AIT & FIA Position Paper: The balance of power between manufacturers, dealers and consumers in the European Union. Evaluation of the application of Regulation 1475/95 concerning Motor Vehicle Distribution
Publication date: 12 February 2001
As the representatives of some 40 million motorists in the European Union through our affiliated national automobile clubs, the AIT & FIA have been well placed to assess the application of the current block exemption Regulation 1475/95 over the last five years.
Automobile clubs affiliated to the AIT & FIA who responded to the European Commission’s consultation on motor vehicle distribution received, over the last three years, more than half a million requests for advice from motorists concerning either their new car purchases, guarantees and warranties or the quality of after-sales services received. Clearly, the block exemption has not worked as well as originally intended. Limited resources have prevented the European Commission from adequately monitoring the application of the Regulation. To date, there has been only one successful case brought against a vehicle manufacturer for restricting cross border sales within the Member States. Any future legislation must redress this situation.
What has clearly emerged is that it is the consumer that must take precedence in any new competition policy. In future consumers must benefit from greater choice enhanced by greater flexibility in terms of how, where and from whom they purchase a car, the price paid (within a brand and inter-brands) and the warranties and after-sales services they receive. Stronger competition within the automotive sector must be guaranteed to facilitate this.
New technological developments, new retailing and distribution practices and increased competition between manufacturers and suppliers are about to stimulate changes in European distribution systems. If the right decisions are made, consumer demand will be a powerful force in driving these changes to the benefit of all concerned. For this to happen safeguards must be put in place and closely monitored to ensure fair competition and to better protect the consumer's power of choice. In the provision of after-market repair services, competition will be improved and the consumer better served when manufacturers are obliged to make technical information about their products more readily available to all interested parties.
The choice between renewing the current regulation and abolishing it is not an easy one. It is unrealistic to believe that without a renewed block exemption full liberalisation will be achieved. Most manufacturers would still be able to make selective distribution agreements under the general vertical restraints and concerted practices block exemption (EC Regulation No. 2790/1999). In anticipation of greater competition, concerted efforts are being made to strengthen their direct relationship with the consumer as well as gain greater control of the after-sales and services market. In the absence of counter-balancing legislative measures, the benefits afforded under the specific block exemption to the consumer and independent suppliers and service providers would be lost. A move to greater liberalisation will offer consumers advantages particularly where new car sales are concerned but at the risk of creating new, unforeseen and equally detrimental distortions of competition in after-sales and servicing.
The AIT & FIA seek evolution not revolution, change based on sound reforms that both address and anticipate the various dimensions of the developments occurring in the automotive sector. We believe that for a transitional period, lasting only as long as it takes to introduce specific legislation protecting consumers’ rights and ensuring universal access to technical repair data, a specific but improved block exemption Regulation would be the best means of guaranteeing fair competition.
Rosario Alessi Max Mosley
President of AIT Region 1 President of the FIA
A car is the second most expensive purchase a consumer makes after his home. Repair and maintenance of the car accounts for a large proportion of average household budgets. Modern motor vehicles are highly sophisticated, technologically complex consumer durables, requiring expert maintenance and repair, not always in the same place.
Rapid developments currently taking place in retailing and distribution systems due to electronic commerce and the internet and ever-greater integration are making the Internal Market increasingly more dynamic and competitive. The benefit of these changes to European motoring consumers should be even greater freedom to choose how and where to purchase a car, at what price and with what guarantees or warranties. The nature of the relationships between consumers and suppliers of products and after market services is also changing.
It is against this background, that the European Commission is reviewing the operation of the motor industry block exemption (Regulation (EC) N° 1475/95 on the application of Article 85 (3) of the Treaty to certain categories of motor vehicle distribution and servicing agreements).
With the expiry of this block exemption imminent (autumn 2002),the AIT & FIA’s EU legal and consumer experts have examined the existing motor vehicle distribution regime and consulted with the various interested parties (vehicle manufacturers, parts producers, dealers and expert lawyers). The AIT & FIA have responded to the European Commission's consultation assessing how well the current block exemption has functioned. This position paper, examining what must be achieved in any future regime governing motor vehicle distribution and retailing in the European Union after 2002,is the result of this research.
