Brussels, 17 July 2002

Today the European Commission adopted a bold but balanced reform of the competition rules for the motor vehicle sector. The new regulation aims to put right the competition problems identified in the Commission's 2000 evaluation report on the current competition regime. It is designed to increase competition and bring tangible benefits to European consumers for both vehicle sales and servicing. The regulation will open the way to greater use of new distribution techniques, such as Internet sales. It will lead to more competition between dealers, make cross-border purchases of new vehicles significantly easier, and lead to greater price competition. Consumers will be better informed and it will be easier to compare cars and associated services offered by dealers. Car owners will have easier access to after-sales servicing, potentially at lower prices. At the same time, the quality of vehicle servicing and repairs will be fully maintained. The new regulation comes into force on 1 October 2002, with a one-year transition period allowing for the adaptation of existing contracts. A specific longer transition period until 30 September 2005 applies to the phasing-out of location clauses.

Competition Commissioner Mario Monti explained: "The ground rules for competition are the same for all sectors: specific distribution and servicing systems can be allowed but only if their advantages outweigh the competition restrictions on the market and provided consumers get a fair share of the resulting benefit. This is what the new Regulation attempts to put right. What the Commission adopted today is a bold and balanced reform aimed at injecting competition at all levels of car distribution and repair. The cost of repair and maintenance of a car is as high as the purchase price. It is therefore appropriate to provide equally effective measures for both sales and servicing. As from October 2002, dealers -directly or indirectly- will be able to reach consumers wherever in the EU without constraints, and consumers will benefit from greater diversity and choice. They will also benefit from improved after-sales servicing."

European Parliament's views largely taken on board

Mr Monti also stressed the importance of the input and opinions received during the public consultation on the new regulation, and especially of the views expressed by the European Parliament. "We have taken on board, either fully or partly, 18 out of the Parliament's 29 requests for modifications. On an issue which has commanded particular interest, the ban of the so-called location clause in contracts between car manufacturers and their dealers, a longer transition period than initially foreseen has now been granted. In my view this is a balanced and practical solution on a matter where opinions were divided. It also avoids the situation of legal uncertainty that would have been created by postponing a decision on this key part of the reform".

"In addition, we have striven to meet the Parliament's wish to keep under review the developments in the market", the Commissioner declared. "The Commission undertakes to monitor the effects of the regulation on competition in retailing and after-sales servicing in the common market or relevant parts of it, including on the structure and level of concentration."

Why adopt a new regulation?

The new regulation will replace the regime brought in in 1985 and slightly revised in 1995, which is due to expire on 30 September 2002 (current Regulation 1475/95). The regulation was drawn up following an extensive process of fact-finding and consultation, and takes into account the views of interested parties and the findings of a series of studies commissioned from independent consultants. The Commission also took into account the European Parliament's views to a great extent. All Member States, the European Parliament and the Economic and Social Committee agree on the absolute need for a substantial reform.

The Commission's own evaluation report showed that several of the aims underlying Regulation 1475/95 have clearly not been achieved. European consumers do not derive their fair share of benefits from the system, competition between dealers is not strong enough and dealers remain too dependent on car manufacturers. Consumers have also in practice found it difficult to exercise their Single Market right to take advantage of price differentials between Member States and buy their vehicle wherever the price is lowest.

The evaluation report confirmed the restrictive nature of the distribution methods established by the motor vehicle manufacturers: a restrictive nature widely spread across the whole motor vehicle sector, as all manufacturers implement similar distribution agreements. In particular, the evaluation report identified the combination of full control over dealer selection by the manufacturer with the allocation of exclusive sales territories to dealers as the main reason for substantial lack of intra-brand competition.

If the Commission simply let this Regulation lapse, the car sector would automatically fall under the general competition rules for distribution agreements (Commission Block Exemption Regulation 2790/99). While this general regime is suitable for most economic sectors, the Commission has concluded that it does not contain sufficient safeguards to remedy the problems identified in the evaluation report, and that a stricter regime for the car sector is therefore necessary.

The new sector specific Regulation spells out the stricter exemption conditions that will apply for the distribution and after-sales agreements of new motor vehicles.

The new Regulation will be applicable to the sale and after-sales services of all motor vehicles (passenger cars, light commercial vehicles, trucks and buses).

Allowing freedom of choice

The new regulation is based on the same philosophy as Regulation 2790/99, in that unlike the current sector-specific block exemption (Regulation 1475/95), it does not prescribe a single rigid model for car distribution in Europe but rather leaves a wide number of choices open to carmakers, distributors and dealers.

