Tuesday 21 January 2020

Market has taken over where we feared the 'Block' would begin

ON May 31, full deregulation of new car sales takes effect in Ireland and across the EU when Regulation 1400/2002 – aka the 'block exemption' – expires.

With it ends 30 years of bureaucratic effort to change how new cars are sold to EU consumers.

What was achieved and will things change for Irish car buyers? First adopted in 1985, the block exemption had a number of aims.

The main one, though, was greater competition between dealers. The assumption was that more competition between dealers – including dealers selling the same brand, so-called 'intra-brand' competition – would lower prices.

The vision was that one day cars would be sold from large discount-style warehouses displaying multiple brands – supermarkets for cars. As a result, the minutiae of showroom standards were regulated to ensure car manufacturers could not use such standards to undermine this policy goal – down to things like the size of the reception area at your local dealers.

In an era where retail experience is a big part of the brand (think Apple), this seems anachronistic. In all events, the vision floundered. By 2008, after 23 years of block exemption, 5pc of EU dealers sold different car brands within the same showroom, accounting for 1pc of total sales. The commission concluded that ". . . any impact that the block exemption can conceivably have had can only have been marginal at best."

The truth is, market realities changed faster than regulation – and in ways regulators did not foresee.

Rather than intra-brand competition increasing, competition between manufacturers of rival car brands (termed 'inter-brand' competition) increased exponentially.

This happened because of new entry from brands such as Kia, as well as excess capacity in EU car manufacturing.

Detriment

As a result, real car prices fell 12.5pc between 1996 and 2004 across the EU, a trend that has continued during the crisis. As the Commission humbly noted ". . . this increase in inter-brand competition appears to be driven by factors other than the block exemption."

So what is the legacy? The Commission now admits that its own "over-prescriptive rules may have made distribution more expensive to the detriment of consumers".

But with car sales over 60pc off the peak, and massive price cutting already the norm, further reductions must be unlikely. One welcome outcome, however, would be an end to the bureaucratic fixation on intra-brand competition.

Contrast the Commission's throwaway admission, buried deep in a report, that its rules harmed consumers with the 2006 treatment of some dealers for allegedly conspiring to do the same.

Philip Andrews is co-head of the EU & Competition Group at McCann FitzGerald

Irish Independent

Also in Life