Fleet News

EC tears up new car sales and servicing rule book

CLAIMS that new car prices in the UK could fall by as much as £3,000 under new car distribution rules announced for Europe have been labelled as 'wild and ridiculous' by the motor industry.

The Society of Motor Manufacturers and Traders has rejected claims by national newspapers that new car prices could fall by between £1,000 and £3,000.

An SMMT spokesman told Fleet News: 'This is not going to happen. Consumer groups are shouting these figures trying to justify their positions but they have no basis for such claims. They are wild and, frankly, ridiculous.'

The war of words follows the publication last week of the new European Commission block exemption regime governing car sales in the European Union. It exempts car makers from competition laws that govern other industries and consumer groups claim manufacturers have abused the rules to the detriment of new car buyers.

Sheila McKechnie, director of the Consumer's Association, said: 'For years car manufacturers have cynically exploited British consumers by forcing them to pay high prices. British consumers are still paying an average of £2,000 more than cars sold in the rest of Europe.'

She added that the new block exemption regulation represented 'an historic day when consumers finally beat the car manufacturers in the battle to lower overpriced cars.'

Even consumer and competitions minister Melanie Johnson said the new rules 'should bring UK prices closer to those in other EU countries'.

However, with many manufacturers already facing red balance sheets in the UK, it appears highly unlikely that they can afford to cut substantially the pre-tax price of cars.

Moreover, if pre-tax prices harmonise across Europe, they are more likely to rise to the level of the two largest European markets – Germany and the UK – than tumble to match the prices in countries such as Denmark where manufacturers effectively subsidise sales to keep cars affordable in a high tax climate.

Automotive expert Richard Gane, a partner in PricewaterhouseCoopers' management consultancy division, said: 'Manufacturers are marginally profitable and to reduce prices by as much as some people are saying would be commercial suicide. They simply will not be able to do it. The fact is prices in countries like Denmark will go up, they will not go down in the UK.'

The SMMT has broadly welcomed changes to block exemption announced by the European Commission last week, saying, 'manufacturers will now work within this framework to ensure that there continues to be a competitive marketplace serving consumers'.

The new regulation means manufacturers have one of two choices on how they sell their cars – either through exclusive or selective distribution.

Exclusive distribution means each dealer approved by the manufacturer is allocated a sales territory and can then also sell cars to further middlemen who are not part of the official manufacturer network, such as supermarkets and internet sites.

Ian Lancaster, chief executive of internet sales channel Virgin Cars, said: 'These changes are a huge leap forward. Consumers are now poised on the brink of a brave new car retailing world as they will be able to buy new cars at the best European prices.'

If manufacturers choose selective distribution, they must supply any distributor that meets their set criteria. Under the new rules, manufacturers will not be allowed to combine both exclusivity and selectivity (as they can at the moment) in any one country, but they can implement exclusive distribution in one country and selective distribution in another.

From 2005 dealers in a selective distribution system will be able to set up a secondary sales operation elsewhere in the EU. This potentially means that a dealer in Denmark, which has low pre-tax prices, could set up a sales centre in the UK, the most expensive pre-tax market in the EU, and sell cars at Danish pre-tax prices with UK VAT added on.

Such a move would be likely to lead to a swift rise in pre-tax prices in Denmark and manufacturers have already started to harmonise pre-tax prices in the Eurozone where currency fluctuation no longer has an impact.

BMW, for example, has harmonised pre-tax prices for the 7-series in Euro countries, so any retail price differences are due to local VAT rates and vehicle registration taxes.

Carmakers claim they are forced to adopt significantly different pre-tax pricing strategies within the EU because of the different national tax systems.

However, the EC said: 'Regarding price increases in countries with high car taxes such as Denmark, Finland, Greece or Ireland, car-makers will take into account the risk of losing local market share, or reduced demand for new cars.

'If there is substantial competition between brands, price increases should not occur in the long term as a consequence of the new rules.'

Block exemption fact file

  • October 2002: New block exemption regulations come into effect, although there will be a one-year general transition period during which pre-existing distribution agreements will be adapted for the new rules.
  • Dealers no longer obliged to offer repair services, but they will have to sub-contract to a suitable repairer.
  • Manufacturers choose one of two distribution methods per country, exclusive distribution or selective distribution.
  • Dealers allowed to sell more than one brand in the same showroom but in separate 'brand specific' areas.
  • Supermarkets could become dealers if they meet manufacturers' quality criteria.
  • Manufacturers must give dealers a contract of at least five years and to explain in writing the reasons for any termination.
  • September 2005: Dealers allowed to set up additional outlets where they choose to
  • May 2010: Block exemption regulation expires.
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