Commission Regulation (EC) No. 1400/2002 of 31 of July 2002: Future Developments within the E.U. Car Market
4
Methodology
The first step in the composition of this final Dissertation was to attempt and define the
problem that is the core of this work and think of the possible implications that the (EC)
Regulation No. 1400/2002 would have on the market, inclusive of whom it would affect
and how.
We consulted at first articles readily available, such as the ones published on the Italian
magazine “Quattroruote”. Subsequently we found a copy of the regulation, which was
available on the Internet, on the European Union website, and familiarized with it. As
the reading of the regulation was difficult at first, we looked for a commentated version
of it, which unfortunately proved to be equally very confusing. We then gathered as
many articles, documents, interviews, proceedings of congresses as possible, from
specialised magazines, the European Union website, other websites of organizations that
wrote about it and are directly involved in it. The web search engines that were most
commonly used were: msn.com and msn.it, ask.com, and google.com and google.it,
infotrac-college.com which proved useful for immediate consultation. The sites most
visited were: europa.eu.int, automotivenews.com, europe-autonews.com, quattroruote.it,
interautonews.it, anfia.it, toyota.com, toyota.co.jp, toyota.co.uk.
All these sources provided us with a fairly comprehensive understanding of the issue,
and enabled us to realize that the following step would be to single out the public
involved or directly affected by this Legislation and understand their opinion and how
they were reacting to the new scenario. To do this an interview schedule was planned
whilst searching for relevant books on the subject most of which had to be purchased
abroad through sources such as amazon.com or amazon.uk, barnes&nobles.com and
others.
The distribution of vehicles, the past regulation and the new one have not been studied
in depth. More books were available on the history of the car industry or about specific
brands, but not about the distribution, how after-sales services are carried out in the car
industry or multi branding. Books, such as “The truth about Automobiles” by A.J.
Smith and “Distribution Agreements under the EC Competition Rules” by Valentine
Korah and Denis O’Sullivan were very good findings.
Commission Regulation (EC) No. 1400/2002 of 31 of July 2002: Future Developments within the E.U. Car Market
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The reading of an article, accessed through infotrac-college.com, gave us the starting
point for the first interview because the contact details of the author were present,
namely Mr. Fulvio Pastore Alinante, a famous lawyer. He was available for an informal
interview. Attendance to a congress in Torino, held at Lingotto Fiere at the Automotor
2003, on the 26
th
of March: “L’impatto della legge Monti – Block Exemption
Regulation – sul settore dei ricambi e dell’assistenza in Italia.” gave us precious insight
and information on the feelings of repairers and outlets about the regulation.
Considering the Regulation’s aim of increasing competition, favouring customers, a
book that proved to be useful in understanding the growing power of customers and the
importance of them as an asset for companies is “The Customer Revolution – How to
thrive when customers are in control” by Patricia B. Seybold. This book has been
helpful, for example, in the analysis of the possibility for car manufacturers and
distributors to sell through the Internet. The need for getting to know as much as
possible about the Legislation articulate issues has pushed us in the search for as many
chances to talk to people affected by the Block Exemption No. 1400/2002 or simply
working within this panorama. That is why another informal talk with the senior editor
of the current affairs and economic section of “Quattroruote”, Mr. Marco Di Pietro, has
contributed to further enrich our research work.
Once an understanding of the issues related to the new Regulation has been achieved
through specialized magazines and available documents, the piece of Legislation has
been read once again more easily.
The next step has been that of gathering information about the chosen case study,
Toyota Motor Company, through the various Toyota’s websites and other automobiles
websites and articles from newspapers and magazines. After the development of the
case study, conclusions upon the dissertation have been drawn.
Chapters have been allocated according to the criterion of slowly introducing the reader
to the subject matter. Firstly, we offered an introduction to state what we were going to
discuss in the present thesis and, secondly, a methodology has been given to show how
we proceeded in our work. A brief overview about the European Union competition
Commission Regulation (EC) No. 1400/2002 of 31 of July 2002: Future Developments within the E.U. Car Market
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policy has, then, been provided. Subsequently we suggested reasons why a new
regulation has been compiled as a substitute for (EC) Regulation 1475/1995. The next
step was to present the aim of the new Regulation, followed by a comparison with the
old one, to underline the main differences. Once a first comprehension of the issue has
been accomplished, a timeframe has been given to see how Block Exemption No.
1400/2002 is going to be applied. At this point, to put the reader in the position of
gaining a more complete scenario, an analysis has been carried out. While structuring it,
it seemed reasonable to single out the most important points of it, which are
distribution, after-sales service, multi-branding and termination. A case study follows to
better support the results of our research work. Finally, a conclusion has been written as
a summary of the dissertation paper.
The Vancouver reference method has been adopted for this dissertation as, in our
opinion, it allows a more fluent reading. To the very end continuous attention was paid
to what was being published about this subject matter.
Commission Regulation (EC) No. 1400/2002 of 31 of July 2002: Future Developments within the E.U. Car Market
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1. Commission Regulation (EC) No. 1400/2002 of 31 July 2002
1.1 Competition within the European Union
A competition policy is essential to the realization of an internal market and to allow
companies to equally compete on the markets of all the State members. Its objectives
are to promote economic efficiency in favour of innovation and technical progress; to
favour the consumers’ interests enabling them to purchase products and services under
the best conditions; to avoid anti-competitive practices by entrepreneurs or national
authorities that would obstruct competition
1
. The competition policy of the European
Union is focused on guaranteeing internal market unity and preventing the birth of
monopolies that would impede the normal flow of competition. That is to avoid the
improper use of economic power by one or more companies to the detriment of minor
companies.
