Opinion of the Economic and Social Committee on the "Draft Commission Regulation on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices in the motor vehicle industry"

(2002/C 221/04)

On 11 February 2002, the Commission decided to consult the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the above-mentioned Draft Commission Regulation(1).

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 8 May 2002. The rapporteur was Mr Regaldo.

At its 391st plenary session (meeting of 29 May 2002), the Economic and Social Committee adopted the following opinion by 90 votes to one with three abstentions.

1. Introduction

1.1. Article 81(1) of the Treaty prohibits companies from making agreements that restrict competition and distort trade between the Member States. However, under Council Regulation 19/65/EEC, the Commission may rule, on an individual basis or by means of a regulation, that the prohibition made in paragraph 1 is not applicable to a given agreement or category of agreement between companies, by virtue of paragraph 3, providing the four conditions specified are met.

1.2. As far as Article 81 of the Treaty is concerned, vertical distribution and after-sales servicing agreements in the automobile industry are currently governed by Regulation (EC) No 1475/95, which expires on 30 September 2002.

1.3. Experience acquired with this type of agreement, starting back in 1974 with the BMW decision, continuing in 1985 with the adoption of Regulation (EEC) No 123/85, and confirmed in 1995 by the current Regulation (EC) No 1475/95, has enabled the Commission to define categories of vertical agreement that have over time met the conditions laid down in Article 81 (3).

1.4. The Commission has raised questions about whether the system, which combines selective and exclusive distribution and provides a single model for motor vehicle distribution, fulfils the requirements of Treaty Article 81 (3), which authorises agreements between companies providing they contribute "to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit".

1.5. Developments in the process of evaluating the implementation of Regulation (EC) No 1475/95 described in the Commission report(2), studies on the development of techniques for managing the distribution structure(3) and on consumer preferences in automobile distribution(4) and, last but not least, the importance of the new approach to competition policy in the area of vertical restraints with the adoption of Regulation (EC) No 2790/99, have led the Commission to the conclusion that the current rules laid down in Regulation (EC) No 1475/95 are out of date. In the Commission's view, the current regulation can no longer respond properly to the structural changes in the market. Neither can it meet the needs of consumers, who will not benefit fully from the advantages of the system until the conditions are right for greater competition, allowing them to exploit the single market by buying their cars in the Member State where prices are lowest. Hence the need to draft a new block exemption regulation on vertical agreements and concerted practices in the motor vehicle industry for distribution and customer services.

1.6. Following the consultation procedure, and once it has been adopted formally by the Commission, the new regulation should come into force on 1 October 2002. A one-year transition period ending in October 2003 is planned to allow time for current contracts to be adapted. The regulation will expire on 31 May 2010 in order to coincide with the expiry of Regulation (EC) No 2790/99 governing the general block exemption applicable to vertical agreements.

2. The new legal framework for the distribution of motor vehicles and related services

2.1. The new draft regulation based on the new competition policy regarding vertical restraints defined in the general regulation (EC) No 2790/99 is radically innovative. While being stricter, it is in fact less prescriptive and more flexible than the previous regulation (EC) No 1475/99.

2.2. The main innovations are the following:

- There will be differentiated market thresholds: 30 % for exclusive distribution, 40 % for selective distribution, and 30 % for the distribution of spare parts and services. There will be no single set model for distribution and it will no longer be possible to combine exclusivity and selectivity as under the current system.

- There will be a series of options for manufacturers, distributors and resellers to choose from.

- Producers will be able to opt for agreements on:

- exclusive distribution;

- selective qualitative distribution;

- selective qualitative and quantitative distribution.

- A black list will be drawn up of hardcore clauses that cannot be exempt, applying the principle that all is permitted except that which is specifically prohibited.

2.3. Other significant elements designed to further enhance competition and expand consumer choice are:

- Heightened (intra-brand) competition between distributors in the Member States and market integration in selective distribution systems, through:

- freedom to carry out active sales (personalised e-mails/Internet),

- the elimination of the location clause;

- the development of widespread multi-branding;

- expansion of the role of intermediaries and those acting on behalf of consumers;

- an obligation on exclusive distributors to sell to independent resellers that are not members of the network;

- no limits on passive sales and an availability clause for all motor vehicles, setting of sales targets, product delivery systems and bonuses based on EU rather than national level.

2.4. In the area of after-sales services:

- The sales/after-sales link has been restructured in order to allow distributors to choose whether to provide the service or subcontract it to official repairers.

- Independent repairers may become official repairers, providing they meet the manufacturer's quality criteria.

