There has been a lot of weeping and wailing and gnashing of teeth in Europe the past couple of years over changes to rules which have for many years let automakers keep a stranglehold on how cars and parts are sold.

They alone have been allowed to award franchises and effectively have full control over who is allowed to sell, service and repair their vehicles as well as distribute origina" />

Issue: May 2003


Europe Report



Block Exemption Changes May Shift Entire Industry

by Anthony Lewis

There has been a lot of weeping and wailing and gnashing of teeth in Europe the past couple of years over changes to rules which have for many years let automakers keep a stranglehold on how cars and parts are sold.

They alone have been allowed to award franchises and effectively have full control over who is allowed to sell, service and repair their vehicles as well as distribute original equipment parts.

This is set to change in October of this year when, under changes to what has been known as Block Exemption, effectively open the business up for anyone to sell cars and parts even supermarkets.

Its called block exemption because car makers are exempt, en bloc, from normal EU rules on competition. The perfume industry has a similar but more relaxed, Block Exemption, for example, and there are numerous Block Exemption agreements aimed at helping small and medium-sized enterprises.

The theory behind the changes in the auto industry Block Exemption is that there will be more competition, greater price transparency and generally a better deal for the consumer. So everything is going to change then? Apparently not.

While the ending of Block Exemption will give independent garages the right to sell, service and repair vehicles without flouting warranty rules, industry experts say there will be little or no difference in the short or medium term and prices could even go up.

Block Exemption has tied vehicle sales to maintenance and servicing. While consumer groups claim the exemption has been abused, and disguises an elaborate price-fixing cartel, carmakers argue that the sheer number of rival brands and models creates sufficient price competition, while the increasing technical complexity of cars requires dedicated outlets.

Carmakers insist that any business carrying out warranty work will have to meet the technical and quality standards laid down by them and use authorized parts otherwise the warranty will be invalidated.

Mercedes-Benz was the first carmaker to issue all its dealers with termination notices and then reissue those it wanted to keep with Block Exemption compliant contracts. Dermot Kelly, director of passenger cars for Mercedes Benz U.K., is glad that the company acted early.

It means we can get on building the sales outlets, watching others catch up. I dont think we could have coped with all the rebuilding and Block Exemption issues at the same time, he says.

What Kelly and his team are doing in the U.K., where M-B and its 29 sales partners are investing more than $700 million, is expected to be used as a blueprint across Europe.

Every outlet must meet core standards, but some minor national variations are allowed. Audit teams are currently working in each country to make sure that those standards are being met. Those audit teams are, in turn, being randomly audited by teams from Mercedes-Benz headquarters in Stuttgart to make sure standards are the same.

Applications for service and aftersales franchises have been received and companies are being sent information including on DVD detailing what would be expected of them to win an independent contract. We should be ready to appoint the first independents from October 1 if they meet the standard, says Kelly.

But, and its a big but, to achieve the criteria laid down by the carmakers, independent garages may have to make a significant investment in training and equipment.

With an increased cost base, prices could well rise, according to Professor Garel Rhys, expert in motor industry economics at the University of Wales.

Independents will be able to service cars without flouting warranty rules only if they conform to the standards laid down by the vehicle manufacturers, he says. As long as the manufacturer owns the warranty, it has a right to say which components are used as a replacement after all it has to pay for them. Rhys says he can not see franchised dealers giving up the service side of their business because the profit margins are greater than selling new cars. What you might see is a new type of menu servicing at dealers, maybe offering a cheaper option to retain the business, he adds.

This would be to try and keep the customers whose cars have gone out of warranty and who often migrate to independent operators. It is mainly owners of upmarket brands who tend to stay with the main dealer longer to maintain service records.

Rhys believes the cost of car servicing is not outrageous, despite the protests of consumer groups. He adds: The trouble is we have nothing to compare them with. In old days we used to have all sorts of household appliances serviced but in this throwaway age this is no longer the case.

Warranties are a way of tying customers into dealers and new Block Exemption rules could lead to an increase in their duration. The current industry norm is three years or 60,000 miles although they are already increasing. Hyundai in the U.K. has just announced the first five-year warranty. Others will follow suit, believes Rhys. This has happened in the U.S., where there is no exemption, as a way of locking people into the brand and the dealer network for the long term.

The U.K.s industry body, the Society of Motor Manufacturers and Traders, believes the effect of the new rules is very difficult to call. A spokesman says: The whole idea of opening up the market is for independents to grab some of the business provided they meet criteria.

It might be that these independents can source cheaper parts elsewhere but they may not be specified under the manufacturers warranty.

If you want to be authorized to carry out warranty work then you will still have to be able to meet the quality standards and use the authorized parts. To achieve this a lot of small independents will have to invest heavily to come up to the required standards. It is unlikely to have any downward effect on prices in the medium or short term.

This article was provided exclusively to Automotive Industries by Interchange, a U.K.-based automotive business agency and consultancy servicing media and corporate clients. Anthony Lewis is a partner in Interchange and can be contacted via e-mail at ajlewis@compuserve.com.

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