Articles 81(1), 81(3) and 82 of the EC Treaty more precisely explain the intent of the
European Union with regard to competition:
Article 81(1) (previously Article 85(1)) of the EC Treaty bans agreements and concerted
practices between firms which “may affect trade between the Member States and which
have as their object or effect the prevention, restriction or distortion of competition
within the common market”
2
. This prohibition affects both horizontal agreements (at the
same level of production, processing or marketing) and vertical agreements (the firms
that are not in competition with one another because operating at different stages of the
economic and commercial process)
3
.
“A restrictive agreement is an agreement between two or more firms which requires one
or more of the parties to the agreement to adopt a specific type of conduct. A concerted
practice involves coordination among firms which falls short of an agreement proper”
4
.
Since it is difficult to distinguish these two forms of cooperation, the Commission
1
European Union. Competition: Introduction. [Online] [cited 2003 Feb 26]. Available from:
http://europa.eu.int/scadplus/leg/en/lvb/126055.htm.
2
Ibid.
3
Ibid.
4
Ibid.
Commission Regulation (EC) No. 1400/2002 of 31 of July 2002: Future Developments within the E.U. Car Market
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simply draws a line between agreements falling within the scope of Article 81(1) and
parallel conduct not meeting the criteria of Article 81(1).
“A broad overall policy has been established with regard to restrictive agreements and
concerted practices. Certain types of agreement are prohibited, almost without
exception. These are:
• horizontal or vertical agreements that fix prices directly or indirectly;
• agreements on conditions of sale;
• agreements that isolate market segments, such as those concerning price
reductions or those that seek to prohibit, restrict or, on the contrary, promote
imports or exports;
• agreements on production or delivery quotas;
• agreements on investments;
• joint sales offices;
• market-sharing agreements;
• exclusive collective markets;
• agreements leading to discrimination against other trading parties;
• collective boycotting;
• voluntary restraints (agreements not to engage in certain types of competitive
behaviour)”
5
Article 81(3) (previously Article 85(3)) does, nonetheless, offer the possibility of
authorising agreements prohibited under Article 81(1). Selected types of cooperation,
positive ones, such as agreements which improve the production or distribution of
goods or promote technical or economic progress may thus be exempt, including:
• “exclusivity agreements;
• licensing agreements for technology transfer;
• specialisation and R&D agreements;
• franchise agreements;
• agreements in the insurance sector”
6
.
5
Ibid.
6
Ibid.
Commission Regulation (EC) No. 1400/2002 of 31 of July 2002: Future Developments within the E.U. Car Market
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Article 82 (previously Article 86) of the Treaty states that “any abuse by one or more
undertakings of a dominant position within the common market or in a substantial part
of it shall be prohibited as incompatible with the common market in so far as it may
affect trade between the Member States.
A dominant position is a situation of economic power held by a firm which allows it to
hinder effective competition in the relevant market. It puts the firm in a position to exert
considerable influence on the conditions in which competition is to develop and to act
without having to take that into account.
There is abuse of a dominant position when the conduct of the firm in question is such
that it influences the structure of the relevant market or its degree of competition, even
if such conduct is favoured by a provision of national law. Such abuse may consist in:
• directly or indirectly imposing unfair prices or other unfair trading conditions;
• limiting production, markets or technical development to the detriment of
consumers;
• applying dissimilar conditions to equivalent transactions with other trading
parties;
• making the conclusion of contracts subject to acceptance by the other parties of
supplementary obligations which have no connection with the subject matter of
such contracts”
7
.
Unlike Article 81 (previously Article 85) of the EC Treaty, Article 82 (previously
Article 86) has no individual derogations or block exemptions.
7
Ibid.
Commission Regulation (EC) No. 1400/2002 of 31 of July 2002: Future Developments within the E.U. Car Market
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1.2 Why a New Regulation Was Needed
The Directorate General for Competition of the European Commission has carried out
an Evaluation Report, which was due to be published by the end of 2000, to verify of
the achievements of Regulation 1475/1995. The evaluation parameters were those on
which the Block Exemption Regulation 1475/1995 had been based upon: the existence
of effective competition in the automotive industry, the obligation of car dealers to
provide after-sales services and the need for brand specialists for the repair of motor
vehicles. With regard to the first assumption two types of competition have to be
considered: inter-brand competition (between manufacturers) and intra-brand
competition (between dealers belonging to the same network). When taking into
account inter-brand competition, it is easily visible that the six largest manufacturers,
that is Volkswagen, PSA, Renault, General Motors, Ford and Fiat, hold 75% of the
European car market. This has created, therefore, an oligopolistic system reducing the
level of competition. Nevertheless the wide variety of car versions in each country,
between 2000 and 4000, and of brands, around 50, says that competition is present in
the car industry. However the increasing levels of co-operations among manufacturers
has advised for constant monitoring by the EC.
For what it concerns intra-brand competition, it seemed that car distribution agreements
did not give enough room to dealers to develop this kind of competition. An example
can be represented by the dealers’ reward policy, which results in almost the same
margins for both small and large dealers. Also the allocation of exclusive sales territory
has brought limit to the entrance of independent resellers, denying the possibility of
opening extra-territory outlets, enlarging their structure and increasing their turnover.
The existence of competition, based on the first assumption, was questionable according
to Commissioner for Competition Policy Mario Monti.
The presence of a close link between the sale of motor vehicles and after-sales services
seemed to be “natural” for some people, but according to a competition mindset, it has
been always regarded as a serious restriction of competition. On the one hand, it seems
that no technical reasons exist, which entails that pre-delivery inspections could be
performed by the manufacturer or the haulier, who delivers a new car to a dealer.
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