The AIT & FIA have a two-fold interest in this issue:
- To uphold the interests of their members, the motorists/consumers;
- To defend their role as providers of roadside and after-market repair services.
By allowing vehicle manufacturers to control distribution of their new cars via selective exclusive distribution networks, the current block exemption EC/1475/95, has played an important role in determining the existing relationships between the various parties involved: vehicle manufacturers and their authorised dealers; vehicle manufacturers and independent producers and service providers; and most importantly, relationships with motoring consumers. AIT & FIA believe that the future regime to be established must respond convincingly to the following questions, to justify its introduction:
- Why retain the Block Exemption?
- Why not have a free market?
- What are the benefits of each option to the consumer?
The block exemption renewed in 1995 contained a number of improvements on its predecessor, including greater commercial independence for dealers from manufacturers, better access for independent spare parts producers and distributors (including franchised dealers), freedom for consumers to purchase a vehicle anywhere in the European Union and it also defined "black" practices and clauses that were prohibited. The key reason AIT & FIA supported the continuation of the block exemption in 1995 was to ensure high quality, specialised servicing and customer care, which we considered would be best guaranteed through selective distribution networks and franchised dealerships. Essentially, the framework set out in the block exemption was sound and should have provided a competitive environment while safeguarding consumers’ interests. However, in the absence of effective monitoring the arrangements have been open to abuse and manufacturers have broken the rules. Rationalisation of dealership networks and mergers of manufacturers continue to reduce consumer choice both in terms of intra-brand and inter-brand competition.
In considering the future, the goal must be to avoid a monopoly of the distribution chains, prices and the market. However, it would be unrealistic to believe that without a new block exemption full liberalisation of the mar ket would be achieved. Most manufacturers would still be able to make selective distribution agreements under the general vertical restraints and concerted practices block exemption (EC Regulation N°2790/1999). More importantly the advantages that exist for the consumer and independent suppliers and service providers under the specific block exemption would be lost.
The AIT & FIA consider that the dominance of the vehicle manufacturers in the automotive sector is so strong that consumers' interests would be best guarded in the future within the framework of a specific Regulation for a limited transitional period. During this interim, AIT & FIA would strongly recommend the formulation of specific legislation protecting consumers’ interests and access to technical repair data. A rapid shift to a completely liberalised market may offer consumer advantages when purchasing a new car. However, with regard to after market services we foresee a number of disadvantages, such as a sharp drop in residual car values. The current block exemption guarantees universal access to vehicle manufacturers' repair data. Without this guarantee the competitiveness of the independent after market sector would be seriously hampered, to the detriment of consumers.
Whatever the outcome of the European Commission's review of the block exemption a number of reforms are necessary to strengthen and safeguard competition and consumer rights and at the same time ensure the flexibility to accommodate future developments. These include:
- Legislative protection for consumers in a liberalised regime
- Measures to enhance competitiveness in the after-sales market
- A better resourced and effective EU competition watchdog
- Regulation that offers transparency, flexibility and legal certainty must be guaranteed
- Improved vehicle manufacturer inter and intra-brand competition
- Greater scope for the independent after market to compete
- No minimum price agreements
- Multi-territory advertising by dealers
- Improved respect of warranties
- Universal access to technical data necessary for repairs and servicing
- Specific legislation addressing access to technical data
1. Evaluating the application of Regulation 1475/95 concerning Motor Vehicle Distribution
One of the main objectives of the European community is to create a common market where free competition not only prevails but is encouraged. One way to guarantee this is by banning restrictions on free trade. However, under certain terms and conditions consistent with the competition articles of the European Treaty, the possibility of relaxing such bans exists. The automotive sector has made use of this. The sector is permitted to make vertical agreements in the distribution chain in order to realise a better turnover of vehicles. The legislation introduced to permit such agreements was intended to take account of the interests of the manufacturers, the dealers and the consumers. The current Block Exemption Regulation (1475/95) pursuant to Article 81 (new) of the EC Treaty remains valid for only a limited period and will end on 30 September 2002.
