Our three-part series on the use of agency in the sale of motor vehicle concludes with a summary of competition law risks that should be avoided in practice. While the agency model has seen an unprecedented boom in recent years, largely due to the European Commission’s loosening of the rules, it is advisable to seek advice from competition law specialists when implementing this model. Even a minor error in setting the terms of cooperation can transform a legal sale into a serious restriction of competition.
For any new readers of our blog, it is worth reminding that car manufacturers and/or importers use the agency model to better manage vehicle sales. As they bear most of the risks, competition law allows them – more flexibly than even before – to determine market behaviour of their dealers acting as agents.
However, the agency model is a narrow exception to the application of competition law. If a manufacturer sets up the system improperly – or just imperfectly –, it risks major legal issues. In these cases, the carmaker, in good faith, influences the market behaviour of its (alleged) agents that are deemed independent distributors from the competition law perspective. The manufacturer sets resale prices and customer restrictions – something not permitted in typical distribution relationships.
A single unfinished aspect of the agency-based model could trigger a heavy fine from a competition authority.
The hidden pitfalls of agency
For example, automakers may face practical challenges when selling some vehicle models through agency (such as electric vehicles) while distributing others (for instance conventional models) through independent distribution network.
If a carmaker wants to use the same network of partners for this, it can be problematic in terms of eliminating the transfer of commercial and financial risks to dealers, which is a critical requirement for the agency model. In fact, it can be difficult to distinguish which risks are specific to electric car sales (and should be borne by the carmaker or compensated for dealers) and those already inherent in selling petrol and diesel vehicles (and therefore can be borne by the dealers themselves).
The “dual role” of business partners, where they act as independent distributors for some goods of one supplier and as agents for others, is not prohibited. However, competition law imposes relatively strict rules on this arrangement. The commercial risks inherent in agency model must be clearly defined, and the business partner must be free to choose whether to accept this dual role. Suppliers cannot force business partners into a dual role. Also, it is not acceptable to make further cooperation with these business partners conditional on their acceptance of the “dual role”.
Implementing the requirements in practice demands a strict separation of the two sales models at every level, from IT system to human resources. This separation can prove time-consuming, costly, and logistically challenging for car manufacturers and/or importers and dealers.
Under the agency model, there could be additional challenges if carmakers wish to sell vehicles through agents that resell also vehicles supplied by competing manufacturers or importers. This practice is more feasible in an independent distribution system, where it is commonly observed with minimal competition law risks. Analogously, it is akin to a retail chain selling butter products from various manufacturers.
Nevertheless, the agency arrangement poses several competition law concerns. Dealers would essentially act as agents, working for, and being in fact managed by, multiple competing carmakers. This setup could enable the exchange of commercially sensitive information and/or facilitate cartel agreements. These potential pitfalls should be carefully considered and addressed before implementing the agency model.
Prospects for the future
Messages from the market suggest that some carmakers are delaying or rethinking the transition to an agency model. This is largely due to the high costs associated with the change, as well as dealers’ reluctance to forfeit their profit margins and shift to an agent-based system.
However, we believe that the trend of carmakers adopting the agency model is likely to continue and grow in the future. This model allows manufacturers and/or importers to centralize their sales processes, which can be significantly more efficient for managing their sales strategy. As a result, carmakers can better meet the demands of modern customers and improve their retail sales.
Manufacturers and/or importers that adapt to the growing trends of digitalization, customer process simplification and acceleration, and high-quality customer service will be better positioned to thrive in the rapidly evolving market.
The transition to an agency sales model carries significant competition law risks that cannot be overlooked. To ensure these risks are properly identified, named, and mitigated in a timely manner, it is essential to have a team of competition lawyers assisting with this transition. Our team is here to provide that expert guidance and support.
