What are the innovations in the 2002 Block Exemption for car sales? How are they related to the "Volkswagen-Autogerma case"?

TABLE OF CONTENTS

LIST OF ABBREVIATIONS

1. Introduction

2. European Single Market and the EU competition policy
2.1 European market conditions in automobile sector before introducing block exemptions on the basis of the 'Volkswagen' case
2.2 What is a 'Block Exemption'?
2.3 Innovations of Block Exemption 1400/2002 in relation to the Volkswagen case

3. Conclusion

LIST OF LITERATURE

LIST OF APPENDICES

Appendix I

Appendix II

LIST OF ABBREVIATIONS

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1. Introduction

The European Commission proposed certain block exemptions about motor vehicles, which is very important for the European Union’s competition policy, because the car industry is one of the biggest in Europe. Due to these regulations on the one hand European consumer shall achieve benefits for vehicle sales and servicing, and on the other hand there is an increasing degree of competition between dealers in this sector.^[1]

The following case study will illustrate some important aspects on the latest Block Exemption 1400/2002 on car distribution and servicing agreements on the basis of the example of the German car manufacturer 'Volkswagen'.

2. European Single Market and the EU competition policy

The single market of the EU provides the free movement of goods, persons, services and capital promoting economic efficiency and simulating intra-community trade.^[2]

The result of the introduction of the Euro is an unprecedented degree of price transparency in the EU.^[3]

Competition policy is an essential condition for the functioning and completion of the European Single Market. It ensures fair competition promoting economic efficiency, meeting the interests of European consumers and making sure, that European undertaking, goods and services can compete on the world market.^[4]

According to Article 81(1)^[5] of the EC Treaty, vertical constraints, these are agreements or practises between companies operating on different production or distribution levels, are forbidden. But so-called 'block-exemptions' for the automobile sector allow vertical constraints in order to improve production or distribution of vehicles.^[6]

2.1 European market conditions in automobile sector before introducing block exemptions on the basis of the 'Volkswagen' case

The 'Volkswagen group' holds the highest market share of motor vehicles sold in the EU. It sells his vehicles via a selective distribution network, e.g. via 'Autogerma SpA', an Italian subsidiary.

In 1992 the Italian Lira’s value decreased by 39% compared to the DM due to tensions in the European Monetary System. Therefore purchases of vehicles in Italy were much cheaper for e.g. German or Austrian private consumers, so they re-imported the cars to Germany. Volkswagen reacted with a punishment for those Italian dealers who sold cars to German customers, which were designated for immediate re-export to Germany or Austria.

In this way Volkswagen had violated European Community competition law by following a market-partitioning policy and by restricting parallel trade.

In 1995 the EU Commission imposed Regulation 1475/95 relieving Regulation 123/85 to force Volkswagen to discontinue these restrictive practises hindering the objectives of the common market.^[7]

2.2 What is a 'Block Exemption'?

Article 81(1) of the EC Treaty intends to prohibit agreements with anti-competitive effects. But many common pro-competitive agreements benefiting the consumers contain clauses, which limit other parties’ ability to compete. Therefore due to Article 81(3) the EU Commission can release such agreements from the ban.

Dealers were too dependent on car manufacturers and therefore competition between dealers was not intense enough. The result was that consumers could not benefit from the advantages of the Single Market of price differentials and the opportunity to do purchases where the vehicle is cheaper.

Regulation 1400/2002 is based on the same content than Regulation 1475/95 while including stricter elements applying for the distribution of new motor vehicles, after-sales servicing and the sale and supply of spare parts.

Normally the car sector would fall under Regulation 2790/99 concerning general competition rules for distribution suitable for most economic sectors, but stricter rules are necessary for the car sector.^[8]

[...]

^[1] Cf.: European Commission: Commission adopts comprehensive reform of competition rules for car

sales and servicing, http://europa.eu.int/rapid/start/cgi/guesten.ksh, Brussels, 17th July 2002,

page 1

^[2] Cf.: Internal market: http://europa.eu.int/scadplus/leg/en/lvb/170000.htm, 7th January 2003, page 1

^[3] Cf.: Driven to distraction, The Economist,

www.economist.com/surveys/PrinterFriendly.cfm?Story_ID=873560, 29th November 2001

^[4] Cf.: Competition: Introduction, http://europa.eu.int/scadplus/leg/en/lvb/126055.htm, page 1

^[5] “Article 81(1) provides that:

The following shall be prohibited as incompatible with the common market: all agreements between undertakings, decisions by associations of undertakings and concerted practices which may affect trade between Member States and which have as their object or effect the prevention, restriction or distortion of competition within the common market, and in particular those which:

a. directly or indirectly fix purchase or selling prices or any other trading conditions;
b. limit or control production, markets, technical development, or investment;
c. share markets or sources of supply;
d. apply dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at a competitive disadvantage;
e. make the conclusion of contracts subject to acceptance by the other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts.“ European Commission-Directorate General for Competition: Distribution and Servicing of motor vehicles in the European Union-Commission Regulation (EC) No 1400/2002 of 31st July 2002, http://europa.eu.int/comm/competition/car_sector/explanatory_brochure_en.pdf, page 7

^[6] Cf.: Prof. Schüle, Ulrich; Dölp, Nadja: Vertical Constraints to Competition: The 'Volkswagen' case,

Mainz, February 2001, page 2

^[7] Cf.: Prof. Schüle, Ulrich; Dölp, Nadja: see footnote 6, pp. 4-5, 7-8

^[8] Cf.: EU Commission Press Room: The Commission Regulation for a new motor vehicle Block

Exemption-Questions and Answers-Background information on press release IP/02/1073,

http://europa.eu.int/rapid/start/cgi/guesten.ksh, Brussels, 17th July 2002, pp. 1-2