The block exemption Regulation cannot be considered in isolation. Other EU Directives also describe the rights and obligations of car manufacturers or set out the position of consumers: End-of-Life Vehicles, the Emissions Directive, Legal Protection of Designs and Models, EU Type Approval, Consumer Warranty, Product Liability and Trademark Law. Consideration was given to all of these issues in determining the position of the AIT & FIA on the Block Exemption Regulation.
Block Exemption and Vertical Restraints
In considering the future of the automobile market and in particular car retailing, it would be unrealistic to envisage that a totally liberalised market could be achieved in the absence of a specific block exemption Regulation for the motor industry. Selective distribution will continue to be a major element of retailing activities for some time to come even if manufacturers' distribution systems are currently the focus of rigorous rationalising strategies.
Based on the general block exemption regulation (the new Vertical Restraints Regulation) only companies having a market share of less than 30% of the relevant market are allowed to establish a selective distribution system. If this market share were established at EU-level, no car manufacturer would exceed this share. The result would be that selective distribution systems in the car sector would continue thanks to the general block exemption regulation without the consumer benefiting from the protection of a specific block exemption Regulation.
The current specific block exemption Regulation possesses a number of key advantages. It establishes a comprehensive (though sometimes rather detailed) set of rules which, while they protect the interests of both the dealers and the suppliers were also intended to benefit the consumer. Its aim, when negotiated in 1995, was to deal with negative developments that had arisen in the system of the selective distribution of motor vehicles. Some automobile manufacturers however, have continued in their efforts to undermine the rules set up by the block exemption regulation regardless of the potentially severe consequences and penalties. As only one successful case has so far been brought against a vehicle manufacturer, perhaps the risk is perceived as low.
In an increasingly globalised and competitive inter-brand arena, motor manufacturers are making every effort to strengthen their direct relationship with the consumer. Increasingly, they are concerned to attract and maintain lifelong customers. Examples of this trend include the increasing availability of financial and insurance products to facilitate car purchase, and ownership offered by the manufacturer directly. This is intended to tie the customers to the brand indefinitely. Measures taken to achieve this may not always be best for consumer choice.
2. Failings of the current block exemption Regulation
The degree to which the warranty is fulfilled by the importer/manufacturer requires further examination. Where the importer/manufacturer refuses to honour the warranty, repairs under warranty may sometimes be covered by the dealer but rather as a gesture of good will than because of obligation. However, this is not always the case and the consumer often has to pay.
Manufacturers often refuse to honour the guarantee for a new car, even when the scope of the guarantee is clear, if the authorised dealer has not completed the guarantee booklet correctly.
In contrast to what is provided for in Regulation 1475/95, recall campaigns are mostly conducted at national level only, either because the manufacturer's recall actually only applies to one Member State or because the defect cannot be repaired in another Member State.
Despite the provision in the current block exemption for warranties that are valid across the EU, irrespective of where a car has been purchased, in reality, consumers purchasing abroad often experience difficulties in having services provided under the warranty at home. The buyers of re-imported or parallel imported vehicles are still facing the disadvantage that manufacturers/dealers provide services only as a gesture of good will. Sound arrangements must be drawn up in order to assure the provision of guarantee, service, repair and maintenance services, after an international purchase, by a dealer other than the one who sold the car.
Consumers cannot verify the nature of the spare parts used in repairs made by dealers. Very often the suppliers of OE branded spare parts also produce unbranded identical parts for a fraction of the price of the OE spare parts. The consumer is often charged the price of the OE spare parts even though non-OE spare parts are fitted.
In view of the selection and competition for spare parts it should be ensured that the manufacturer of the spare part is always identified. This would also be desirable with regard to product liability and safety.
Natural links - purchasing and after sales services
Consumers must be able to make the choice between the brand and the non-brand dealer. The link between the sale of automobiles and the provision of after-sales services has been created and is not a natural one. In its absence the consumer has greater purchasing choice in terms of variety, price and also of after sales services. There is a wider, and more geographically extensive, range of services available.
There is no compelling case to inextricably link the sale of new cars to their after-sales servicing and support. Selling does not require a complex and highly technical infrastructure. Cars should be delivered in such a way that a technical inspection by the dealer is no longer necessary. Independent garages should be capable of providing servicing of comparable quality. At the same time it is also recognised that some vehicles may require a more dedicated, specialist and specifically trained infrastructure.