Car manufacturers may choose exclusive distribution, where each dealer approved by the manufacturer is allocated a sales territory but is free to sell to operators that are not members of the official network set up by the manufacturer. They may also choose selective distribution, where dealers are also selected according to a set of criteria but are not allocated a sales territory and are not allowed to sell to operators that are not members of the official network set up by the manufacturer(1).

The Commission does not seek to define what criteria are permitted or how a carmaker should organise his network; instead, providing an agreement corresponds to the basic conditions for the application of the regulation, everything is permitted with the exception of a defined blacklist of "hard core", i.e. severely anti-competitive restrictions.

Although the Regulation is much stricter than the current block exemption when it comes to ensuring effective competition, it is also more flexible in offering a broad range of possibilities.

Multi-brand dealerships

Studies have shown that many consumers would value the in-store choice and comparability available in multi-brand outlets. This "multi-branding" reinforces dealers' commercial independence vis-à-vis their suppliers and also enables dealers in sparsely populated areas to keep their businesses profitable. The new regulation therefore gives retailers a genuine choice as to whether they sell more than one brand. Carmaker may only impose a requirement to display their cars in brand specific areas within the showroom. The current regime imposed conditions such as separate premises, separate legal entities and separate management: consequently multi-branding did not constitute an economically sustainable option for most dealers.

Making the Single Market a reality for the European consumer

The existing clause commonly referred to as the "availability clause", which allows dealers to supply cars to consumers from other Member States that are identical to those supplied to dealers in the consumer's home country is retained in the new regulation. This allows consumers to make cross-border purchases, and has enabled, for example, UK and Irish consumers to obtain right-hand-drive vehicles from Continental dealers at lower prices.

The Commission's twice-yearly car price report has consistently revealed major differences in new car prices between EU Member States. A study published for the Commission last year concluded that these differences cannot totally be explained by differences in tax levels(2). The new regulation contains other measures which will make it easier for the consumer to take advantage of lower prices in other EU countries. In particular, existing restrictions on operators who act on behalf of a consumer with regard to the purchase of a vehicle will be lifted. In future, these representatives, commonly referred to as intermediaries, will only have to produce a mandate showing that they are acting on behalf of a consumer.

The new Regulation not only makes shopping abroad easier, but also contains measures to allow those dealers who wish to sell to consumers in other areas of the European Union to be more pro-active.

It provides that dealers in a selective distribution system may engage in active sales in other words, they may place advertisements in other areas, and address mail shots and personalised e-mails to consumers located anywhere in the European Union. Dealers may not be penalised in any sense for selling in this manner.

Dealirs in an exclusive distribution system may actively sell to independent resellers within their exclusive territory and may also, if approached, sell to final consumers or resellers based outside their territory. These active sales inside the territory, and unsolicited sales outside the territory, will create the conditions for better price competition across the EU than under the current regime where all active sales outside the territory, as well as sales to independent operators, were forbidden.

In addition, dealers in a selective distribution system may set up a secondary sales outlet or a delivery point in another part of their own country or in another Member State of the European Union. Manufacturers would therefore not be allowed to restrict the freedom of existing dealers to expand by developping secondary outlets (this is the so-called ban on location clauses). One might imagine, for example, that a dealer in Spain who commonly sells many vehicles to French consumers might find that it made business sense to open a sales outlet or a delivery point in Marseilles. The new regulation would make it possible for him to do so. The prohibition of such location clauses is indispensable as otherwise car manufacturers could continue to apply both selectivity and territorial protection, effectively carrying over the main features of the current regime, which has not delivered the expected benefits to the European consumer. The evaluation report identified precisely this combination as the main obstacle to competition between dealers and to the proper functioning of the Single Market. Moreover, implementation of such location clauses would hinder the development of multi-brand dealerships.

These measures should help to ensure that the Single market operates to allow consumers to take advantage of the often extraordinarily high price differentials that exist between Member States of the European Union.

Promoting competition, quality and choice in the repair sector

Under the current regime, anyone who sells new cars is obliged to carry out repair. Under the new regulation, dealers may choose whether they wish to carry out repairs themselves, or sub-contract them to another authorised member of the manufacturer's network, be it another "integrated dealer/repairer" or a repair-only outlet. The new regulation also provides that, providing they meet the quality standards set by a manufacturer, both independent repairers and today's car dealers may become authorised repairers within that manufacturer's network, without being obliged to sell new cars. The carmaker may not limit the number of authorised repairers, and may not limit an authorised repairer's right to repair vehicles of other makes.

