Select Committee on European Scrutiny Third Report


COMPETITION IN MOTOR VEHICLE DISTRIBUTION AND SERVICING


(21898)
13889/00
COM(00) 743

Commission Report on the evaluation of Regulation (EC) No. 1475/95 on the application of Article 85(3) of the Treaty to certain categories of motor vehicle distribution and servicing agreements.


Legal base:
Document originated: 15 November 2000
Forwarded to the Council: 17 November 2000
Deposited in Parliament: 14 December 2000
Department: Trade and Industry
Basis of consideration: EM of 20 December 2000
Previous Committee Report: None
To be discussed in Council: No date known
Committee's assessment: Politically important
Committee's decision: Not cleared; for debate in European Standing Committee C

Background

  4.1  Article 81 of the Treaty generally prohibits all agreements, decisions, or practices between undertakings, or within associations of undertakings, which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the single market. However, Article 81(3) allows for practices which would otherwise be prohibited where they contribute to improving the production or distribution of goods, or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefits; and which do not, in turn, impose restrictions not essential to the attainment of those objectives or afford undertakings the possibility of eliminating competition in respect of a substantial part of the products in question.

  4.2  There are longstanding exemptions under Article 81(3) in respect of the distribution and servicing of motor vehicles. These are currently set out in Regulation 1475/95 (commonly known as the "cars block exemption"). That Regulation is in turn based on a revision of Regulation 123/85. In addition the Commission has issued Notices which complement or clarify issues involved in the Regulation. The cars block exemption creates a special regime for the distribution and servicing of motor vehicles. In particular, it allows car manufacturers to operate selective and exclusive distribution systems, subject to certain restrictions. The block exemption expires at the end of September 2002.

  4.3  In April 2000, the Government published the UK Competition Commission's Report on the supply of new motor cars within the UK. It mainly focussed on the high prices for new cars sold in the United Kingdom but it also evaluated many aspects of Regulation 1475/95. It concluded that the Regulation permitted restrictive practices which work against the public interest. It recommended, amongst other things, that selective and exclusive distribution of new motor cars should be prohibited and that Regulation 1475/95 should be changed, or at least allowed to expire.

  4.4   Regulation 1475/95 requires the Commission to draw up by 31 December 2000 a report on how it is working.

The document

  4.5  The document presents the report which the Commission is required to draw up under the Regulation. It evaluates the application of Regulation 1475/95, particularly as regards the impact of the exempted system of distribution on price differentials of motor vehicles between the different Member States, and on the quality of service to final consumers. It covers not only cars but also trucks, buses and the servicing of such vehicles. It follows widespread consultation by the Commission with relevant undertakings and consumer bodies. It also takes account of last year's report of the UK Competition Commission.

  4.6  In his Explanatory Memorandum of 20 December 2000, the Parliamentary Under-Secretary of State for Competition and Consumer Affairs at the Department of Trade and Industry (Dr Kim Howells) summarises this lengthy document as follows:

    "It begins by reviewing the history of the special arrangements which have existed in the motor sector since 1985 and then examines the current structure of the EU market for new cars and spare parts in the light of changing approaches to distribution (e.g. 'lean' distribution, the Internet, new distribution channels such as supermarkets).

    "The report goes on to detail the enforcement action the Commission has itself taken under Regulation 1475/95 (amongst other things noting some 500 letters of complaint about problems in obtaining right hand drive cars on a cross-border basis in 1998-9). It also notes the formal proceedings against various manufacturers for impeding cross-border sales and concludes that in this area the regulation has not entirely fulfilled one of its main objectives — protecting the rights of customers in the single market.

    "Section 6 of the report then examines the operation of the present system in detail. While arguing that effective inter brand competition exists in the EU, it concludes that intra brand competition is limited. In the after sales service sectors, competition is confined to the period after the expiry of the manufacturer's warranty; the report concludes that specialist repairers do not necessarily need to be dealers or service outlets belonging to a manufacturer's network and goes on to argue that the 'natural link' between sales and servicing does seem no longer to exist in the way which it may have done in the past.

    "Turning to the issue of the commercial independence of dealers, the report examines a series of issues before concluding that another major aim of the 1995 Regulation — giving dealers more independence — has only been realised to a limited extent. Even if manufacturers abide scrupulously by the terms of the Regulation, they remain largely able to control their dealer network. Similarly, independent repairers have not been able to obtain access to the technical information necessary if they are to have full access to the repair and maintenance market.

    "The report next examines how far consumers have been able to benefit from the single market in the purchase and servicing of vehicles. It notes the persistence of significant pre-tax price differentials between Member States (in particular affecting the UK). It concludes that the availability of new vehicles in a dealer's contract area functions well but that practices on the setting of sales targets which are allowed under the block exemption can hamper competition. On cross-border purchases, it concludes that these remain difficult because the manufacturers and distributors are reluctant to make such sales and because the systems of setting sales targets again enables the manufacturers to segment markets along national lines. Intermediaries undertaking purchases on behalf of consumers experience the same problems as individual consumers in this field. The report concludes that the exclusion of independent resellers from the distribution of new cars may be questionable.

    "On after-sale service, the report concludes that there are no major problems over the honouring of warranties for cars bought from a local dealer but that manufacturers have not always informed their network dealers across the EU that they have to honour warranties on cars purchased in another Member State. It also concludes that after sales services provided by dealers do not always meet consumer expectations even though they are on average more expensive than those provided by independent repairers.

    "Finally, the report concludes that the present system is not well adapted either to Internet sales (even though consumers are increasingly willing to make purchases through that medium) or to distribution through supermarkets."

Policy implications

  4.7  The Minister says that:

    "Although this report is confined to an examination of the workings of the current system of car distribution under the cars block exemption, it is designed to set the scene for the discussions on what regime should replace the cars block exemption when it expires at the end of September 2002. Its conclusions are broadly in line with those reached by the UK Competition Commission in its report on the new car market in the UK. This found that practices permitted by the cars block exemption operated against the public interest. Ministers have implemented those Competition Commission recommendations which did not conflict with the block exemption. As far as the future European regime is concerned, ministers have made it clear that they wish to see radical reforms to make the regime more responsive to consumer interests.

    "Since this is a report by the Commission on the workings of a piece of legislation there is no need for formal consultations on the report itself, though DTI will be consulting widely over the shape of the future European regime.

    "The Commission has already adopted the report and is seeking comments on it from interested parties (i.e. manufacturers, dealers, consumer groups etc). The next step will be a hearing in mid-February 2001 at which these parties will be invited to express their views."

Conclusion

  4.8  This report covers an important subject of much concern and interest both to the motor trade and to consumers. Although it does not, of itself, make any specific proposals, it is designed to set the scene for discussions on the kind of regime which should replace the cars block exemption after September 2002. There will now be a period of public discussion and consideration before the Commission makes proposals. We note that the Government will be consulting widely over the shape of the future European regime. In that context, we consider it important that the Government is aware of views in the House, not only in respect of the Commission's analysis of the current regime, but also about the broad shape of any successor regime. We accordingly recommend a debate on this document in European Standing Committee C.


 
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