The presence of an independent after market is good for competition. Examples already exist where the manufacturer has reduced prices of repairs in order to compete with the independent after-sales market. Of course the sophisticated repair services offered by the manufacturer's network are valued but they should not prevail to the exclusion of all other choices for the consumer.
The existence of super markets or car boulevards is also good for competition and widening consumer choice. Their existence makes it difficult to justify the obligation imposed by manufacturers under the current block exemption that different makes of car must be sold out of completely separate sales premises, under separate management. This obligation must be lifted. A range of brands can be displayed on the forecourt or show room, while there is only one repair shop catering for all brands at the back. Consumers would have a greater choice according to the type of car sought after, the level of service desired and their purchasing power. However, this should not rule out the option to enjoy the experience of purchasing a car from a specific brand dealer.
The links between selling and after-sales services will anyway in practice be reduced even further with the development of Internet selling and other new communication technologies and marketing methods.
While it is clearly stated in the current block exemption that consumers should be able to purchase a car wherever they wish within the European Union many examples exist where this has not been the case. Apart from dealers refusing to sell to potential customers coming from outside his country or region, competition has also been hindered by rationalization within distribution networks. The creation of ever-larger territories dominated by a single dealer has reduced competition to such an extent that dealers are free to increase prices and control sales. The partitioning of markets must be prohibited and prevented by means of sanctions. Allowing dealers to advertise outside their region directly by means of personal contacts would help to redress this situation.
The existing block exemption correctly recognises that motor vehicles are consumer durables, which at both regular and irregular intervals require expert maintenance and repair, not always in the same place. Indeed repair and maintenance represents the second most costly aspect of motor vehicle ownership after the actual purchase itself, possibly even more in the case of second-hand vehicles. In considering any future regulation, serious attention must be given to promoting greater competition and flexibility with regard to the provision of after sales services.
The automobile clubs and associations represent a wide range of their motoring members' consumer interests but the principal reason for the adherence of our 40 million members across the European Union is the provision of much-valued quality roadside services and aftermarket services. These quality services are provided across a wide geographic area and independently of the vehicle manufacturers' repair networks. At the same time however, provision of these services is highly dependent on access to the necessary repair and maintenance technical information for the full range of car brands and models. Only vehicle manufacturers can provide this information.
The fact that manufacturers are continually making changes to car models and updating vehicle systems adds another dynamic to the situation.
Computer based management systems are being developed to control an increasingly wide range of vehicle functions including safety, comfort, security, engine and environmental performance, with ever greater technical complexity. Apart from managing these crucial functions, computer systems are also being used for diagnosis and inspection. Prompt access to technical data for qualified independent economic operators providing repair and maintenance services is even more crucial if they are to continue offering consumers a choice to suit their wallet as well as satisfactory service.
In any future legislation, it is absolutely essential that detailed provision be made with regard to the access to technical information, particularly electrical and electronic data, if free competition, consumer choice and reasonable repair costs are to be assured. Regulation 1475/95 includes important provisions (recital 28 and article 6.1(12)) requiring vehicle manufacturer to share technical information with repairers outside of the network. Even so, in some countries technical information is only provided to authorised dealers. In some cases, this information is provided only after a certain delay (e.g. a year after the appearance of a new model on the market). Thus new cars involved in accidents are heavily reliant on authorised dealers for repairs.
Within the body of European legislation, there are very few other measures covering access to technical data. Currently, access to technical data is not the subject of a specific piece of legislation. Apart from Regulation 1475/95 such measures are only to be found within environmental legislation and are therefore limited in scope.
AIT and FIA campaigned vigorously and successfully to ensure that within the framework of Directive 98/69/EC concerning air pollution by emissions from motor vehicles, vehicle manufacturers are required to provide "unrestricted and standardised access" to the repair information necessary to repair and maintain cars installed with on-board diagnostic systems that monitor emissions (as set out in Annex XI, section 2 of this Directive). Throughout this campaign, the argument was often made that our concerns about access to technical data from vehicle manufacturers were excessive because of the existence of Regulation 1475/95. While this was an important achievement, the provisions covering access to technical data are already outdated as on-board diagnostic systems already control many more functions within a car than the emissions covered by this environment directive. Essentially, this issue still has to be fully addressed.