- Official distributors (dealers and authorised garages) will be obliged to provide warranties and services for new vehicles throughout the EU.

- The location and non-compete clauses will not apply to official repairers.

- Repairers that are part of the motor vehicle distribution network, spare parts distributors, final users and independent repairers will be free to acquire original parts from the producer of those parts or from another third party of their choice.

- The producers of original spare parts will be free to apply their brand-name or logo to their products whether they are supplied to the motor vehicle manufacturer or to the repairers for replacements. The authorised repairers will be able to use spare parts of equivalent quality for vehicle repair and maintenance, although they will be obliged to use original spare parts supplied by the manufacturer during the warranty period.

- Manufacturers must give independent repairers access to all technical information, diagnostic and other equipment and tools, including all relevant software, and the training necessary to repair the vehicles.

2.5. A manufacturer terminating a contract with a dealer must give reasons. Disputes between suppliers and distributors must be referred to an independent arbitrator or expert third party.

3. General comments

3.1. The Committee would note that the new proposal, which is highly innovative, can be welcomed in principle as it ties in with the scenario suggested by the Committee in its previous opinions on Regulations (EEC) No 123/85 and (EC) No 1475/95 (on automobile distribution), Regulation (EC) No 2790/99 (on the general rules governing vertical agreements) and lastly its opinion on the Evaluation Report on Regulation (EC) No 1475/95, which it adopted on 30 May 2001.

3.2. In the conclusions of this last opinion, the Committee declared itself to be in favour of the establishment of a block exemption for motor vehicle distribution and recommended that the Commission explore ways of modifying and extending the current regulation. In addition, in the same opinion, the Committee stressed that "The primary aim of the new Regulation should be to raise the overall level of competition in order to improve consumer well-being and safety, and the operation of the single market. In order to achieve these objectives, the new Regulation should have a practical impact in providing greater protection for dealers and promoting the SMEs operating in the European car sector"(5).

3.3. The Committee is pleased to note that the new Regulation responds in large part to these concerns:

- the interests of consumers are put first, giving them more opportunities to choose from the entire common market;

- there are measures designed to heighten competition between distributors in sales and after-sales services;

- there will be sharper competition in the production and distribution of spare parts;

- and lastly, resellers are given more commercial independence, essential to enable them to provide buyers with a better service, through greater contractual protection in the contract termination phase and greater recourse to arbitrators to resolve disputes.

3.4. The Committee also notes with satisfaction that the Commission has taken up its recommendations on the need to maintain a specific block exemption regulation for the car sector and that it has recognised that the general competition rules relating to vertical distribution agreements (Regulation (EC) No 2790/99) were not in reality applicable to motor vehicle distribution.

3.5. The Committee would however note that the complex system of measures foreseen in the new regulation, whether interpreted narrowly or broadly, may reduce legal certainty and lead to forms of concentration in the location of distributors, in after-sales services and in the production of spare parts, with the resulting disappearance from the market of a significant number of SMEs and with negative effects on employment and the expected benefits to the consumer.

3.6. The Committee notes that the new regulation provides for the introduction of market shares and provides business operators in the motor vehicle sector with a wider choice of distribution system.

3.7. More specifically, the introduction of market quota thresholds, with percentages differentiated by the type of distribution chosen in advance, will mean that vertical agreements under the thresholds set can be presumed to be compatible with the block exemption, whereas those above the threshold, though not necessarily illegal, will be eligible for an individual assessment based on the guidelines on vertical restraints. However, regardless of thresholds, the block exemption will not be allowed if the black list of hardcore restrictions that cannot be exempt (owing to serious adverse effects on competition) is disregarded.

3.8. The new regulation also provides (Article 7) for decentralisation to national level of the application of the rules set out in Article 81, providing the scope of the agreements is limited to the national territory. The Committee would stress, as it did in the above-mentioned opinions, the principle of the European one-stop shop, which should always have priority in cases of the decentralised application of antitrust rules, so as to prevent non-uniform application of the rules, market fragmentation or possibly a differing application of competition policy.

3.9. The Committee would also stress that the complexity of the set-up under the new regulation necessitates the drafting of specific guidelines to counterbalance the flexible and pragmatic approach that the Commission wishes to pursue, with the requirement of legal certainty for the economic operators, most of which are small and medium-sized companies (over 280000).

4. Specific comments

4.1. The separation between exclusive and selective distribution

4.1.1. The Commission has decided that a single model for the distribution of motor vehicles consisting of a combination of selective and exclusive distribution is no longer appropriate for the industry. Instead it proposes to require undertakings to choose between exclusive distribution or quantitative selective distribution. This has been described as increasing flexibility of choice for manufacturers.

