reduce distribution costs and in order to protect their brands after the abolition of the SED system?  Will the Daewoo distribution model be the one for the future?  How would this vertical integration be treated under the new Competition Act?

l                    If the Block Exemption is removed how will the new UK Competition Act influence future agreements?  Will there be an increased tendency for dealers to seek corrective action under its provisions?

For further information on our competition consultancy services please contact George Weldon, Partner, on 0207 303 2139.