In the absence of 1475/95,if this issue is not treated seriously within a specific measure there will be a serious lacuna in European legislation open to abuse by vehicle manufacturers at the expense of the independent after market sector, who will be severely restricted in competing. There are currently about 2,500 EU based specialised parts producers generating a turnover of about 100 million Euros annually and employing 600,000 people. Their livelihoods will also be seriously affected if attention is not given to this issue.
A renewed regulation should be much more specific and detailed concerning access to technical repair and maintenance data than the present 1475/95. In principal the AIT and FIA believe that all technical repair information that vehicle manufacturers give to their authorised networks should be available against reasonable compensation to all interested parties with a legitimate interest. This information should be presented in a standardised electronic form.
Such access also applies to regular service announcements from the manufacturer that relate to road safety and the environment, to the VIN-codes for identification of the age and the type of cars on behalf of the buyers of second hand cars and also to the results of type approval tests.
AIT and FIA would recommend that in considering the issue of access to technical data necessary for the repair and maintenance of motor vehicles, the Commission should respect the important precedent established in Annex XI of Directive 98/69/EC.
If 1475/95 is not renewed and no other steps are taken there is a real risk that present levels of available repair information will be reduced, competition will be curtailed and the costs for repairs incurred by consumers will increase.
3. A New Improved Regulation
The AIT & FIA believe that a free market in motor vehicle distribution is the ideal situation but it will not be achieved without a transitional phase. Based on our research we are of the view that a new Regulation is a viable proposition only if it is capable of meeting the following conditions:
- Legislative protection for consumers’ rights
and choice in a liberalised regime requires greater transparency. Warranties, guarantees and consolidation of dealership networks should not be exploited to tie consumers unfairly to vehicle manufacturers. Tougher competition in the sale of new cars should not be offset by increased consumer costs for after market services and replacement parts.
- A better resourced, effective and even independent European competition watchdog
to ensure that any new regulation is properly monitored and enforced. Only under such circumstances will consumer interests be better protected than under a general Regulation or an individual permit.
- Regulation offering transparency, flexibility and legal certainty must be guaranteed.
The text of a future regulation must offer clarity and above all avoid grey areas open to abuse. It must provide greater legal certainty, transparency and justification concerning the relationships between the motor manufacture r, dealers /economic operators and the consumer. It must be sufficiently flexible to ensure that rapid developments taking place in technology and retail and distribution do not render the prescribed framework obsolete.
- Greater scope for the independent after market to compete
The spare parts market should not be monopolised by vehicle manufacturers. Service and repair by independent workshops and the use of alternative spare parts must not be prohibited under the manufacturers' warranties within the scope of any new Regulation.
- No minimum price agreements
Dealers should not be bound by hard-core price agreements covering minimum or fixed prices. While dealers must be able to sell their products on a competitive basis, including within the dealer network, maximum prices should be set. Competition within and outside of the dealer networks and unrestricted cross border purchasing must be guaranteed
- Multi-territory advertising by dealers
removing the restrictions on out-of-territory advertising by dealers.
- Improved respect of warranties
Tougher measures must be introduced to ensure that manufacturer's warranties are respected across the European Union irrespective of where a car is purchased. The establishment of a central institution for warranty claims in each EU Member State would greatly facilitate this.
- Universal access to technical data for repairs and servicing
Data required for diagnostics, repairs, maintenance, inspections and recycling should be available to all interested parties as soon as a new car model is on the market. This also includes regular service announcements form the manufacturer that relate to road safety and environmental issues.
- Specific legislation addressing access to technical data
Without the specific block exemption if this issue not addressed by the European Union, competition will be severely limited.
- 'The balance of power between manufacturers, dealers and consumers in the European Union' - L. Edzes , June 1999
- AIT & FIA submissions to the European Commission in November 1999 by ANWB, AA, TCB, RACC, ACI, ADAC, ÖAMTC.