European Block Exemption Rules Offer Significant Opportunities for Manufacturers

DETROIT, Feb. 21 -- The European Commission's plan to reform Block Exemption regulations, which govern where and how automakers and their dealers sell and service vehicles, will provide manufacturers with significant new opportunities to structure their dealer networks, according to Urban Science, a global strategic consulting firm that has analyzed the retail networks of virtually every auto manufacturer in the world.

Peter Stevenson, Urban Science senior manager in Europe, and Mitch Phillips, Urban Science global director of network analysis, have analyzed the preliminary report issued by the European Union's Competition Commissioner Mario Monti. They cite seven of the most challenging aspects of the impending legislation and their potential impact on the automotive industry.

1. Automotive manufacturers can choose either an exclusive or selective distribution network.

Depending on the manufacturers' market share in a given country, they may set up an exclusive network that assigns a specific territory to each dealer. But they cannot set selective standards nor dictate to whom the dealer sells. This option, however, would allow manufacturers the opportunity to ensure complete market coverage.

Another option is to establish a selective network in which manufacturers could create standards for dealer selection. However, these dealers may open additional sites anywhere in the EU, including next door to a competing dealership, as long as these sites adhere to the same standards.

This creates a necessity for continual examination of a brand's entire distribution network, as well as an exploration of new alternative distribution partnerships.

2. Automotive manufacturers cannot discourage dealers from selling more than one brand as long as they maintain separate sales areas in their showroom for each brand.

This presents manufacturers with an opportunity to examine the potential impact of competitive brands within a dealership and the impact that would have on sales and customer/dealer loyalty.

3. Dealers will be able to sell proactively across borders.

This creates on opportunity for dealers to sell on a wider scale. The manufacturers' success will be measured by the effectiveness (more sales) and efficiency (less cost) of their distribution networks.

4. Termination of dealers will require ``detailed reasons'' from the manufacturer.

Currently, manufacturers can terminate a dealer for no cause with a notice of two years. Under the pending regulation ``detailed reasons'' for the termination will be required. Auto manufacturers would benefit, therefore, by having objective standards for evaluating performance and justifying termination.

5. The connection between sales and service will be broken.

Dealers will be able to choose to sell but not service vehicles if they provide service through an authorized repairer. This creates an opportunity for automotive manufacturers to evaluate new network scenarios, such as service-only facilities or a mix of ``traditional'' dealers and other service providers.

6. Consumers will be able to have their vehicles serviced at any authorized repair facility.

Under the pending legislation, warranty work can be carried out at any authorized service site and auto manufacturers would be required to make technical information available on a fair and equitable basis to all authorized repairers. However, standards must be in place to guarantee quality repair work regardless of service provider and to maintain the desired branding. For example, instituting a mystery shopper program for repair work or assessment of compliance to standards could be strategies for the manufacturer.

7. ``Original'' parts will be available to authorized repairers directly from the parts suppliers.

This is expected to increase competition between automotive manufacturers and parts suppliers. The automotive manufacturer, therefore, should consider ways to sell parts more efficiently in terms of overall capacity, delivery time, customer convenience, and customer/dealer loyalty.

While Europe focuses intently on the implications of these BE changes, they are only a small part of an increasingly uncertain and changing global consumer marketplace.

``The automotive manufacturer that accurately assesses its opportunity and quickly capitalizes on it will likely be the winner in the long run,'' Phillips says. He advises automakers not to underestimate factors such as new Internet technologies, the surge of cross-border selling, and the rise of new types of companies owning either sales or service channels, now that they may be split.

Despite the changes, Urban Science believes a successful dealer network still comes down to providing convenient access to the product for sales and service and a competitive environment in which to shop. Changing consumer behavior may dictate that automotive manufacturers reconsider the way their dealer networks are structured.

Urban Science is a global organization that has been able to address distribution-channel problems previously thought to be unsolvable. Urban Science continuously develops new techniques to address the changes in market conditions and relevant regional/national legislation. This enables the company to offer solutions to help automotive manufacturers optimize the profitability of their sales channels. Urban Science serves a global clientele from its offices in the United States, Spain, England, Germany, Italy, Australia, The Netherlands, Mexico and Japan.