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Session 2000-01
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European Standing Committee C Debates

Motor Vehicle Distributors

European Standing Committee C

Wednesday 7 March 2001

[Mr. Bill O'Brien in the Chair]

Motor Vehicle Distributors

10.31 am

The Minister for Competition and Consumer Affairs (Dr. Kim Howells): I am grateful for the opportunity to debate the European Commission's review of the vehicles block exemption. The purchase of a car is perhaps the second most expensive purchase many of us will make. Continued maintenance and servicing of the vehicle is another major on-going expense, as anyone who has a car will know. Both activities are affected by the provisions of the EC's motor vehicles block exemption. The future of the European car distribution regime is a matter of great concern. All branches of the motor industry—manufacturers, dealers, component manufacturers, independent repairers—have strong views on the subject. So, of course, do us poor consumers.

By way of introduction, it may help if I sketch in some of the background. The European Commission report is a review of the workings of the current system of new car distribution in the European Union. That review was undertaken by the European Commission, and it was planned when regulation 1475/95 was introduced. Indeed, the regulation contains a commitment to undertake the review. In layman's terms, regulation 1475/95, which is known as the cars block exemption, exempts car distribution agreements between suppliers and dealers from the general ban on anti-competitive agreements under article 81 of the EU treaty—an extraordinary arrangement. The block exemption allows motor manufacturers to structure their distribution networks on the basis of selected dealers with exclusive rights to sell the manufacturer's products in a given territory, known in short as selective and exclusive dealerships.

Regulation 1475/95 replaced and amended an earlier regulation. An important aim was to enhance the power of dealers, independent parts manufacturers and consumers as against that of the car manufacturers. Another aim was to encourage greater cross-border trade in motor vehicles. From a United Kingdom point of view, serious concern about the operation of the selective and exclusive distribution system began to emerge in the second half of the l990s, as sterling strengthened. The European Commission's regular surveys of pre-tax car prices across the EU began to show the United Kingdom regularly to be the most expensive market in Europe for most makes of car. Furthermore, prices remained high even though a high proportion of cars sold in the UK are imported and a strong pound ought to have exerted a downward pressure on prices. That is a mystery. In principle, suppliers importing cars into the UK ought to have been able to maintain their profit margins in their domestic currency by selling cars in the UK for lower sterling prices, but such price competition did not happen.

In addition, there were complaints that manufacturers were finding ways to make it hard for UK residents to purchase cars cheaply abroad for import into the UK, implying that the single market was not operating well in this sector. In 1998, in its first report, the Trade and Industry Select Committee criticised the operation of the selective and exclusive distribution system. Following a detailed investigation, the Director General of Fair Trading referred the market for the supply of new cars to the Competition Commission in March 1999. That report was published last April, and its conclusions were clear. Many selective and exclusive distribution system practices permitted by the block exemption were found to operate against the public interest.

The present version of the cars block exemption will expire at the end of next September. The review undertaken by the European Commission was designed to assess how the present regime is working in relation to its aims. Inevitably, the review's findings also set the scene for discussion on what may be put in place after that date—what I shall refer to as the successor regime.

The broad conclusions of the review are clear. The present regime has failed to fulfil its aim of protecting the rights of consumers in the single European market. It has permitted practices that allow manufacturers to segment the single European market on national lines and to operate price discrimination. It has failed to enhance the position of dealers. Problems remain in the after-sales and servicing markets. Finally, the present system is not well adapted to innovative retailing methods such as internet sales or sales through non-traditional channels.

The European Commission's conclusions raise serious question marks over the justifications that have traditionally been advanced for excluding motor vehicle distribution from the normal operations of competition law and allowing the establishment of selective and exclusive distribution systems in the industry.

