The future of motor vehicle distribution in European Competition Law (BER 1400/2002)

1. The future of motor vehicle distribution in European Competition Law (BER 1400/2002) Dr. Stephan Simon, LL.M. Deputy Head of Unit, DG Comp

2. DG Competition • Commissioner: Neelie Kroes • Director General: Philip Lowe • Almost 800 staff • Of which more than 400 AD staff • Mostly lawyers and economists • Chief economist: Prof. Damien Neven

3. Kroes-Control Director General Philip Lowe Commissioner Neelie Kroes

4. Time line 1 October 1400/2002 entered into force 1 October Location clause 31 May Evaluation report 31 May 2790/99 expires 2002 2003 2004 2005 2006 2007 2008 2009 2010 30 September End of transition period 31 May 1400/2002 expires 1 May: Reg 1/2003 entered into force LE – study

5. The objectives of the BER 7 objectives: • Protecting parallel trade • Diversity of distribution formats • Multibranding • Access to network • Competition between IAM and network • Liberalisation of spare parts market • Dealers independence

6. BER 1400/2002 • 40% threshold for quantitative selective distribution • 13 hardcore restrictions, 7 specific conditions, 23 definitions • Non-compete not exempted • Dealer protection

7. Success or failure? • “The objectives of the BER have been achieved. The industry's main difficulties are not caused by the regulation or questions relating to competition rights but rather by contractual rights.” • “The versions of the BER, in particular the last one of 2002, have resulted in situations of more subordination and abuse for the members of the authorised networks by the VM.” (Quotes from national dealer associations)

8. The review process • Effectiveness • Efficiency • Relevance + • Economic approach, i.e consumer-oriented effects-based approach • Pure competition focus

9. Market Developments • Real car prices all fell by 12.5% from 1996 to 2004 • Fluctuating market shares 2002 – 2006 • Successful new entries and expansion of Asian manufacturers • Moderate, slightly decreasing concentration, from 2002 to 2006: CR4 declined from 57% to 54% • Increased choice of models and brands • Dealer market is still fragmented: 340 annual car sales/dealer [USA 628 cars] • Dealer profitability low

10. Enforcement European Commission: • > 500 informal complaints • 5 decisions • 1 prohibition decision: Peugeot NL • 4 commitment decisions on technical information • 4 informal settlements • 46 formal complaints National Competition Authorities • Total number of complaints: ca. 350 • Less than a dozen envisaged decisions Private Actions • 4 private actions before ECJ (Art. 234 preliminary rulings)

11. Safeguarding access for competing manufacturers • Measure: allowing for sales of competing brands Arts. 5(1)(a) and (b) + Art. 1(1)(b) • A modest increase in multi-branding has been driven by market forces • Only limited take-up of the same-showroom sales model • Encouraging this model may have led car manufacturers to drive up standards to protect brand image

12. Protecting intra-brand competition between dealers • uniformity in distribution models may stifle intra-brand competition • the exemption of all types of distribution agreement – Art. 2(1), up to 30% market share, but 40% for quantitative selective distribution • allowing for stand-alone sales facilities – Art. 4(1)(g) • allowing dealers to open secondary sales outlets – Art. 5(2)(b) • Objective not reached, although in the light of strong inter-brand competition, protecting intra-brand competition less important

13. Facilitating cross-border trade • Measures: • allowing active and passive sales by members of selective distribution networks – Art. 4(1)(b) • repeal of the notice restricting activities of intermediaries • Non-exemption of location clauses in selective distribution systems – Art. 5(2) • Encouraging cross-border dealerships – Art. 3(3)

14. Protecting competition between independent and authorised repairers • independent repairers provide valuable consumer choice, particularly for owners of older cars. Their market position is vulnerable if essential inputs are withheld • protecting access to technical information – Art 4(2) • Protecting the supply of spare parts by authorised dealers – Art. 4(1)(i) • Protecting the supply of spare parts by original equipment suppliers – Art. 4(1)(j) • Objective achieved • Article 4(2) was helpful, though enforcement was needed – measure will be redundant in the future due to EURO5/6 Regulation 715/2007 • Specific measure allowing authorised networks to supply independent repairers not necessary in the context of selective distribution

15. Protecting competition between authorised repairers • Measures • No exemption for quantitative selective distribution above 30% market share • providing for stand-alone repairers, which may not be obliged to sell cars – Art. 4(1)(h) • Protecting authorised repairers’ ability to offer alternative spare parts brands – Art. 5(1)(b), 4(1)(k) • Objective achieved • numbers of authorised repairers have increased • But Article 4(1)(h) is redundant: due to high market shares, qualitative selection has to be applied, and a stipulation that a repairer has to sell cars is not a valid qualitative criterion

16. Facilitating spare part producers’ aftermarket access • definitions of “original” and “matching quality” spare parts” that allow producers to sell more effectively directly to the after market – Art. 1 • Objective achieved - spare parts manufacturers have maintained their market position • Definition of original and matching quality parts will be redundant in the future due to equivalent provision in Type approval Directive 46/2007, and to a certification procedure for safety-critical parts

17. Protecting dealer independence vis-à-vis suppliers • Reason: to reduce the likelihood of dealers being “disciplined” by car manufacturers for engaging in the pro – competitive behaviour promoted by the BER • Measures: • minimum contract durations and notice periods – Art. 3(5) • Reasons for contract termination – Art. 3(4) • Contractual arbitration right – Art. 3(6)

18. Protecting dealer independence vis-à-vis suppliers • Vast majority of dealers have indefinite contracts, with termination possible on two years’ notice • As regards dealers, not in VM’s interests to arbitrarily terminate their contracts • In reality, dealers are disciplined using more subtle tools than threats of termination (high purchase targets, auditing) • Rules on termination for authorised repairers unnecessary, since such networks are based on qualitative selection • Arbitration appears to be useful for both dealers and suppliers as an expedient means of resolving disputes, although it is scarcely used in practice

19. Code of best practice • Termination and dispute resolution are not competition-related issues, but are rather a matter for commercial laws and practices • In the interest of all, for these issues to be enshrined in a code of best commercial practice, along with minimum notice periods

20. Overall Assessment • General competitive conditions have improved, largely independently of the BER • However, the BER has helped to adjust to that changing environment • Positive evolution of other parts of the EU regulatory framework applicable to the motor vehicles sector • General Regime would bring • benefits for consumers • reduce legal uncertainty

21. Next Steps • Adoption of Report in May • Consultation period until 31 July • Impact assessment

22. Further Information DG COMP Webseite: http://ec.europa.eu/comm/competition/sectors/motor_vehicles/overview_en.html

23. Disclaimer • The views expressed are those of the author and cannot be regarded as stating an official position of the European Commission • These slides are part of a presentation and cannot be fully understood separately from that presentation. Ideas presented here are intended to promote further discussion and analysis. They may not represent a complete or well articulated picture of the author‘s view.