Introduction

Over and over again European Commission President, Romano Prodi and Competition Commissioner Mario Monti have emphasised the freedom of consumers to purchase new motor cars and to obtain ancillary back-up services, including warranty services, anywhere within the European Union. The EU objective is to enable consumers to purchase vehicles anywhere in the European Union on the cheapest and most competitive terms.

Although differing national taxation systems (most notably Ireland's draconian Vehicle Registration Tax) and currency differentials between sterling and the Euro have been the primary factors in new car price differentials, the European Commission has selected the intra-EC car price differentials charged by car manufacturers in member states as evidence that the single market in new motor vehicles is simply not working.

Block Exemption Regulation 1475/95

New car manufacturers and distributors have been given a special industry-specific Block Exemption. The first Block Exemption Regulation was introduced in 1985 for a period of 10 years and it was replaced in 1995 by a revised Block Exemption Regulation 1475/95 giving new car dealers more protection and further freedom of operation.

The Commission monitored the car price differentials between the different EU member states and, after exhaustive economic analysis, concluded that there were economically unjustifiable differentials and price discrimination between the member states. In particular, the Commission concluded that new car manufacturers were exploiting the United Kingdom market.

The ability to cross borders and purchase vehicles in other member states where the pre tax price is least expensive was not helping to achieve price harmonisation. Ireland is an exception to that. The single largest item of export from Ireland to Northern Ireland is new motor cars, accounting for over 10% of the total value of exports.

Need for Change

Although Block Exemption Regulation 1475/95 gave new motor vehicle dealers additional legal protection in order to resist undue pressure from manufacturers to ignore cross border orders for purchase of vehicles, a number of important decisions by the European Commission imposing substantial penalties upon Volkswagen and others demonstrated that some motor manufacturers were non-compliant. Rather than concentrating on enforcing the existing Block Exemption Regulation, the Commission decided to change the rules and introduce a new regime the purpose of which is to reduce the opportunity for geographic differentiation.

Commission Draft Block Exemption Regulation

The Draft Block Exemption Regulation, which was introduced on the 5th February 2002, is quite complex and will be difficult to interpret in practice. The essence of the new regime is to dismantle the connection between selective distribution and exclusive distribution (often called SED) and require manufacturers and their national distributors to opt for one system or the other and not a combination of both systems, as currently applies.

The new Draft Regulation, if adopted, will make some radical changes. Access to spare parts and after sales service will be facilitated. The ability of independent repairers to provide expert servicing will also be enhanced. The separation of after sales service and repairs is intended to increase competition. The ability of dealers to become multi- brand and multi-franchise will be enormously facilitated and the previous requirements of separate sales premises separate staff and separate management will be abolished.

Dealers will be provided with much greater protection against termination. The two years' notice for termination without breach is being retained but manufacturers and distributors will now have to give reasons for termination and there will be a requirement to provide expert third party or arbitration for the resolution of disputes between manufacturers and distributors and distributors and dealers, not only in relation to termination, but also in relation to sales targets and other contractual issues.

The Future

Obviously standard dealer agreements will need to be completely overhauled and manufacturers and distributors will have to carefully evaluate new models of distribution to accommodate these changes. Dealers will have greater freedom to locate and cross border dealerships are envisaged as enabling cross border sales with the purpose of eliminating, or at least reducing, pre tax price differentials between member states.

Submissions have been received by the European Commission by the deadline date of the 16th April 2002. The Commission has now finalised amendments based on the submissions received, having gone through the interservice process. The revised draft regulations are due to be published on the European Commission Competition web site very soon. It has been stated that the amendments are intended to clarify the ambiguities and vagueness in the current draft.

In the meantime manufacturers have galvanised Governments and certain member states, especially Germany, to postpone the implementation of these radical changes. The European Parliament in a non binding vote of 287 to 128 votes resolved to delay the implementation and to allow a longer transition period but the European Commission has resisted this, stating its exclusive competence to regulate in this area.

Whether the new draft regulation, if adopted and brought into operation, will have the effect of creating a truly single market for new motor vehicles in Europe is certainly open to question. Perhaps it would have been sufficient for the Commission to continue its strong and determined enforcement action against manufacturers who fail to observe the single market requirements would have eventually provided a solution.

For further information or general enquiries contact:-