What of the future? The debate on the shape of the successor regime has already begun. The Commission held an open meeting in Brussels on 13-14 February at which a wide range of interested parties were able to set out their positions, and is commissioning a study of the potential impact on the European motor industry as a whole of a variety of different future regimes. That will no doubt inform its proposals for a successor regime. We expect those proposals to be put to member states for comment some time this autumn. Revised draft proposals are expected to be published towards the end of the year. There will then no doubt be further debate, in which all interested parties can put forward their positions, before a final text of a new regulation is adopted some time next year.

The Government do not have any hard and fast blueprint for the shape of a successor regime. That is not to say that we have no views on the subject. We support the European Commission's conclusion that the regime is failing consumers in important ways—after all, that is in line with the findings of our Competition Commission.

We have made it clear that we believe that radical change is needed to the EU regulations that govern the arrangements for the distribution and sale of new cars.

We welcome the comments made by Commissioner Monti last year to the effect that the car distribution regime in the EU should be reformed in a way that puts the consumer in the driving seat. However, we do not have any settled views on the precise content of such a change or a checklist of points that a successor regime will have to contain. The European Commission, the United Kingdom and no doubt other member states are currently in the middle of a thorough consultation exercise involving all sectors of the new-car market as well as consumer representatives. That exercise will help to shape the views of the Government and the European Commission on successor arrangements.

I need hardly stress the importance of the market for motor cars in the UK. It is extremely important that we get the structure of distribution right, for the benefit of consumers here and across the EU. The European Commission review that we are considering performs a valuable role, as it highlights the shortcomings of the present system and helps to inform our discussions on how best to achieve the radical reforms that are clearly required. The Committee's debate will make an important contribution to the consultation exercise, and I am grateful for the opportunity to take part in it.

The Chairman: We now have until 11.30 for questions to the Minister. They should be short and one at a time.

Miss Anne McIntosh (Vale of York): I shall first declare an interest from my curriculum vitae. I spent six months in Directorate-General IV of the European Commission, dealing mostly with joint ventures but also all aspects of competition policy.

Will the Minister explain what benefits to the increasing parallel imports of cars would result from the abolition rather than the renewal of the block exemption?

Dr. Howells: There would be many benefits. I am glad that the hon. Lady is here to give us the benefit of her experience and expertise as a member of the body that considered competition policy. She will know that there are some obvious anomalies. The block exemption applies to only motor vehicles, planes and yachts— I may have missed a couple of other items. For an industry with such a central place in the economic and social lives of all our communities, we must keep reviewing and exploring the possibility that there may be better methods.

At the least, great pressures are put on manufacturers and retailers through new avenues such as the internet. We know that many retailers would like to get into the market but feel that they are prevented from doing so. We also know of developments that could pose serious problems in future. On-board diagnostic systems are increasingly built into cars, and the opportunity for the dissemination of technical information about those systems to independent repairers is a serious question. I worry a good deal about the opportunity for consumers to use alternative garages if and when they require them, rather than being tied exclusively to dealers and associated repairers that have some umbilical link to the manufacturers.

All sorts of benefits could accrue. I am sure that the hon. Lady will agree that, in relation to the present system, it is important that we do not throw the baby out with the bath water.

Mr. Keith Darvill (Upminster): My hon. Friend will be aware that the Commission's most recent report, which was released last month and based on data compiled by 1 November, found that the UK was again the most expensive market for all models examined, despite the recent price cuts. Will the Minister tell me why that is the case?

Dr. Howells: No, this Minister cannot tell the Committee why that is the case. It seems extraordinary. Obviously, it is a source of great concern for the Director General of Fair Trading. He recommended that the matter be referred to the Competition Commission. The commission was adamant that the block exemption lay at the heart of the price differences between the United Kingdom and abroad.

I tried to make it clear in my opening remarks that we find it difficult to understand why prices remain very high when sterling is strong and 71 per cent. of car sales are imported. In some countries with high local taxation regimes, some models can sell for almost half the price for which they are available in this country. We think that the block exemption, through its selective and exclusive distribution arrangements, has certainly encouraged manufacturers to pick and choose the price at which they sell cars in different locations, in what is supposed to be a single market. The subject warrants serious investigation.


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