Miles Trower, analyses some of the potential outcomes of the European Commission's recently published Frequently Asked Questions (FAQ) guidance on the application of competition and new block exemption rules to the automotive sector.
"The recent FAQs fail to address some of the pressing competition issues affecting the sector, but it's not all bad news. Upon closer inspection, the FAQs suggest certain opportunities for manufacturers to help their authorised networks absorb more after-sales work (particularly in the context of certain products, such as PCPs) while underlining the Commission's commitment to opening up aftermarkets to more competition" summarises Miles Trower.
After an 18 month delay, the European Commission (its competition department or 'DG COMP') has finally published further guidance, in the form of FAQs on the application of EU competition rules to the motor vehicle sector.
Notwithstanding the time taken to prepare the FAQs, it is immediately clear that DG COMP has confined this guidance to a limited number of after-sales issues. In other words, it has declined the opportunity to cover a wider range of new vehicle sales matters, despite calls from certain bodies to do so.
The FAQs focus on providing guidance on warranty restrictions, as complicated by extended warranty and lease-type deals, as well as on access to spare parts, tooling, technical information and authorised repairer accreditation.
Most notable by its absence from the FAQs is any commentary on the benefits of an industry Code of Conduct. DG COMP has been reluctant to elaborate on such a Code - announced in its 2010 Supplementary Guidelines for the sector - which would be designed to support greater transparency and predictability in relations between manufacturers and dealer networks. This may be because DG COMP considers that other departments within the Commission are better placed to take this initiative forward, probably as part of the ongoing pan-European consultation on unfair commercial practices in B2B relations.
Either way, DG COMP has, for some time, expressed a reluctance to get involved in issues which, rightly or wrongly, it perceives as being outside its remit of pure competition regulation. While this concept may work in theory, it does not help those businesses, particularly SMEs, who need more concrete guidance in order to challenge restrictive behaviour cost effectively. Moreover, it fails to recognise the plethora of measures, pressures and behaviours that can be used to restrict competition indirectly. It follows that DG COMP's present reticence is unlikely to advance the private enforcement of legal rights in this particular area.
As far as the actual content of the FAQs is concerned, certain commentators might observe that the FAQs are bland and, in some instances, generate more questions than they answer. However, one assumes that these questions were put to DG COMP at some point, so perhaps further guidance was necessary. Moreover, the FAQs raise several interesting points, even if the accompanying lack of detail is unsatisfactory. The following points merit attention:
- As we know, the protection provided by a manufacturer's new car warranty (howsoever presented to the customer ) cannot normally be made conditional on repair or servicing work that is not covered by the warranty being confined to the dealer/authorised repairer network. So, provided the right processes are followed by an independent garage and provided, of course, the customer is willing to accept the associated risk that a faulty repair might invalidate the manufacturer's warranty, the customer is entitled to go further afield for non-warranty work etc. This does not, of course, prevent dealers/authorised repairers from selling pre-paid servicing packages to their customers.
- Similarly, for non-warranty work, a manufacturer cannot insist that its dealers and/or authorised repairers use only those parts sourced from the manufacturer Original parts (from other sources) as well as matching-quality parts may be used. Certain manufacturers choose to apply purchase or sales targets to parts to overcome this issue (whether or not such targets are consistent with the concept of qualitative selective distribution) and the FAQS do not address this issue specifically.
That said, the FAQs do confirm – from an abuse of dominance perspective – that a manufacturer risks infringing EU competition rules if it makes bonuses or other incentives available on 'captive' parts (i.e. those parts which are only available from the manufacturer) conditional on the dealer and/or authorised repairer also sourcing 'competitive' parts (i.e. parts where there are third party alternatives) from the manufacturer. Of course, sophisticated manufacturers might find ways around this issue through the weighting of incentives attached to different categories of parts; however, the FAQs confirm an important principle.
- The FAQs also recognise the fact that, in the context of extended warranties, dealers and/or authorised repairers tend only to have a competitive advantage over independent garages at the original point of sale of the vehicle. The FAQs go on to say that extended warranties sold "some years after the purchase" of a vehicle might feasibly incorporate restrictions which, among other things, tie the provision of all repair and maintenance services for that vehicle to the authorised network.
