EUROPEAN UNION: Commission opening car parts market

Analysis

A distinguishing feature of the EU autos market has long been the 'block exemption' -- the legal framework that defines allowable practices in the distribution, sale and servicing of new cars in exemption from the competition provisions of the EU treaty base:

• Replacing an earlier framework, the current rules came into force in October 2002 (remaining until 2010) and contain some important new provisions. These include the vehicle manufacturers being asked to choose between two types of franchise system in member states: an 'exclusive' network where dealerships would be allocated territories; or a 'selective' network where dealerships would be recruited on the basis of a range of criteria (see EU: Auto rules to increase competition - July 26, 2002).
• Previous block exemption rules had allowed for the combination of exclusive sales territories and selection, which the European Commission -- and consumer groups -- saw as creating an uncompetitive environment. Under the new rules, the Commission hoped to introduce more competition, for example through greater use of internet purchases and more diverse (multi-brand) dealership structures.

Although consumer groups reacted positively to changes to the new block exemption, there have also been some problematic consequences: for example, in the restructuring that followed its introduction, small service-only dealerships serving local communities are being squeezed out of distribution networks. However, the Commission is optimistic that in the long term, consumers will generally benefit from downward price effects and increased choice.

Parts problems.With respect to after-sales service, the new provisions should have made it easier for independent service outlets to undertake maintenance and repair activities. In practice, this has not proved to be the case in many EU member states. Vehicle manufacturers have tended to place onerous requirements on independents seeking to be recognised as authorised repair outlets, resulting in unattractively high investment costs. Furthermore, the parts market for repair and after-sales remains highly restricted.

In this respect, consumers have been supported by the insurance industry. Large, high-value items, such as crash-damaged bumpers, exterior body panels and lights are often impossible to repair and the replacement has a single source: the vehicle manufacturer. In the 1990s, the automotive industry mounted a vigorous campaign against independent producers of body panels, claiming such parts contravened manufacturers' design rights. The insurance industry has long been concerned at the costs involved in replacing such damaged parts, and indeed some major insurance companies have directly entered the body repair business themselves or have used their bulk purchasing power to drive down repair costs.

While certain member states have moved to liberalise the repair and after-sales market, the Commission is now seeking a uniform solution across the EU single market to the problem of protection afforded under design rights. In a new proposal released last month, it seeks to change design protection rules in order to introduce more competition for outside and visible parts such as bonnets, bumpers, doors, lamps, radiator grills, windscreens and wings. Rebutting manufacturer concerns about safety, the Commission insists that its proposal would not affect the safety or quality of spare parts, which would be governed by minimum standard rules.

The proposal requires the scrutiny of the member states through the Council of Ministers -- and the European Parliament -- before it comes into force. Markets in the United Kingdom, Spain and Italy have already been opened up to independent suppliers, but those in France and Germany have not, and there may be difficulties in the Council.

Decision in context.In the eyes of many, the European automotive industry has shown itself to be insensitive to the needs of consumers, preferring to pursue a narrow and short sighted definition of its own interests. However, the importance of the debate over the car parts market for the automotive industry in general and the vehicle manufacturers in particular should not be under-stated:

• The market has an estimated annual value of 10 billion euros (12 billion dollars). More importantly, when the entire lifetime profits generated by a car are considered, spare parts, body shop work and repairs represent a far more significant element of the value chain than the actual sale of the car.
• For the vehicle manufacturers, the supply of spare items such as bumpers and wing mirrors has been one area of activity where profit margins have been retained. Given that other aspects of the business that were previously profitable, such as finance provision, are under increasing competitive pressure, the concern over this income stream is understandable. In addition to arguments over safety, the automotive industry has argued that this decision will undermine the European parts industry, and force production to low-cost locations such as India, Brazil and China. However, this is precisely what is already underway with respect to the purchase of parts for original production.

Worryingly for manufacturers more generally, markets in Europe, with the exception of the United Kingdom, have not been very robust. In particular, the market in Germany has been relatively weak and this has increased the pressure on the major vehicle manufacturers. Indeed, while BMW and Audi continue to thrive, the other producers such as Opel (GM), Mercedes and VW are all struggling with lower-than-expected sales and unsustainable costs. In Italy, Fiat has not been able to reverse market decline despite the partnership with GM.