New Car Retailing Industry

New Car Retailing Industry

A market study by the ACCC

December 2017

.au

Australian Competition and Consumer Commission 23 Marcus Clarke Street, Canberra, Australian Capital Territory, 2601

? Commonwealth of Australia 2017 This work is copyright. In addition to any use permitted under the Copyright Act 1968, all material contained within this work is provided under a Creative Commons Attribution 3.0 Australia licence, with the exception of:

the Commonwealth Coat of Arms

the ACCC and AER logos

any illustration, diagram, photograph or graphic over which the Australian Competition and Consumer Commission does not hold copyright, but which may be part of or contained within this publication.

The details of the relevant licence conditions are available on the Creative Commons website, as is the full legal code for the CC BY 3.0 AU licence. Requests and inquiries concerning reproduction and rights should be addressed to the Director, Content and Digital Services, ACCC, GPO Box 3131, Canberra ACT 2601, or publishing.unit@.au.

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Foreword

Market studies are used by the Australian Competition and Consumer Commission (ACCC) to help promote effective competition in markets. Studies are normally undertaken where a number of concerns about market conduct have been raised, and a detailed examination of market characteristics could help to determine whether market intervention, including new policy proposals, regulatory solutions or enforcement action is warranted.

The ACCC's market study into the new car retailing industry was initiated in response to a number of concerns raised with the ACCC and other fair trading agencies related to the industry, including issues about consumer guarantees and warranties, access to technical information for servicing and repairing new cars, and fuel consumption and emissions representations. The purpose of this study was to gain a better understanding of how the new car retailing industry operates, while focusing on key issues that have come to the ACCC's attention.

This report presents the ACCC's findings from almost 18 months of investigation, consultation and research, and is based on a wide range of evidence. The report contains a number of key findings and recommendations for improving consumer protection and promoting competition in new car retailing and associated markets.

The ACCC, and this study, benefited from the contributions of a range of stakeholders, including consumers, industry participants and their representative bodies, advocacy groups and government. We are grateful to all those stakeholders who participated in this study through meetings, attendance at the ACCC's stakeholder forum and round table, and by providing written submissions. A full list of market study participants are listed in Appendix A.

Rod Sims ACCC Chairman

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Contents

Foreword............................................................................................................................... iii Executive summary.............................................................................................................iv1 Key findings and recommendations ...................................................................................... 4 Shortened terms ................................................................................................................. 16 1. Introduction .................................................................................................................. 18 2. New car retailing industry characteristics...................................................................... 24 3. Consumer guarantees and warranties.......................................................................... 46 4. Accessing technical information to repair or service new cars ..................................... 92 5. Parts needed to repair and service new cars.............................................................. 135 6. Fuel consumption and emissions ............................................................................... 146 7. Other issues............................................................................................................... 163 Appendix A ? Consultation ................................................................................................ 173 Appendix B ? Government reviews relating to cars ........................................................... 176 Appendix C ? Motor vehicle regulations and codes ........................................................... 179 Appendix D ? Claim limits in tribunals and small claims courts.......................................... 181 Appendix E ? Types of technical information to repair and service new cars..................... 182 Appendix F ? Supporting information on access to technical information .......................... 184 Appendix G ? EU and US models of technical information sharing ................................... 187 Appendix H ? Regulatory options for sharing technical information ................................... 191

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Executive summary

The new car retailing industry

Buying a new car is a significant purchase for a consumer. The purchase of a car and its ongoing maintenance account for around five per cent of total average household expenditure annually, typically making it second only to housing expenditure in importance. Well-informed consumers and competitive new car retailing markets are therefore likely to deliver considerable benefits.

New car retailing activities cover more than just the sale of new cars at a car dealership. They extend to:

activities that occur prior to the sale, such as the advertising of new cars and representations made about car performance or emissions

activities that occur at the time of the sale, including the sale of finance and insurance products, representations on standard manufacturer warranties, and the sale of additional warranties

post-sale activities which are closely linked to the new car sale, such as regular maintenance and the cost of spare parts for the new car.

The sale of a new car also triggers consumer guarantees under the ACL which relate to post-sale activities. These statutory rights cover what consumers can expect from a good or service and the remedies available to them if something goes wrong.

