IMI Magazine

IMI Magazine

News Analysis - By Arthur Way

Block exemption: another damp squib?

When the ban on location clauses takes effect at the beginning of October, all the provisions of the revised block exemption regime will be in force. The final piece of the jigsaw gives a dealer with an existing franchise the right to set up sales and delivery operations anywhere within the EU, providing that these meet the manufacturer’s standards. However, if the experience since October 2003 (when the first provisions were introduced) is any guide, the impact on the retail motor industry’s day-to-day functioning is likely to be minimal.

After all, there’s been no noticeable recasting of vehicle sales and servicing functions in favour of franchised dealers and the independent aftermarket, as the regime intended. Indeed, manufacturer control appears to have strengthened, not least through an extension of dealership ownership and a more vigorous approach to ensuring that aftermarket business remains within the franchised network.

As demonstrated consistently since October 2003, it is one thing to be offered the chance of freedom and quite another to take it. Dealers have been empowered to establish secondary servicing operations over the past two years but very few have done so, and it is not clear how or why changes to the location clause will create a different business dynamic.

In any event, the UK’s major dealer groups have already circumvented the location clause – with full co-operation from manufacturers – by taking over existing UK dealerships together with the acquisition of overseas distribution assets. Smaller dealer groups, though, are unlikely to have the necessary managerial and financial resources to take advantage of location clause changes, even assuming they had the wish to do so.

Reputations at stake in name tussle.

Further evidence that vehicle manufacturers intend to retain control of the retailing agenda comes from the growing emphasis on corporate branding. In particular, the requirement of some marques that dealerships change their trading name to highlight the marque they represent and geographical location they cover rather than their own identity.

At first sight it is difficult to take issue with the RMI’s claim that this contravenes the spirit of block exemption which was meant to promote the cause of multi-branding and allow dealers to cut loose from manufacturer control.

It also goes against the attempts of some dealer groups to emphasise their own identity and establish a reputation among consumers over and above the merits of the marque. It is possible too that the replacement of a name which is well established and respected in a local community could be viewed as a serious erosion of the value of a business’s goodwill and therefore detrimental to its financial worth.

In the final analysis, though, manufacturers are determined that the predominant brand in a consumer’s consciousness will be their own rather than the dealer’s, and that loyalty will be afforded to the producer and not the seller. This stems in part from the long-held recognition that retaining an existing customer is noticeably less costly than capturing a new one, and in the age of multi-branding the imperative of preserving personality and distinctiveness within the marketplace becomes increasingly vital. (See, also, dealership design feature, page 22).

Predators at work among the ‘middle rankers’.

Latest financial statements from publicly-quoted dealer groups present a patchy picture. Some of the largest players like Pendragon and Reg Vardy have provided their shareholders with encouraging news. Pendragon reports higher profits and turnover along with a massively increased dividend, while Reg Vardy has announced a sales advance and a reduced (but still highly respectable) level of profitability. Less satisfactorily, both HR Owen and William Jacks have warned of losses during the first half of their financial years amid signs of strained trading conditions.

These contrasting fortunes suggest that vehicle retailing is following in the footsteps of the food sector where the larger groups’ superior economies of scale have provided a compelling competitive advantage over mid-range operators, leading to a process of consolidation and the emergence of just four major groups dominating the scene. In much the same way that Tesco and others mopped up companies like Hintons and Wm Low over the past 20 years and, more recently, Morrisons acquired Safeway, motor retailers have already experienced major consolidation moves.

However, a number of mid-range distributors remain ‘in play’ with the result that further corporate action may be anticipated over the next year or so. This is all the more likely given prevailing market conditions, with declining new and used vehicle sales exposing the inherently weaker contenders and forcing them into losses. The fact that share prices have held up so well suggests that predators and speculators are building up their positions among the middle rankers in readiness for the action to come.

Chapter of despair.

Hot on the heels of Ford’s recent bailout of Visteon comes confirmation of Delphi’s dire financial position. Unless it can raise prices and reduce workforce costs, the company says it may seek Chapter 11 protection from its creditors. A compelling sign of its troubles is an investment rating now three notches below investment grade.

Both Visteon and Delphi have been victims of hostile circumstances. Despite efforts to expand their customer bases, they remain uncomfortably dependent on their former parents (Ford and General Motors), with Delphi still deriving around 50% of its revenues from GM. This would be less serious if Ford and GM were on a roll, but they have troubles of their own, not least falling market share in North America. All this has generated a vicious circle, with carmakers squeezing suppliers at a time when raw material costs are on the rise.

Delphi also inherited what has proved to be an unsustainable level of employment costs comprising  high hourly rates and astronomic pension and healthcare liabilities. Alarm over pensions and healthcare is replicated with a vengeance at both Ford and GM, which poses the question, incredible though it may seem, of whether they too might be forced to consider Chapter 11 protection.

End in sight for those doghouse days?

Those with the best interests of Europe’s motor industry at heart will be encouraged by recent stirrings at those two poor performers of late, Mercedes-Benz and Fiat.

In Germany, there are high hopes that Dieter Zetsche – architect of Chrysler’s spectacular product-led revival over the past five years – will inspire the same magic into DaimlerChrysler’s troubled Mercedes-Benz and Smart car manufacturing operations, now that he is returning to Europe to replace the accident-prone Schrempp as group chairman.

