EU Competition Law and the Automobile Industry

Introduction
The present work aims at investigating the application of the competition law of 
the European Union (EU) to the automobile industry. Undertakings active in this sector 
in Europe are among the most influential economic operators in terms of GDP, 
innovation and employment in the EU.
1
 However, while vertical relationships between 
car manufacturers and distributors of motor vehicles have been at the core of EU 
competition law, the industry is not at the top of competition policy concerns as far as 
horizontal relationships are concerned; this is because the European automobile market 
is a competitive environment and lacks worrisome degrees of concentration. However, 
in spite of this, two facts have to be kept in mind: first, in order to reach rapidly 
increasing optimal scales the global automobile sector is on a trend towards more 
consolidation, and this trend also affects the EU market since the biggest manufacturers 
operate on a global basis; second, the conditions of competition among automakers are 
not levelled across EU Member States, meaning that the competitive structure of the EU 
market as a whole may not correspond to the structure of some national markets.
The authors starts off in Chapter 1 by highlighting the business reality and the 
main economic features of the European car industry, also providing insights on the 
definition of the relevant market in this sector; defining the relevant market is crucial no 
matter which area of antitrust is being applied, since it is key to circumscribe the 
product and geographic scope of the commercial practices to be assessed. In Chapter 2, 
after sketching the general framework of EU competition law, we focus on the EU rules 
on anti-competitive agreements (Article 101 TFEU); we start from the premise that the 
EU competition authorities have frequently allowed policy considerations other than 
competition concerns strictu sensu to shape the application of Article 101. This reality, 
which stands upon a flawed economic approach, has had two diametrically opposite 
consequences: on the one hand, the internal market policy has usually lead the 
Commission to a formalistic application of Article 101(1), particularly evident in the 
context of the car sector and the sector-specific block exemptions (Section 2.4); on the 
1 Relevant statistics are provided in the Annex.
9
other hand, other policies such as enviromental, employment and industrial policy have 
allowed some agreements to be exempted under the conditions of Article 101(3). The 
author calls for a prioritization of consumer welfare and economic reasoning under 
Article 101, which entails inter alia the adoption of a rule of reason-style approach 
based on some ECJ case law; this approach allows us to identify the very notion of 
“competition” in the EU regime and the correct interplay between Articles 101(1) – 
concerned with allocative efficiency –, 101(3) – concerned with productive efficiency –, 
and public policies.
Based on our distinction between allocative and productive efficiencies, in 
Chapter 3 we approach the issue of agreements between undertakings in time of crisis, 
often labelled as “crisis agreements” or “crisis cartels”. Starting off by acknowledging 
the particularly harsh approach adopted by EU competition authorities towards this kind 
of agreements, we seek to assess their economic impact from the perspective of the 
automobile industry (an interesting example due to its overcapacity issues) to see 
whether and when such agreements should be declared compatible with Article 101(1) 
or exempted under Article 101(3).
In Chapter 4 the author investigates a much less popular competition law topic as 
regards the automobile industry, namely mergers and acquisitions (M&A). After 
outlining the EU regime on merger control, including the rescue of failing firms through 
mergers, the author starts from the increasing consolidation in worldwide auto industry 
and asks which hypothetical mergers between European manufacturers might yield the 
greatest concerns from a competition perspective. The distinction between allocative 
and productive efficiencies is again useful insofar as it separates the market power 
effects of such mergers (allocative efficiency) from the possible beneficial outcomes 
deriving from cost-savings and rationalization (productive efficiencies).
Chapter 5 is concerned with a prospective review of the V olkswagen “Dieselgate” 
case from the point of view of competition law. After a short factual background, we 
assess to what extent existing EU rules on competition could be applied to VW's 
conduct. Then, we try to identify which possible solutions within the EU regimes on 
competition and State aid could be attractive to the VW Group should it be seriously 
undermined in its competitive capabilities by the financial burdens stemming from 
10
administrative and private proceedings. The author investigates whether State aid may 
be granted in form of enviromental aid and especially in form of public support for the 
rescue and restructuring of firms in difficulty. While acknowledging that this is a highly 
hypothetical scenario, the author still believes it interesting to identify which would be 
the hottest topics of restructuring aid in light of the VW's situation and the 
characteristics of the car industry.
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Chapter 1
Economic Outlook of the Automobile Industry
The automobile industry
2
 is a major industrial sector in today's world economy. 
We will focus on the European automobile industry, which is one of the biggest 
contributors to economic growth and employment. In the 2014-2015 period the sector 
generated € 843 billion of turnover, accounting for 6.6% of the EU GDP.
3
 In the same 
period the European car sector employed 3.1 million people in production – 10.3% of 
employment in manufacturing in the EU, and 12.7 million people overall – 5.8% of total 
EU employment.