4.1.2. The Committee is doubtful that the proposals will have that result. On the contrary, the Committee considers that the terms proposed for exclusive and quantitative selective distribution will lead to the great majority of manufacturers opting for the quantitative selection distribution system. In other words, it is quite possible that under the new BER, one model for the distribution of motor vehicles will predominate.

4.2. Non-compete obligation [Article 1(b)]

4.2.1. The Committee notes that the new regulation reduces to 50 % the annual total purchase obligation for contractual goods and services, from the 80 % set by Article 1(b) of Regulation (EC) No 2790/99 on which the regulation is based. In order to allow access for new operators, multi-branding and increased competition, the Committee believes that it makes sense for that percentage to be set at at least 65 %.

4.2.2. The Committee welcomes the clearer definitions of "original spare parts" [Article 1(p)] and "spare parts of matching quality" [Article 1(r)]. This will make for greater transparency and greater competition on the repairs market, which will translate as benefits for the consumer/client in terms of both price and safety.

4.3. Scope of application (Article 2)

4.3.1. The Committee notes [Article 2(1)] that the scope of application of the new regulation is taken directly from the regime provided for by the general regulation on vertical agreements, Regulation (EC) No 2790/99. The scope of the agreements is extended to include two or more companies operating at different levels in the production or distribution chain, increasing the opportunities for market operators to buy, sell, or resell motor vehicles, spare parts or repair or maintenance services.

4.3.2. The Committee therefore welcomes the fact that the new regulation includes vertical agreements made between groups of retail dealerships and their members or between such groups and their suppliers, bearing in mind the fact that the Committee specifically requested this in its opinion on the vertical restraints regulation.

4.4. Market share thresholds [Article 3 (1), (2) and (3)]

4.4.1. The Commission has chosen to introduce market share thresholds to reflect the fact that the efficiency-enhancing effects of motor distribution agreements will outweigh the anti-competitive effects only to the extent that the market power of the undertakings is curbed by inter-brand competition in the industry. The Committee accepts the need for market thresholds and quotas.

4.4.2. It welcomes the 40 % threshold for quantitative selective systems as well as the sensible decision not to introduce a threshold for qualitative selective distribution agreements. It also accepts the logic of the 30 % market share thresholds for exclusive distribution and exclusive supply agreements.

4.4.3. The Committee would however make the following observation. The Commission uses market share thresholds as an approximation of market power and not as a completely reliable measure. It is a convenient approximation for the Commission and an inconvenient one for the parties concerned. They should be allowed some degree of flexibility at the margins of the market share thresholds in recognition of this fact.

4.5. As already stressed in the previous opinions, on the subject of market shares, the Committee believes it is essential that companies have access to the necessary interpretative instruments, such as special guidelines for the accurate identification of the relevant product and geographical market, in order to enable companies to conduct independent assessments of the market effects of agreements with the highest possible degree of legal certainty.

4.5.1. The guidelines should provide precise explanatory notes, including specific examples of market share calculations for agreements at European, national and regional level, thus increasing companies' legal certainty.

4.6. With reference to the Communication on "agreements of minor importance"(6), the Committee invites the Commission to clarify in the guidelines whether market share thresholds should apply to motor vehicle distribution agreements.

4.7. Termination of distributorships [Article 3 (5) and (6)]

4.7.1. The Commission has proposed three safeguards for distributors in the event of termination by the supplier.

4.7.2. The first, described in Article 3(5), obliges the supplier to agree in the contract to give detailed reasons for termination. Those reasons cannot include reasons prohibited by Articles 4 or 5.

4.7.2.1. The Committee agrees with this condition because it acknowledges the need for dealers to have the minimum protection of being given detailed reasons for termination, and above all because it prevents the supplier from terminating the agreement because of practices that cannot be restricted within the meaning of the regulation.

4.7.2.2. The Committee recommends that, to avoid the supplier using spurious reasons where adequate compensation is not provided for, the supplier's reasons must be objective, non-discriminatory and transparent.

4.7.3. The second safeguard [Article 3(6)] is that suppliers must give two years notice of termination but may reduce that period of notice to one year where they are required by law or agreement to pay appropriate compensation on termination or if they claim it is necessary to reorganise the whole or a substantial part of the network.

