The automotive sector is currently undergoing significant changes. It’s not just about the shift to green energy, but also about changes in the business model for placing new motor vehicles on the market. Manufacturers and importers across Europe are increasingly shifting away from the traditional system of independent dealerships to the agency model. In this model, dealers become an extended arm of car manufacturers, which has a substantial impact on their operations. In the first part of our three-part series on this topic, we explore what the agency model is and what are its advantages.
Reasons for shifting away from the traditional dealership model
New motor vehicles have traditionally been sold through an independent distribution system. Dealers, often acting as authorised sellers, operate as independent entrepreneurs. They purchase new cars (or vans or trucks) directly from manufacturers or importers and then sell them to end customers at their own risk. Original Equipment Manufacturers (“OEM’s”) continue to prefer this sales method because it allows them to focus on the manufacturing process and wholesale market operations, while leaving direct customer contact, vehicle handover preparation, and handling complaints to the dealers.
This is a common distribution model seen in various industries. Due to competition law regulations, OEM’s cannot set resale prices for dealers or influence the group of customers (e.g., by customer type or location) to whom dealers should sell vehicles. All these key decisions must be made by the dealers independently and freely, allowing them to respond flexibly to customer demand. If manufacturers and importers limited them, they would face hefty fines from competition authorities. For instance, the Polish competition authority has recently imposed fines exceeding €150 million in two separate automotive cases.
As a result of competition law regulations, OEM’s lose control over the pricing and customer base for their vehicles. They can establish a system of authorised dealers who must adhere to high-quality standards and are prohibited from unauthorised sales to grey market (unauthorised) dealers. However, even within a selective distribution system, they cannot influence or effectively manage the retail sales by authorised dealers. Essentially, they supply vehicles to dealers and hope that they can sell them well.
This is why, in recent years, we have observed a shift by OEM’s away from traditional sales methods towards alternative business models. Among the pioneers in this area is TESLA, which has been selling its electric vehicles directly to customers through its online store from the very beginning. Other OEM’s, such as BMW and Mercedes-Benz, have also publicly announced their gradual transition to the agency model.
The agency model and its features
Key factors motivating OEM’s to transition to the agency model include the purchasing process digitalization and the growing demand of customers for the ability to buy their dream car online. Manufacturers and importers naturally want to adapt to these changes in customer behaviour and simplify the entire process of buying a new car. Additionally, from a business perspective, they aim to bring the entire sales network under their control, allowing them to better manage pricing and vehicle distribution, and thus respond more efficiently to possible production fluctuations.
OEM’s can achieve these goals by implementing the agency model. It is important to distinguish between commercial agency within the meaning of civil law (Section 2483 et seq. of the Civil Code) and agency within the meaning of competition law. Our article focuses on the latter category, which does not always overlap with the former. Experience shows that in practice, innominate contracts (Section 1746 of the Civil Code) are often used, where the parties agree on mutual rights and obligations with significantly higher flexibility.
In the automotive sector, agency refers to supplier-customer relationships in which dealers, acting as agents, bear no more than negligible commercial or financial risks in connection with the sale of new motor vehicles. This includes risks arising directly from contracts with importers or manufacturers, as well as risks associated with specific market investments. Dealers thus become an extended arm of the OEM’s, expected to follow their instructions in exchange for a commission (either fixed or per vehicle sold). The logic behind this approach is that agents do not bear any risks related to sales and therefore should not have significant decision-making power over them.
In the context of competition law, agency agreements are exempt from the prohibition of anti-competitive agreements. This allows OEM’s to set resale prices for dealers acting as agents or to designate specific customer groups to whom new cars should be sold. Consequently, OEM’s can control pricing policies for end customers, reduce logistics and distribution costs, streamline the entire sales process, and gain access to increasingly valuable customer behaviour data and identification details.
The shift from the independent distribution system to the agency model could significantly disrupt the traditional functioning of the automotive market. Dealers may no longer fear the business risks associated with selling new motor vehicles (even in the event of warehouse fires, as the vehicles must remain the property of manufacturers or importers), allowing them to focus on providing better sales and after-sales services. OEM’s, on the other hand, can manage their sales strategies more efficiently, ultimately benefiting end customers. After all, competition isn’t always about offering the cheapest deal at any cost.
The agency model offers numerous advantages for OEM’s. Additionally, the new legal framework for distribution agreements, which we will discuss in the second part of this series, has made this system significantly more flexible. In the third article, we will address the challenges that unfortunately exist and require the advice of competition lawyers.
