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.

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.

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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.

of Findings

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:

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

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

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

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:

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

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;

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

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).

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:

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

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

/ Competition Background

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

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.


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:

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

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

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

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:

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.)

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.

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,

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;

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;

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;

publishing RRPs;

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

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.


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:



price comparisons with other EU states;

bonuses to dealers;

dealer discounts to customers;

lack of volume discounts to dealers;

pre-registration of cars;

discounts to fleet customers; and

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

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:

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

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

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;

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 

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:

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;

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

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:

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

allocating exclusive territories to dealers;

requiring dealers to sell the full model range; and

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.

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:

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;

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

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

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

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

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


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

Voluntary export requirements

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.


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

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:

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

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.

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

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;

information regarding terms and prices offered to fleet customers.

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;

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

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

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.

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?

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?

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

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

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?

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?

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?

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?

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?

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?

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.