4.7.3.1. The Committee has grave reservations about Article 3(6)(b). It would appear that the need to reorganise the whole or a substantial part of the network is justification for allowing one year's notice without compensation and with insufficient guarantees. This should possibly be limited to substantial reorganisation. If not, why should the supplier be freed from the obligation to give two year's notice? The distributor's hold on a distributorship is precarious enough and the investment in premises is usually sufficiently great that the two years' notice should be seen as the minimum entitlement except in extreme circumstances or where provision is made by law or agreement for adequate compensation.

4.7.4. The third condition is the requirement for arbitration of disputes between supplier and distributor. The Committee strongly supports the Commission's proposal to increase the scope of arbitration to include the issue of the termination of distributorships. The Committee is particularly pleased that the Commission responded to the Committee's suggestion for such a step in its last opinion(7).

4.7.4.1. The Committee notes that the arbitration requirement must be written into the distributorship agreement and it strongly supports that requirement since that gives some legal weight to the arbitration entitlement.

5. Hardcore restrictions (Article 4)

5.1. Location clauses [Articles 4 (d) and 5 (f)]

5.1.1. For motor vehicles other than cars, the Committee welcomes the Commission's move. However it questions the advisability of eliminating the location clause for the selective distribution of cars, as this raises significant problems of interpretation. It is difficult to see how the manufacturer can monitor adherence to the qualitative criteria regarding the establishment by the distributor of sales or delivery outlets or warehouses in other EU locations, or how this interpretation could be combined with quantitative selective distribution, which would be seriously prejudiced, if not totally undermined.

5.1.2. In addition, it cannot be ruled out that removing the clause would distort competition to the detriment of small and medium-sized companies, which would find it difficult to make use of the opportunity to locate additional sales outlets in the common market, while also encouraging the concentration of major companies, which would locate mainly in major urban areas. All this could lead manufacturers to base their distribution networks on branch offices in order not to lose control of them (Lademann study).

5.1.3. All these elements could reduce the geographical density and necessary spread of companies and lead to the creation of a genuine oligopoly in distribution with potentially distorting effects on competition and on the high quality of client/consumer relations that is characteristic of SMEs.

5.1.4. The Committee wonders whether the Commission has applied the indispensability criterion appropriately to the location clause [Treaty Article 81(3)(a)].

5.1.5. In fact, the Committee believes that the Commission's objectives of increased cross-border sales, price convergence between Member States and greater competition between distributors could be largely secured - without the addition of the location clause restriction - by the major innovations already introduced by the new regulation, namely: the liberalisation of active sales by the dealer (including Internet sales), the complete liberalisation of sales between intermediaries, the detachment of sales objectives from the individual country and dealers' freedom to treat "corresponding goods" in the same way as goods designed for their own market [Article 4(f)].

5.1.6. Only if the major innovations mentioned above do not produce the desired effects of price convergence, market integration and intra-brand competition should the Commission reserve the right to conduct a further examination as part of the periodic evaluation of the working of the new regulation, and then at that stage if necessary introduce a ban on location clauses and thus the possibility for distributors to locate their sales outlets away from their place of establishment.

5.2. Intermediaries

5.2.1. Taking on board the request made by the Committee in last year's opinion, the Commission plans to bolster the role of intermediaries (Recital 14) by opening up to new instruments (Internet) to allow consumers to benefit from price differences in the common market.

5.2.2. The Committee is clearly pleased with this approach. It would note however that the abolition of the current "notices" on the role of intermediaries(8) creates a legal void that the Commission will have to fill by adopting guidelines to define procedures for Internet use, where e-commerce is concerned, and the mandate and role of intermediaries, so as not to adversely affect the Commission's aim of stimulating active sales and the integration of markets by means of parallel trade, and also to prevent the illegal use of producer and distributor brands by intermediaries.

6. After-sales services [Article 4 (1)(g)]

6.1. The Committee notes that the new regulation allows the dealer to choose whether to provide after-sales services or to subcontract them, informing the consumer of the address of the authorised garage.

6.2. On this note, the Committee would point out that it addressed this issue in its opinion of last year (points 6.4.6 and 6.4.7) and came to the conclusion that the best way of protecting consumer interests was the necessary sales/after-sales service link for new vehicles, owing to the necessarily high levels of service in terms of quality and safety provided free of charge during the warranty period throughout the EU.

6.3. The Committee notes that Recital 18 of the new regulation repeats the obligation for dealers and repairers to provide services free of charge during the warranty period. It would also point out that the Lademann and Andersen studies confirmed that the natural place for after-sales services is with the seller.

