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The End Of A Free Ride For Carmakers? (Int'l Edition)


International -- European Business: Autos

The End of a Free Ride for Carmakers? (int'l edition)

The EU takes aim at their power to vary prices by country

Xavier Bategat, a Ford Motor Co. dealer in Brussels, scans an order fresh off the fax. Although most cars sold in Belgium have left-hand drive, a customer in Britain wants to buy a right-hand-drive Focus Ghia from him. "I get faxes like this all the time," says Bategat, who orders right-hand drive cars for British drivers. Why the roundabout purchasing? Big-time savings. Including taxes and registration fees, the British buyer saves 15%, or about $3,100.

Such sharp variations in car prices across Europe may soon spark a monumental battle between carmakers and regulators. The regulators want to undo a 15-year-old loophole that car companies won in European Union antitrust rules. It gives them control of most dealerships, supposedly to assure top quality maintenance. But it also lets them vary prices country by country. If regulators get their way, they will dramatically reshape the way cars are sold in Europe and pave the way for a lot more competition.

Currently, an auto maker selling to consumers in its home market may charge high. But if it's selling in markets where it's trying to establish itself or compensate for higher taxes, it may discount. British consumers are the biggest losers. To get a Honda Civic, they pay 89% more than Continental customers. Other car buyers get whacked, too. After taxes, a German can save $2,600 by buying a Volkswagen Golf in Finland and registering it in Germany.ACTIVISTS' ALLY. No wonder consumers are crossing borders to buy cars, especially now that the euro makes it easy to compare prices. Pressure is growing to end the price variations altogether. Under go-getter director Sheila Mc-Kechnie, the British Consumers' Assn. has collected 20,000 signatures on a petition protesting high prices.

The activists now have EU Competition Commissioner Mario Monti on their side. On May 11, he announced plans to close, or at least tighten, the loophole when it's due to expire on Sept. 30, 2002. That would force carmakers to relinquish exclusive control of their dealer networks, which in turn would allow price competition. "It is the consumer who should be in the driver's seat," Monti says.

Carmakers are vowing to resist. It's certainly a loophole worth fighting for, and all the European carmakers will be pulling every string they can at national and EU levels to preserve it. Fiat Chief Executive Paolo Cantarella, who heads the ACEA, the European carmakers' association, says value-added and registration taxes are mostly responsible for the big swings in prices: They range from 15% in Luxembourg to 218% in Denmark. Don't blame the dealerships, he says.

Maybe so, maybe not: What's clear is that if Monti gets his way, uniform pricing across borders would slash auto makers' earnings. If British car prices fell in line with Continental levels, that alone would wipe $150 million from the annual earnings of PSA Peugeot Citroen, $163 million from Volkswagen, and $284 million from Ford of Europe, according to estimates from brokerage firm Schroder Salomon Smith Barney. That's 10 times more than Ford earned last year in Europe. And if the car companies lost control of their sales networks, independent dealers might spring up and demand big discounts on cars they buy from auto makers.

Monti is on the attack. He is looking into whether Peugeot, Renault, DaimlerChrysler, and General Motors Corp.'s Adam Opel are telling dealers to turn away cross-border bargain hunters. The EU slapped VW with a $95 million fine in 1998 for such practices in Italy.

The auto makers are already making changes. Anticipating a hit to earnings, they are accelerating the restructuring of their sales networks. Ford is slashing its network to 1,000 dealers from 2,500. VW is cutting its German dealers by 40%. Partners Renault and Nissan Motor Co. expect to save $1 billion by reorganizing their European dealers.

Monti isn't finished with harrying the carmakers: He wants to see if the auto companies have tried to squelch car buying on the Internet. British dealers say VW threatened to terminate their contracts if they cooperated with Internet brokers. Monti's investigators are on the move: Expect an overall report on the industry in the fall. That leaves auto makers with a lot of explaining to do this summer.By Christine Tierney in Frankfurt, with William Echikson in Brussels and Katharine A. Schmidt in StuttgartReturn to top


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