Why a deregulated UK motor trade will not curb rogue trading

If the UK motor trade becomes a free market, consumers will still be exploited, but by retailers instead of manufacturers, suggests George Pitcher.

I readily admit to not being much of a geezer, as the vernacular has it for one who is street-wise, ducks and dives and bobs and weaves. So, toying with the idea of buying a car that’s flasher than I’m used to, it didn’t occur to me that I might do what the British find so embarrassing and ask for a discount.

That was until I read the price-fixing story about Volvo at the weekend and the slap over the wrist it received from the Office of Fair Trading (OFT). Volvo is these days part of the Ford empire, as is Jaguar, which is the marque with which I’m currently flirting.

What should you do? Go into the showroom, kick the tyres and with an Arthur Daley shoulder roll ask what they can do on a new set of wheels for cash in used notes? On a three-month delivery for new Jags, I rather doubt it – demand appears to be outstripping supply, which I would have thought is an argument for prices heading in the other direction.

See what I mean? I’m talking the price up already. Which is what Volvo has been up to, by indulging in a little bit of price-fixing. Apparently, some dealers have liaised with Volvo “secretly and cynically”, as the OFT has it, to keep prices artificially high.

There are, of course, rogue traders in the motor business who would make Nick Leeson look like a Mormon treasurer, albeit on smaller budgets. But it appears, in the Volvo case, that they have been aided and abetted by the manufacturers’ employees, now departed. So this is a case of rogue suppliers as much as rogue traders.

Details are scant, since Volvo has made a clean breast of it and the OFT has presumably agreed not to hang out its dirty linen. But I suppose the scam worked something like this: The dealer wants Volvo to restrict supplies to its rivals; Volvo, for its part, wants to keep minimum prices up. So Volvo penalises dealers who offer discounts by restricting supply and withdrawing bonuses – or, rather, that’s what its erstwhile rogue employees did.

That amounts to a price-fixing cartel. And cartels are enemies of the people. But they’re nothing new. The old Building Societies Association used to preside over the fixing of savings and mortgage rates. But perhaps more comparable with the motor trade is the old brewery on-trade, which enjoyed a captive market through what were called the tied houses. The breaking of the “beerage” has been one of the most painful industrial processes of the past decade.

One wonders whether we are about to embark on a similarly painful process in UK motor retailing. On the face of it, there is a sound case for the regulators to give the UK motor trade a good clobbering. Prices of new cars in the UK can be as much as 40 per cent higher than on the continent. Little wonder that motor manufacturers call Britain “treasure island”.

This situation arises from the 14-year-old “block exemption”, which allows car manufacturers to avoid the strictures of competition law by selling their product only through captive retailers (not unlike the old tied houses). The UK motor trade is currently before the Competition Commission, which aims to report before the end of the year and is expected to recommend that the European Commission revoke the block exemption.

If it does, then car retailing will join the free market, so theoretically any retailer will be able to sell any marque in open competition. You’ll even be able to kick those tyres in your local supermarket, if it feels so inclined to develop from petrol retailing into selling the hardware too.

Which brings me to an observation: the major supermarket chains are currently before the Competition Commission, despite or perhaps because of the protestations of their leading lights such as Asda and Tesco, on account of the OFT’s suspicions that they may be abusing a monopoly position to screw their suppliers and their customers.

The essence of the argument against the supermarkets is that they can use their buying clout to keep the prices charged by suppliers down and their margins up. If this particular case is proved, then the retailers will be cast as the villains and the manufacturers as their victims.

We’re led to believe that the casting is the other way around in the motor industry. But the net effect is the same, whether it’s groceries or cars we’re talking about – margins are tighter on the continent and that is thought to be in the public interest.

One way in which the British market could unfold is especially intriguing. Suppose the block exemption goes and car retailing is deregulated. It is entirely plausible that UK supermarkets could start selling cars and using their purchasing clout to drive down prices from manufacturers, without passing savings on to customers. A neat reversal of the current distribution of power between supplier and retailer in the motor trade.

Alternatively, the Competition Commission may rule that the supermarkets have too much purchasing power already and regulate their margins. But I hope the authorities won’t consider it too cynical of me to suggest that, in a free market of manufacturers and retailers, one function will always be screwing the other. You might shift the balance of power through regulation, but you won’t stop them doing it.

George Pitcher is a partner of issue management consultancy Luther Pendragon

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