While DG COMP has clearly not identified the precise point at which such a tie ceases to be problematic from a competition perspective (and we are left to decide what is meant by "some years"); the guidance would seem to open the way to extended warranties being sold to customers during or, at least, at the end of, the initial warranty period which incorporate such requirements. This should, on one level, help dealers and/or authorised repairers absorb more after-sales work for older vehicles and derive greater value from their substantial investments in facilities, tools and training over a longer term. How manufacturers will react to this opportunity to support their networks and explore other benefits associated with the supply of parts remains to be seen.
- In a similar vein, DG COMP also attempts to clarify the position of warranty and servicing restrictions in the context of certain types of 'leasing' arrangement. Importantly, DG COMP notes that for certain arrangements where there is 'no certainty' that ownership of the vehicle will pass to the customer at the end of the term, the manufacturer (or its finance arm) has a clear interest in the residual value of the vehicle. In such circumstances, DG COMP acknowledges the manufacturer's or its finance arm's right to insist that all repair and maintenance work during the warranty period is carried out within its authorised network, and that only certain categories of spare parts are used.
This part of the guidance therefore has serious implications for certain types of finance deals, notably increasingly popular PCPs, where the customer has the option of handing back the vehicle at the end of the term as an alternative to acquiring ownership of the vehicle.
- Another point is DG COMP's acknowledgement that a manufacturer's warranty term may vary between EU Member States and that the level of cover offered may be reflected in the local recommended pricing of the vehicle. It follows that if a vehicle is exported to a Member State with more comprehensive warranty cover, neither the manufacturer nor its authorised network in that destination market should be obliged to extend the enhanced cover to that customer, and the level of cover applying in the market in which the vehicle was purchased may continue to apply .
- Regarding the more cumbersome or unhelpful guidance in the FAQs, DG COMP has indicated that a manufacturer may, where practicable, require that competing brands of spare parts are stored separately to its own. DG COMP refers to how having a mixed parts storage system might affect 'consumer perception' of the brand, although as most consumers do not personally select their preferred spare parts from the workshop, this rationale would seem unconvincing.
- Similarly, DG COMP's benign treatment of restrictions obliging dealers and/or authorised repairers to use its specific tools and diagnostic equipment (as opposed to, potentially cheaper or better, third party equivalents) relies on certain untested assumptions and fails to recognise the impact of such restrictions on multi-franchised workshops.
- DG COMP has also attempted to elaborate on existing guidance concerning the dissemination of technical information, giving particular attention to the robustness of safety-related justifications for withholding data from independents and giving consideration to possible alternatives.
However, in its desire to open up access to technical information to independent garages on an 'as needed' basis, DG COMP has not fully explored the substantial investments made by dealers and/or authorised repairers in the full-suite of technical information and the need to avoid the situation where they are, in effect, subsidising independents. There is a risk that DG COMP has not struck the right balance here. Indeed, its attempt to achieve a level playing field may eventually skew things too far the other way.
- Finally, the FAQs confirm the uncontroversial view that a restriction preventing the appointment of an authorised repairer simply because the candidate is already authorised to repair another brand of vehicle is unlikely to constitute a true qualitative criterion and could restrict competition.
In light of the above, it is more likely than not that the FAQs will attract criticism from certain groups, particularly dealer bodies, which is perhaps not unjustified given the potential issues that the FAQs could have addressed. That said, the FAQs do suggest certain opportunities for dealer networks, the success of which will depend strongly on manufacturers' appetite to pursue them, albeit after seeking further clarification from the Commission.
At the same time, the FAQs, as non-binding guidance, need to be put into context, in terms of what they might reasonably be expected to achieve. In many respects, FAQs are not sufficient to deal properly with certain serious concerns prevailing in the sector, which might only be addressed through separate regulation or through a discrete sectoral investigation in anticipation of the 2013 changes. Other departments within the Commission, such as DG MARKT, may well rise to this challenge, at least as far as unfair commercial practices are concerned.