4
 The industry also remarkably contributes to the EU trade balance: in 
2013 exports of passenger cars generated a value of more than € 111 billion, that is, 
around 6% of the total value of extra-EU exports, while in the same year EU countries 
imported cars for a total of € 22 billion.
5
It is not easy to categorize the automobile sector according to mainstream 
economic classifications. Generally speaking, it is a competitive sector both worldwide 
and in the EU – albeit the economic position of market participants varies greatly across 
geographic areas; even if competition and rivalry are intense, the competitive structure 
is not close to the model of perfect competition, since there is a relatively small number 
of major undertakings active worldwide; on the other hand, in the EU the industry is 
very far away from close-to-monopoly structure, nor does it present the features of a 
monopolistic competition, since entry and exit barriers are very high. Oligopoly is 
probably the most suited model to describe this industry, especially in light of product 
differentiation among carmakers; however is not the perfect example of oligopolistic 
market according to the most accepted definition: whilst an oligopoly is said to exist 
2 We will use, as synonims, terms such as “automotive industry”, “car industry”, “car sector”, etc. In 
all cases we will refer to the industry producing motor vehicles for private transport on public roads 
(passenger cars).
3 Association des Constructeur Européens d'Automobiles (ACEA), The Automobile Industry Pocket 
Guide, 2014-2015. Available at: https://www.acea.be/uploads/publications/POCKET_GUIDE_2014-
1.pdf (last accessed on 1 November 2016), p. 22.
4 Ibidem, p. 21.
5 Ibidem, p. 76. Statistics on extra-EU trade are available here: http://ec.europa.eu/eurostat/statistics-
explained/index.php/International_trade_in_goods (last accessed on 1 November 2016).
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when the number of firms in a market is so low that they are all strategically 
interdependent on each other,
6
 the European car industry is much less concentrated and, 
more importantly, manufacturers are also influenced by factors other than competitors in 
their market policies.
As anticipated, the automobile industry is concerned with high entry and exit 
barriers, and this in light of a number of factors. First, high volume independent fixed 
costs are to be borne by manufacturers when managing R&D facilities, production sites 
and workforce in general; second, motor vehicles are among the most technologically 
complex products available on the market, which requires expertise, specialised 
personnel from design and development to production; third, due to high fixed costs the 
industry is highly affected by scale economies which means that firms have to reach 
considerable size in order to be competitive and make profits on a consistent basis; 
fourth, the manufacturing of motor vehicles requires, upstream, a large network of 
suppliers, and downstream, an efficient distribution system for reaching final 
consumers; fifth, brands are perceived differently by customers according to both 
practical needs and personal taste or other factors not inherent to perfectly rational 
individuals; consequently, brand power is extremely large especially for the strongest 
carmakers in a given geographic area.
7
 
Furthermore, although motor vehicles are dated back to the end of the XIX 
Century and are not technologically trailblazing products, the industry is nonetheless 
extremely dependent on innovations and on investments for reserach&development 
(R&D) programmes, which result in thousands of patent registrations. On average, car 
manufacturers spend around € 30 billion per year in innovation and R&D, and register 
10,500 patents per year at the European Patent Office.
8
 Innovation is driven, on one 
side, by competitive dynamics, charecterised by product differentiation and by the need 
for each manufacturer to maintain and develop its own identity and brand power vis-à-
vis customers and competitors; on the other side, innovation is also made necessary by 
6 See e.g. Lieberman, Hall, Principi di microeconomia, 2
nd
 edition, Apogeo 2005, pp. 293-294.
7 See further below, with regard to the definition of the relevant market.
8 ACEA, The Automobile Industry Pocket Guide, p. 21.
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increasingly stringent safety and environmental regulations and standards,
9
 which in 
spite of some significant steps towards international harmonization are still different in 
many respects across legal systems (e.g. US and EU environmental standards).
In light of the above features, in 1980 Porter
10
 developed a scheme for describing 
the typical competitive equilibrium within the car sector:
Besides low threats posed by new entrants, the industry faces no significant buyer 
power but has to deal with some bargaining power from major suppliers; alternative 
means of transportation are seen as substitutes on long distances. As will be highlighted 
in Chapter 3, the European Commission considers all these factors as key parameters 
when assessing the compatibility of concentrations with relevant EU legislation.
9 For instance, emissions regulations in the EU have significantly tightened over time: the current 
standard for passenger cars, Euro 6, introduced in September 2014, requires vehicles not to emit 
more than 0,80 g/km of NO x, which is far less than the quantity allowed under Euro 4 and 5 
standards (0,180 g/km).
10 Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press, New 
York 1980.
15
Figure 1 – Porter's model
Source: DaimlerChrysler case study, 2014, available at: 
http://www.slideshare.net/DaniyarMeiremgaliyev/daimler-chrysler-case-study-presentation-final