The new car retailing supply chain

A number of entities are involved in the new car retailing supply chain, including:

car manufacturers, usually large multi-national firms that produce cars, parts and tools, and distribute their products through new car dealers

new car authorised dealers are usually in franchise agreements with car manufacturers to supply as well as repair and service new cars

independent businesses that repair and service new cars, or produce or supply parts and tools.

New car retailing is a significant sector of the Australian economy:

Around 1.1 million new cars were sold during 2016?17, including at more than 1500 new car dealers operating more than 3500 retail outlets. Car dealer revenues in 2016?17 are estimated at $64 billion.

New car sales also have flow on effects for car servicing and repairs, crash repairs and replacement parts. Around 22 500 manufacturer-authorised and independent car repair and service businesses will earn revenues of around $18 billion in 2016?17 and close to 11 000 crash repair businesses are expected to earn revenues of $6.8 billion.

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The ACCC's key market observations

Analysis for this study has revealed a number of problems that are harming consumers and hindering effective competition in the new car retailing industry.

Three key observations arising from this study are:

The law offers protections for consumers when purchasing new cars, but there are material deficiencies in the way that consumers are able to enforce their rights, and the way these rights are represented to them by manufacturers and dealers.

The ACL provides protections to consumers through the consumer guarantees. Despite these protections, there are a number of systemic problems in the new car industry preventing consumers from obtaining the remedies to which they are entitled when their car experiences a problem. The biggest obstacle to consumers not receiving the remedies to which they are entitled under the ACL is the conduct of manufacturers in the handling of consumer guarantee claims. Manufacturers' complaint handling systems, policies and procedures across the new car industry fail to adequately take consumer guarantees into account. Commercial arrangements between manufacturers and dealers which focus on warranty rights to the exclusion of consumer guarantees can also constrain and adversely influence the response of dealers to customer complaints.

ACCC response: The ACCC considers that ACL compliance issues can be readily addressed by manufacturers updating their complaint handling systems and transforming their approach to consumer guarantee claims, as well as reviewing their commercial arrangements with dealers to ensure that these provide for due consideration of consumer guarantee rights. The ACCC will continue, through its compliance and enforcement work, to target manufacturers' complaint handling systems, policies and procedures that do not comply with the ACL.

The ACCC has recently instituted proceedings in the Federal Court against Ford, and has accepted a court enforceable undertaking from Holden in relation to its concerns about alleged ACL non-compliance issues. Other investigations are continuing, and the ACCC will continue to actively monitor complaints and emerging issues in the sector, and take further compliance and enforcement action where necessary.

The ACCC will also work with other ACL regulators and the industry to publish guidance for consumers on their rights in the event there is a problem with their new car, including guidance for dealers to distribute to consumers at the point of sale.

The ACCC also supports the amendments to the ACL proposed in the ACL Review which are aimed at providing greater clarity to the application of consumer guarantees. The ACCC recommends that further consultation on the ACL proposals relating to major failure occur on key issues raised by manufacturers and dealers.

In addition, in the course of this study the ACCC has become aware of certain issues raised by dealers relating to the imbalance of power in their commercial arrangements with manufacturers. These issues go beyond the impacts on ACL compliance, which has been the focus of the ACCC's review of these commercial arrangements and may require further examination. One option for consideration of these issues is the next review of the Franchising Code of Conduct.

Concerns remain about the effect of limited access to information and data required to repair and service new cars.

The repair and service of new cars is increasingly reliant on access to electronic information and data produced by car manufacturers. Independent repairers, which are not authorised or affiliated with car manufacturers, are reliant on car manufacturers voluntarily sharing information and data. Around one in ten new car buyers have their car repaired or serviced

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with an independent repairer. The ACCC is of the view that the competitive discipline imposed by independent repairers on the aftermarkets for the repair and servicing of new cars remains valuable and of benefit to consumers, and that consumers also benefit from having a choice of providers to repair and service new cars.

While voluntary commitments have been offered by car manufacturers to provide independent repairers with the same technical information to repair and service new cars that they provide to their dealers, problems with the breadth, depth and timeliness of the technical information offered appear to be enduring.