As an outsider from group headquarters, Zetsche was initially regarded with suspicion by his American colleagues at Chrysler. But he went on to earn respect and loyalty through his skill at communicating at all levels while driving through a long term recovery plan. His latest task is to restore the battered pride of Mercedes-Benz and make it once more the world’s number one luxury car producer.

A recovery in Mercedes-Benz’s fortunes seems more assured than for Fiat Auto which continues to notch up big, albeit reducing, financial losses. Even so, the company is striking a plucky pose and has pledged to retain all of its Italian-based manufacturing facilities as well as announcing a a10bn investment programme over the next four years. Crucially this involves the introduction of five new car models. If these are able to mirror the success of Chrysler’s product-led recovery, then maybe Fiat can rejoin the ranks of PSA, Renault and Volkswagen in Europe’s mainstream car market.

News digest.

A report from website analysts Hitwise shows Vauxhall was the most frequently visited automotive site over the last year.   Analysis by financial comparison website has revealed around 3.3 million people in the UK have car loans totalling nearly £26.7 billion. Almost half the money borrowed is on loan from car makers or dealers with the rest taken out through personal loans. Norwich Union is shutting down two RAC call centres as part of its longer-term plans to axe 1,700 jobs in the newly-merged group.

Lex Logistics has been awarded the aftermarket parts distribution contract by the newly formed Hyundai Motor Company UK operation. The deal covers warehousing, inventory management and dealer training. A dealer has been left red faced after being caught 'borrowing' a customer's £120,000 Mercedes. The dealer borrowed the CL55 AMG to take his daughter to the cinema. Its owner became suspicious when his satellite tracking system showed the car was on the move despite it being left at the dealership for a service.

European industry is alarmed by a raft of EU-wide environmental laws and rules expected this autumn, fearing that Brussels has opted for "gold-plated" proposals that could impose heavy costs on business.

The promotional efforts of manufacturers in the new car market are on the increase new research has found. The study, which was carried out across six European countries by information provider TNS, shows car manufacturers invested over £700 in sales promotions for every passenger vehicle sold last year - a ten per cent rise from 2003.

ChryslerJeep is preparing its dealer network for record volumes next year as the company gears up to launch five new models and introduce the Dodge brand in the UK. Simon Elliott, UK managing director, said total volumes in 2006 would exceed 20,000 compared with around 16,000 this year. New models include the Chrysler 300C saloon and estate, PT Cruiser cabriolet, Jeep Commander and Dodge Caliber. The brand also aims to increase its network from 93 to 105 sites. Pendragon is expecting to recover the exceptional costs of £2.9m incurred as a result of the MG Rover collapse, through profits from selling unwanted MG Rover sites. The car retailing picture remains bleak for dealers, with few expecting any respite from the tough trading conditions, according to the Confederation of British Industry. A CBI survey showed car retailers' sales continuing to fall in July. While 43 per cent of dealers canvassed said their volume of sales were down, only 13 per cent reported an increase in sales. The outlook was also bleak. with more than half the respondents expecting a further fall in sales for August.  A Welsh police force has caught nearly 200 drivers using their mobile phones illegally following a month-long crackdown.

GE Commercial Finance Fleet Service is calling on the government to give some clear signals about the future of diesel company car taxation. Fleets may need to completely rethink replacement cycles and hold on to diesel models for much longer to ensure they get value for money out of their vehicles.

Despite strong growth in sales, BMW reports a 15% decline in second-quarter pre-tax earnings.It blames rising raw material costs, exchange rate pressures and a price squeeze.

Xpart, the original equipment parts supplier which MG Rover sold to Cat last year, is to launch a nationwide network of auto service centres under the Xpart AutoService brand.

Porsche is to invest 1bn euros (£691m) developing a four-door coupe that will be on the roads by 2009.

Dealers selling re-plated vehicles will soon not need to prove the buyer's identity. Under the current Driver and Vehicle Licensing Agency (DVLA) regulations, dealers must obtain proof of identity for the buyer of a re-plated vehicle, and keep a record for three years for possible inspection by enforcement authorities.

The DVLA is expected to scrap the rule by September. The new exemption does not apply when a motor dealer sells a number plate as a separate item. Dealers will still need to obtain and record purchaser details.

The automotive sector has seen some winners and losers in the annual Interbrand Global Brands report which tracks the world's top 100 brands by dollar value. Toyota remains the top placed car maker at number 9 and gaining 10 per cent in brand value, while Volkswagen falls the most at number 56 after losing 12 per cent and 12 places.

A multi-marque car configurator, designed to help dealers keep long-standing customers who want to change to another brand, has been launched by London-based motor retailer Clive Sutton and vehicle data expert CAP. By subscribing to the online service (, franchised and independent dealerships can configure the specification and price of a new vehicle from any carmaker on-screen. 

An online vehicle registration recognition service has been introduced by the Society of Motor Manufacturers and Traders. CarweB VRR is designed to give vehicle retailers and repairers, manufacturers, insurance companies and local government bodies access to information combining the DVLA's records with the SMMT's own data.

Kia's push towards 5% of new car sales by 2010 (100,000 units) has been given renewed momentum by the UK's biggest three retail groups adding 13 volume outlets to the network. Pendragon accounts for the bulk of the new Kia locations with eight dealerships throughout England and Wales, while Arnold Clark strengthens Kia's Scottish presence with three. Reg Vardy has an outlet in Stockton-on-Tees along with a dual franchised Kia/Chevrolet site acquired from from Priory. It is expected to open a third site in the north east shortly.