New research into the future of car distribution systems in Europe predicts that new car prices may actually rise as a result of the European Commission’s new draft regulation for motor vehicle distribution. The European Commission is hoping that by increasing competition between car dealers and by relaxing the restrictions on parallel trade between EU countries, car manufacturers will be forced to reduce new car prices in countries with high pre-tax list prices such as the UK.
The study by Market Facts and and Business Information (MFBI) concludes that car manufacturers may try and confound the Commission’s attempts to increase price competition in the European car market, by increasing new car pre-tax prices in countries such as Denmark (purchase taxes up to 180% of pre-tax price) and Finland where pre-tax prices are low.
Although the recently published new draft regulation makes it easier for dealers and intermediaries to import new cars from lower cost countries in the EU, the threat of potentially greater import substitution and reduced profits in large car markets such as Germany and the UK, may force car manufacturers to raise new car prices in countries with low pre-tax prices.
Although higher pre-tax prices in countries such as Denmark and Finland will cause demand for new cars to fall in those countries, it would prevent car dealers in higher price countries from sourcing cheaper cars in other Member States. This is a preferable option for many car manufacturers who would otherwise be faced with a wholesale reduction in new car prices and therefore lower profits in large car markets. Higher new car prices in some countries and even the total withdrawal of car manufacturers from some markets may force the European Union to hasten a move towards tax harmonisation across the individual Member States.
Some European Union Member States are opposed to tax harmonisation and the issue is unlikely to be tackled until the EU’s constitutional conference (IGC) in 2004. The IGC is designated to deal with the enlargement of the EU to include countries in central and eastern Europe, but it could also include proposals for greater macro-economic co-ordination among eurozone members, including tax policy and tax harmonisation.
Other factors that are a direct result of the European Commission’s new draft regulation could also result in higher new car prices, according to the study.
The opening up of the service and repair market to greater competition from independent garages and parts manufacturers under the draft regulation, threatens the car manufacturers’ highly profitable OEM parts sales. Under the new draft regulation, authorised repairers are not restricted to using replacements parts supplied solely by the car manufacturers for servicing and repairs.
The exception is where a car is repaired under a car manufacturer’s warranty or recall, and also where a car is serviced under a car manufacturer’s free service offer. In these instances, official service and repair outlets are obliged to use parts supplied by the car manufacturer. Rather than risk the loss of profitable replacement parts sales, car manufacturers may begin to offer free or reduced cost servicing on a wider range of new cars. This will ensure that more service and repair business is retained by the manufacturers’ official service and repair outlets and that only the car manufacturers’ supplied parts will be used for servicing and repairs.
The study says that to recover the cost of replacement parts used in free or reduced cost servicing, car manufacturers will build the cost of replacement parts and labour into the cost of new cars. This will result in higher new car prices. Increasingly, car manufacturers will try and attract car owners away from the outright purchasing and ownership of new and even used cars, to monthly contract motoring schemes that include the cost of maintenance and parts within a monthly payment.