The ACCC has found that some car manufacturers provide independent repairers with access to most of the technical information they need to repair and service new cars. However, many of these car manufacturers do not provide technical information they deem as being environmental, safety or security-related, due to the perceived risks of increased car thefts and unauthorised modifications arising from the release of these types of information. Despite some car manufacturers providing a good level of access to technical information, the ACCC is concerned that most car manufacturers do not provide independent repairers with the same level of access to technical information to repair and service new cars as they do to their dealer and preferred repairer networks.

ACCC response: The ACCC considers that consumers benefit from competitive aftermarkets and by having a choice of providers to repair and service new cars, and that voluntary commitments to share technical information have not been successful in meeting their aims. As there has been only a limited improvement in access, the ACCC recommends regulatory intervention to mandate the sharing of technical information with independent repairers on `commercially fair and reasonable terms', subject to appropriate safeguards to enable the sharing of environmental, safety and security-related technical information.

Consumers are not receiving accurate information about the fuel consumption or emissions performance of new cars.

Current fuel consumption and emissions testing procedures rely on laboratory testing rather than testing in real-world driving conditions. Manufacturers may therefore claim results for fuel consumption and emissions based on laboratory tests that are significantly better than can be achieved in real-world driving conditions. This is unlikely to meet consumer expectations and has the potential to be misleading.

Research from the Australian Automobile Association (AAA) indicates that real-world fuel consumption is on average 23 per cent higher than official laboratory test results. The size of the gap between laboratory and real-world fuel consumption tests is not consistent across car types or brands, and has been increasing in recent years, casting doubt on the comparative value of fuel consumption figures currently displayed in fuel consumption labelling. The ACCC notes the AAA's proposal for the Government to introduce independent real world fuel consumption and emissions testing in Australia.

Consumer detriment may also occur when manufacturers fail to appropriately qualify fuel consumption claims. While the information supplied through mandatory fuel consumption labelling is primarily designed to help consumers make comparisons between different cars, the use of absolute values for fuel consumption and emissions may contribute to consumer misunderstanding.

ACCC response: The ACCC supports moves to enhance the quality of information supplied to consumers currently being considered by the Ministerial Forum into Vehicle Emissions, including the introduction of a more realistic laboratory test and real driving emissions testing. The ACCC also considers there may be additional benefits to consumers from an Australian real driving emissions test, and recommends that the Ministerial Forum consider the costs and benefits of an Australian real driving emissions testing program as proposed by the AAA.

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Key findings and recommendations

Chapter 2: New car retailing industry characteristics

Car manufacturers and authorised dealers are typically active in both the manufacture and supply of new cars and in the supply of aftermarket services, including car servicing, repairs and supply of parts and tools.

Manufacturers and authorised dealers generally earn higher profit margins from aftermarket services than from new car sales. For dealers, although parts sales and repair and service account for 15 per cent of revenue, these aftermarket services contribute to 49 per cent of gross profit. The average net profit margin for dealers is approximately 1.7 to 1.8 per cent.

A common pricing strategy for car manufacturers and authorised dealers is to discount new car prices to maximise sales of aftermarket services. This strategy reflects that consumers have more choices available at the time of the new car sale than they do in aftermarkets for repair, service and replacement parts after the sale.

Retail markets for the supply of new cars in Australia are generally competitive, primarily indicated by low market concentration of car brands and dealers.

Competition in markets for the supply of aftermarket services is less competitive as a result of factors including:

o the ability and incentives of car manufacturers and their dealers to impede competition in profitable aftermarkets by controlling access to necessary inputs such as the technical information needed to repair and service a new car

o consumer misunderstanding about warranty and servicing requirements (including the misconception that manufacturer warranties require new cars to be serviced at a dealership)

o high switching costs once consumers have purchased a particular brand or make of car.

Chapter 3: Consumer guarantees and warranties

The ACL provides statutory protections for consumers

The ACL is Australia's national law for fair trading and consumer protection and plays a critical role in providing protections to consumers in their dealings with business and in the event that there is a problem with a good or service, including new cars. The consumer guarantees provided by the ACL cannot be displaced.

Manufacturer warranties provided with the purchase of a new car, and extended warranties offered by the dealer or a third party, provide additional protection to consumers in some circumstances.

Together, the ACL and state and territory legislation, along with manufacturers' warranties, collectively provide consumers with an extensive suite of consumer rights to remedies or other forms of redress in the event that a new car is defective or fails to perform as promised.

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