Sweeping overhaul of car distribution in Europe

He is at it, once again. The short statured Mario Monti, Europes competition commissioner, who recently upset the plans of the worlds largest conglomerate, General Electric,  when he refused approval of its merger plans with giant Honeywell, is now after the European automobile industry.

For years, more than twenty to be precise, auto companies in the European Union used to sell their cars through a dealership network that precluded a dealer from going beyond the territories allotted to him/her. This block exemption enabled manufacturers to control the way new cars are distributed and sold across the European Union through such exclusive selling territories.

What Mr. Monti is pushing for, and may well succeed, is for the block exemption to be abolished and dealers be allowed to sell cars anywhere in the Union. The mere prospect of deregulation, in an industry already suffering from overcapacity and falling prices, has struck fear. For once, the automobile industrys rearguard action is seemingly failing.

While the industry has mounted a massive (and expensive) lobbying campaign, the European commission seems to be unaffected. According to a senior official of the commission, the competition directorate will be most pleased to go for a free-for-all system of car retailing.

The reforms, when implemented, will affect not just car showrooms but also vehicle production, marketing and after-sales. Dealers are sure to face the loss of their traditional business model, where wafer-thin margins on car sales are offset by lucrative servicing and repair contracts. Manufacturers must ready themselves for greater price competition.

According to the competition directorate, the introduction of block exemption clearly hampers cross-border trade, inflates prices and limits inter-brand competition. This is more so in the case of customers in markets like Britain and Ireland, who have been penalised by the cost of right-hand drive variants or prevented from sourcing cheaper cars in mainland Europe.

Brussels appears to have taken its cue from the UK consumer outcry, which has revolted against such restrictive practices by the auto industry.

Auto industry officials have been trying hard to argue that the current arrangement is actually in favour of the consumer since it provides inter-brand competition and expert servicing for products that, if poorly maintained, could be lethal.

The industry view on price disparities across Europe is that this is on account of exchange rate volatility and differing sales taxes rather than price-fixing. The industrys leading association, the Association of European Automotive Manufacturers, is trying to prove that the price disparities for cars are less than for other consumer goods.

Privately, however, the industry is resigned to defeat. Many carmakers have already begun putting in place new retailing strategies.

The commission has appointed Arthur Andersen to recommend the future regime for the industry and the consultants will submit their recommendations shortly before the end of the year. Following a consultation period, the commission will decide to adopt the regime with or without amendments. The European parliament will also have the chance to consider any new rules, although the commission is not obliged to listen to its views.

The industry, however, will be given time to change its practices. Each new regulation will have a transition period. Consultants have advised the commission that an unregulated retailing system could be a recipe for chaos, damaging product liability and consumer protection. As a result the dismantling of the existing system is likely to be a two-step deregulation process.

First, the system of selective and exclusive distribution - captive dealers - is likely to be reformed by forcing the automakers to remove the exclusive territory clauses from the dealers. Second, and perhaps more important, the link between sales and service may be broken. Given that most dealers make more money from servicing cars than from selling them, that could persuade existing retailers to concentrate on purely service-orientated businesses. Outlets would be authorised to service different brands without any restrictions by manufacturers on spare parts.

It is believed that this deregulation would be a boon for smaller, family-owned dealers - often in rural areas - who are struggling. This could also open avenues for retailers such as supermarkets, which would like to sell cars but do not want to service them.

Even if the transition to a new selling and distribution regime will take a whole decade, the revolutionary and far-reaching changes may benefit the consumer the most. The change promises greater price harmonisation and more consumer-oriented competition.