6.4. The Committee is however concerned by the negative consequences that could arise from the Commission proposal as a result of:

- the abolition of the location clause and the resulting risk of a concentration of servicing centres in large urban areas;

- the failure to provide services in proximity to consumers;

- the loss of the broad geographical spread of companies nationally and on the road network;

- the loss of dealers' control over the fragile after-sales services sector and of their direct responsibilities regarding the consumer and the manufacturer;

- the demand for constant improvement of the quality of the service product;

- the implementation difficulty arising from the seller's responsibility within the meaning of Directive 99/44/EC, should the dealer lose control over servicing;

- the risk of free-riding;

- and above all, to conclude, the loss of the benefits of consumer protection, and technical/safety and commercial efficiency provided by a network that makes the most of the sales/after-sales link for new vehicles.

6.5. In view of these dangers and in line with its previous opinions, the Committee is convinced that it would be preferable for dealers to maintain responsibility for the sales/after-sales services link at least for the warranty period for new vehicles. Those services should be supplied to all European consumers throughout the EU in line with common quality standards for each brand, by evenly spread networks of distributors and authorised repair garages. The best way would be to allow manufacturers to choose where to locate service plants for dealers and repairers, in accordance with the selective, qualitative and quantitative distribution system.

6.6. However, the Committee feels that independent repairers (Article 4(2)) should have access to all the technical information necessary, diagnostic and other equipment, tools, including all relevant software, and the training necessary to provide high-quality services in order to raise competition levels on the service market for cars in use, as an alternative to the post-warranty services offered by the official network.

6.7. On the subject of spare parts [Article 4(1) (i)(j) and (k)], the Committee welcomes the provisions made in the new regulation as they strengthen the conditions for improving transparency and access to the market for original spare parts and equivalent products. This should entail greater competition on the market between producers, and official and independent repairers, which will inevitably be reflected in the final prices, to the benefit of the consumer.

6.7.1. The Committee would recommend using the guidelines to clarify the concept of equivalence, who is responsible for certifying it and how to proceed.

7. Multi-branding (Article 5 (a), Recital 26)

7.1. The new regulation promotes the right conditions for nurturing the establishment of multi-brand sales outlets. The Committee supports this initiative, which should be designed to strengthen the position of the distributor and benefit consumer choice. It is nevertheless necessary to provide for measures to properly safeguard brand identity, a vital asset for the European industry in competition on the global market.

8. Non-application (Article 8)

8.1. In view of the nature of the motor vehicle distribution system, cumulative effects will be a distinguishing feature of the sector. The Committee would recommend using appropriate guidelines to clarify the anti-competitive elements that would justify non-application of the regulation.

9. Transitional period (Article 12)

9.1. The Committee believes that, in view of the new legislative set-up and the changes required of manufacturers and distributors, the planned one-year transition period should be extended to 18 months and the new rules on the termination of contracts should apply, not least to avoid large-scale network restructuring on the part of manufacturers and a consequent increase in disputes.

10. Conclusions

10.1. The Committee recognises that the Commission intended the new block exemption regulation to give the motor vehicle system a new innovative tool, to improve its interpretation and anticipation of changes in the market and consumer requirements.

10.2. The Committee is glad to see that many of the suggestions it made in its previous opinion on the subject have been taken up in the new proposal, which recognises, beyond the goal of promoting efficient competition on the markets, the need to provide consumers with proper safeguards in relation to the special nature of motor vehicles as goods, which as an instrument of mobility, must provide quality, reliability and safety over time.

10.3. The comments made in this opinion are designed to adjust, better define and flesh out the legislative framework for this complex regulation, which governs a sensitive area of Europe's social and economic life.

10.4. The goal is a tool that should benefit consumers in a practical way, offering them greater freedom to choose products and services from throughout the common market; to this end, it should enable companies, and SMEs in particular, to operate with a high level of legal certainty on a market where sustainable competition conditions encourage growth and employment.

Brussels, 29 May 2002.

The President

of the Economic and Social Committee

Göke Frerichs

(1) OJ C 67, 16.3.2002.

(2) COM(2000) 743 final of 15 November 2000.

(3) "Study of the impact of legislative scenarios about motor vehicle distribution", Andersen Consulting.

(4) "Customer preferences for existing and potential sales and servicing alternatives in automobile distribution", Dr. Lademann.

(5) OJ C 221, 7.8.2001.

(6) OJ C 368, 22.12.2001.

(7) Point 5.11 of the ESC opinion, OJ C 221, 7.8.2001.

(8) OJ C 17, 18.1.1985 and OJ C 329, 18.12.1991.