Background

After a long wait since the draft for public comments in early 2016, the Administrative Measures on Automotive Sales (“Automotive Sales Measures”) has finally been promulgated by the MOFCOM on April 14, 2017. The effective date of the Automotive Sales Measures is July 1, 2017, as of which the current Measures for the Implementation of the Administration of Automobile Brand Sales (MOFCOM, NDRC and SAIC, February 21, 2005, “Brand Sales Measures”) will become nullified.

So far the reaction of the market to the new Measures is rather calm, partly because 1) there is no material change in the official version comparing to the draft in early 2016; 2) the existing brand sale system as established under the Brand Sales Measures has already been weaken as the SAIC suspended the mandatory filing of “brand dealers” in the late 2014; and 3) the other important regulations i.e. the Antitrust Guideline for Automotive Industry is still in the pipeline (expected to be rolled-out in 2017).

Nevertheless, the Automotive Sales Measures will reshape the automotive distribution landscape (Please refer to our newsletter “Coping with the upcoming Chinese new automotive antitrust legal regime” in August 2016), set new benchmark for the evaluation of business conducts in automotive distribution.

The highlights of the Automotive Sales Measures are as follows:

Diversified and balanced distribution structure

The most significant feature of the Automotive Sales Measures is that it creates a more diversified and fair automotive dealership through re-allocation of the obligations of OEMs and dealers. Specifically, the establishment of dealerships will no longer rely upon the authorization of OEM/General Distributor, and the “4S store” business mode will no longer be mandatory. As such independent dealers and parallel importers will exist in parallel to the authorized dealers.

Comparing to the draft in early 2016, the Automotive Sales Measures is less radical in leveraging direct benefits to authorized dealers while still envisaged to make the game more balanced to the OEMs and authorized dealers. For example the provisions contained in the 2016 draft regarding automatic renewal of authorization and exit mechanism have been removed in general except for the minimum period of authorization (3 years for renewal and 5 years for the first-time authorization).

Business conducts of OEMs

According to the new Measures, apart from vertical price fixing which is clearly prohibited under the PRC Anti-Monopoly Law, the OEMs are not allowed to impose “anti-competitive, unfair or discriminative trading conditions” on the dealers, such as:

  • Requiring the dealers to operate after sales service;
  • Restraints on cross-sale of vehicles and auto parts among dealers;
  • Restraints on concurrent sales of vehicles of other brands by dealers;
  • Restraints on the dealers to provide auto parts or other after sales service for the vehicles of other OEMs;
  • Tied-sale of vehicles, auto parts, etc.;
  • Unreasonable requirement of the size, building structure, decoration, design of the dealer shop as well as the brands/suppliers of construction material, office facilities and equipment;
  • Intervening the management and finance of the dealers.

Legal liabilities

Apart from legal liabilities under PRC Anti-Monopoly Law of PRC, violation of the Automotive Sales Measures may entail 1) administrative fines up to RMB 30,000 per violation; and 2) blacklist in the company credit profile.

It is noteworthy that with the further improvement of a nation-wide company credit profile system in near future, the blacklisting would have greater-than-expected influence on the business operation of the violator, i.e. the legal impact of violation would be serious even if the amount of fines is rather small.

Our suggestion

To be compliant with the requirement of the Automotive Sales Measures, the OEMs and dealers should thoroughly examine their existing business practice, especially the dealer agreements and bonus scheme. Besides, to keep an eye on the upcoming Antitrust Guideline for Automotive Industry would help the OEMs and dealers to adjust the business arrangement and terms to fit the new regulatory landscape.