The ACCC can significantly improve consumers’ new car retail experiences in Australia by recommending the adoption of an Automotive Industry Code when it publishes its findings from the New Car Retail Industry Market Study, expected before year end.
In a supplementary submission to the ACCC in October, AADA proposed an Automotive Industry Code.
The AADA’s submission drew attention to the structural imbalance between new motor vehicle franchise Dealers and manufacturers. This currently disadvantages Dealers and leaves consumers vulnerable.
The submission stated that for some brands the imbalance is caused by one-sided Dealer agreements and related policies and procedures, including restricting what Dealers are allowed to say to consumers.
AADA CEO, David Blackhall, commented, “Dealers are required to adhere strictly to manufacturers’ policies regarding warranties and potential product defect claims. There is not a lot of discretion in some franchise agreements,” he said.
“In certain instances, some manufacturers can assume direct control of consumer complaints and dictate Dealer responses in quite specific detail.”
Mr Blackhall said the imbalance in the relationship between Dealers and manufacturers was highlighted at the AADA National Convention when ACCC Chairman, Rod Sims, said “manufacturers need to step up to meet their consumer guarantee obligations under the Australian Consumer Law and stop putting the squeeze on Dealers through dealer agreements, policies and procedures”.
Mr Blackhall said this clear signal from the ACCC Chair, when taken in combination with the consistent feedback from the Australian Motor Dealer Council, could not be ignored and encouraged the AADA to lodge the supplementary submission.
The Australian Motor Dealer Council consists of the Chairs of leading dealer councils for all the significant brands in Australia. The AMDC has been advocating strongly for an Industry Code for the last several years.
Dealer franchise agreements are currently covered under the broad Franchising Code that covers everything from fast food chains to Jim’s Mowing franchises.
“What we have is a bit of an issue with scale. The average new car Dealer is investing tens of millions of dollars in very specific, purpose-built facilities,” Mr Blackhall said.
“You can’t take a BMW showroom and turn it into a McDonald’s franchise all that easily.”
Mr Blackhall said that, in the worst examples of the existing system, some Dealers have low or no security of tenure; some can be served with non-renewal notices on commercially unacceptable short terms or without reasons being given, and some agreements are completely silent on significant business considerations such as, for example, future capital expenditure requirements.
These types of arrangements provide manufacturers with significant commercial leverage compared with the average Dealer.
“We’ve been hearing about these types of issues with the Original Equipment Manufacturers’ franchise agreements for a very long time. Aside from the negative business impacts, the risk to consumers is there. That’s why we’re asking the ACCC to take a look at framing up some of these issues in a proposed separate code that would govern just retail automotive new cars,” Mr Blackhall said.
“As a Dealer you are asked to make a series of significant investments in a specific set of assets, but the franchising arrangement – the agreement that governs your tenure as a Dealer – might be as short as 12 months. One highly promoted brand consistently adopted that approach in recent years. No surprise to us when the same brand also suffered high levels of consumer dissatisfaction.
“One of the challenges for the car manufacturers as a group is that there’s a range of behaviours here. You’ve got companies – large, well-known, strong global brands – that are very good citizens. They behave in commercially reasonable ways and their franchise arrangements are, to a large extent, exemplary. You’ve got othersÂ – maybe newer arrivals that we might call ‘challenger brands’ – that maybe don’t get it so much that this business is a marathon, not a 100-metre sprint. They can, therefore, place Dealers in positions where the recoupment of the investment over the period of the term of the agreement is almost impossible, no matter how good a Dealer you are.”
The AADA submission called for a minimum tenure of five years and one renewal period of five years, with any right of renewal exercisable by a Dealer, so long as the Dealer is not in breach of the Dealer agreement.
“Our submission specifically requested prohibiting manufacturers from issuing non-renewal notices to Dealers without first issuing reasons why in writing, setting out the steps the Dealer could take to address those reasons and detailing the rights the Dealer has to challenge those reasons.” Mr Blackhall said.
“We’re also concerned about some of the behaviours internally for some of these companies – and, again, this is quite specific, so generalisations aren’t that helpful. But, to give an example, the margins on new cars have, over the last 20 or 30 years, shrunk to the point where I can confidently say if you were going to buy a new car today from one of the mainstream franchises – or even the luxury franchises – you’d stand a very good chance of driving that car off the showroom floor with zero margin in it for the Dealer, zero profit on the actual cost of the car. Many cars are delivered on a negative cash-to-cash basis.
“That is because the mechanisms inside the industry now have shifted to what I’ll call a back-end reward system. So yes, you sell the car, there’s no money in the car, but if you achieve certain objectives and targets at the back of the business you may be rewarded with a bonus at the end of the month or the end of the quarter. That is a very problematic business model for somebody to be putting millions of dollars on the line.”
“We’re not interested in going to war with the people who make the cars – we’re in business with them. But we’re interested in redressing the power balance in the relationship between them and the Dealers who actually put their money on the line and sell the cars for a living,” he said.
“At the end of the day, this is about two key principles: First, not allowing Australian business owners and entrepreneurs to be treated shabbily by offshore multi-nationals with low investment and employment levels locally – you know, the old Aussie ‘fair go’ principle.
“But secondly, and certainly more importantly for the regulators, consumers have to be able to be protected in the manner that the government has enshrined in the black-letter law of the ACL. Any importer who thinks that they can write an agreement that prevents, impedes or slows down their Dealers from delivering on the ACL guarantees is living in the past.
“I would have thought the best response to our initiative from thinking importers would be – well, perhaps the time has come to support a clear, practical and fair Industry Code. It is the 21st century after all…”
“In this regard, the AADA aim is to work with the Chief Executive of the FCAI, Tony Weber, expressing our concerns and seeking a meeting to work through how a sensible collaborative approach can develop a specific automotive industry code that will offer better protection for Dealers and consumers alike.
“We’re optimistic that we’ll get some traction on this. We’re not going to kid ourselves that we’ll get a wish list of everything we’d like, but if we can get some dialogue and get some discussion around some of the more obvious areas of concern for our members, we’d consider that to be progress.”
Once the ACCC releases its findings in December, the matter will go before the Minister for Small Business, Michael McCormack, whose department will produce a series of recommendations.