Studies have shown that consumers prefer a dense network of repairers, and this proposed change should help to maintain network density while reinforcing the current level of technical expertise within the network.

The regulation also provides that carmakers must allow those repairers who choose to remain independent from specific brands to have access to all necessary technical information, tools, equipment, including diagnostic equipment, and training. Furthermore, the regulation forbids clauses which seek to prevent authorised repairers from supplying original spare parts or parts of matching quality to independent repairers. These provisions aim to ensure that independent repairers can continue to compete effectively with the manufacturer's network of authorised repairers. The consumer will therefore have a choice as to where his vehicle is repaired.

The regulation also aims to give consumers a choice as to which spare parts are used to repair their vehicle; clauses by which a carmaker seeks to prevent repairers from obtaining spare parts from other sources or which restrict the right of authorised repairers to use spare parts which match the quality of original spare parts will not be allowed by the new block exemption. These measures should lead to more spare parts being sold directly to repairers by the spare part producers, giving the consumer more choice and increasing competition for the supply of parts.

However, in view of the vehicle manufacturers' direct contractual involvement in free servicing, recall operations, and repairs under warranty, authorised repairers may be obliged to use original spare parts supplied by the carmakers for these types of repair.

Taken as a whole, the changes as regards both independent and authorised repairers set the scene for substantial improvements in competition and for safe and high-quality repair and maintenance services, to the benefit of the European consumer.

Strengthening dealers' commercial independence to allow them to better serve the car buyer

Although the current rules contain provisions to reinforce dealers' commercial independence through contractual protection, notably by providing for minimum notice periods for contract termination, the Commission's evaluation report makes it plain that these have not been sufficient to achieve all of the desired effects.

In the absence of more effective measures, there is the risk that certain carmakers might use termination or the threat of termination as a way of preventing dealers from engaging in the types of pro-competitive behaviour which the new regulation seeks to encourage, such as selling more than one brand within the same showroom, or selling to consumers from other Member States or their representatives. In order to prevent manufacturers or their importers from undermining the new regime in this way, to the detriment of both consumer interests and dealers' commercial independence, the regulation provides that any carmaker wishing to terminate a dealer agreement must give clear and objective written reasons for doing so. This measure should enable a judge or an arbitrator to check the validity of the contract termination. Moreover, the regulation sets a five year minimum term for fixed-term contracts in order to prevent carmakers from using short-term contracts to put pressure on dealers not to engage in pro-competitive behaviour.

In addition, the new regulation provides that distributors of a given brand should remain free to acquire and sell any other distributorship of this brand wherever in the EU. This provision will promote the creation of distributors with greater bargaining power vis-à-vis the car manufacturer, and will also favour the creation of cross-border dealerships.

Entry into force

The new regulation is to come into force on 1 October 2002. There will be a one-year general transition period during which pre-existing distribution agreements will have to be brought in line with the new rules. There will also be a specific longer transition period until 30 September 2005 before location clauses are phased out, or in other words, before dealers can set up additional outlets where it suits them.

The block exemption provided for in the regulation will expire on 31 May 2010. This date was chosen to coincide with the expiry of Regulation 2790/99, the general block exemption regulation applicable to vertical restraints.

For the entry into force of the new regulation, the Commission will publish an explanatory brochure for the public presenting the rights and obligations stemming from the new regulation for consumers and all operators involved in motor vehicle distribution, after-sales servicing, and parts distribution(3). This brochure will also provide guidance, for the purpose of the block exemption, about how to define markets in the motor vehicle sector.

Enforcement

The Commission will continue to monitor of the motor vehicle sector and will check that car manufacturers apply the new rules adequately on the sales and after-sales markets, in order to make sure that consumers get real benefits from the reform.

(1)Car manufacturers may not, however, combine, for a single dealer, exclusivity (allocation of an exclusive sales territory) and selectivity (prohibition to sell to independent operators). Manufacturers are however free to apply, according to their needs, exclusive systems in some markets of the EU and selective systems in others.

(2)The study, and other material relating to the review process can be found on the Commissions website at http://europa.eu.int/comm/competition/car_sector/

(3) A similar explanatory brochure exists for the current block exemption regulation (Commission Regulation 1475/95). It can be consulted on the Competition Directorate-general website.

Copyright European Commission 2002

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