Driving a better deal for auto dealers - Speech

DRIVING A BETTER DEAL FOR AUTO DEALERS

AUSTRALIA AUTOMOTIVE DEALER ASSOCIATION CONFERENCE

GOLD COAST CONVENTION CENTRE

TUESDAY, 4 SEPTEMBER 2018

I acknowledge the traditional custodians of the lands on which we meet, the Yugambeh people, and pay my respects to their elders past, present, and emerging.

I want to thank the Australian Automotive Dealer Association for having me here today and in particular your chief executive officer David Blackhall, with whom I maintain regular contact on a number of matters, ranging from industry specific issues to whether the Westfield Australian Marathon in Sydney was a tougher race than the Gold Coast Marathon.

Today, I’m going to resist addressing you about running. Instead, I’m going to start off by talking about sandwiches. Or to be more accurate, farmers and sandwiches.

As you know, farmers are wedged on the selling side, with only a handful of major firms dominating the purchase market - these include supermarkets, meat processing plants and dairy manufacturers.

What is less well known is the other side of the sandwich. Many of our farmers are at the mercy of highly concentrated markets with only a few big suppliers. Whether farmers are purchasing pesticides, fertilisers, animal feeds or veterinary pharmaceuticals, more often than not they are dealing with major companies with substantial market power. For pesticides, the four biggest firms basically control the entire market, making it one of the most concentrated industries in Australia.

Unfortunately for our farmers, it might be about to get worse. Two ‘mega mergers’ have recently been undertaken which threaten to dramatically change the competitive landscape in agriculture, both globally and here in Australia.

The first is between Dow and Du Pont, now complete. The second merger is between Bayer and Monsanto. According to Bloomberg, the Bayer-Monsanto merged company will have a ‘virtually unassailable position at the head of the market’.

This means that if you’re a farmer, you’ll have even less choice about where to buy some of the essentials you need to do your business.

Over recent years, we’ve seen large and dominant firms pressure smaller companies to accept unreasonable contract terms, unexpected price cuts, and drawn-out payment schedules.

It’s a problem that gets worse when markets become more concentrated. A couple of years ago, I worked with Adam Triggs, an Australian National University researcher, to collect and analyse market share data on Australia’s 481 industries.

We found a high degree of market concentration in many industries. For example, the biggest four firms control more than four-fifths of the market in department stores, newspapers, banking, health insurance, supermarkets, domestic airlines, internet service providers, baby food and soft drinks. In beer manufacturing, the four big players – Anheuser-Busch, Lion, Coopers and Coca-Cola – control more than 90 per cent of the market.

Since 1990 the number of mergers and acquisitions in Australia has more than quadrupled from 346  to 1595. Increased concentration is often associated with reduced competition, resulting in higher prices and higher inequality, and lower productivity, innovation, investment, quality and consumer choice.

As  the University of Chicago’s Luigi Zingales concludes:

that the more firms have market power, the more they have both the ability and the need to gain political power. Thus, market concentration can easily lead to a ‘vicious circle, where money is used to get political power and political power is used to make money’.

Indeed, looking across our economy, you might well ask: what are the industries not dominated by a few big firms?

One of them is represented in this room. You can proudly look to yourselves – car dealerships – as one of the few markets where the top four firms account for less than one-fifth of the market. There are only a handful of others, including hairdressers, pubs and caravan parks.

It is fair to say that Australia has a fairly competitive car retailing market. Australia has over 60 brands selling more than 300 models of cars. Last year, you sold around 1.2 million vehicles.

Within that market, as the Australian Automotive Dealer Association notes, there are around 1500 franchised new car dealers in Australia that operate about 3500 new vehicle outlets, with about 85 per cent of franchised new car businesses are owned by individual operators or family groups. New car dealers employ nearly 70,000 people, and the industry’s total sales amounts to over $65 billion.

So, everything is smelling as fresh as a new car, right?

Not so fast. Politicians and policy-makers need to study the detail of the Australian Competition and Consumer Commission’s New Car Retailing market study report – definitely in as much detail as the AADA has!

The Commission’s report was a forensic deep-dive into the interaction between multinational car manufacturers, authorised car dealers, and the independent businesses that repair and service cars or produce aftermarket parts.

The report was a long time coming. In 2016, the Government delayed a review into the voluntary agreement for technical information sharing, thereby breaking its election promise to review that agreement shortly after the election, finally folding that review into the New Car Retailing Industry market study.

Labor has taken a keen interest in the report, notably the findings on service repair. In May this year, Opposition leader Bill Shorten and I announced that a Labor government will require car manufacturers to share technical information with independent mechanics on commercially fair and reasonable terms, with safeguards that enable environmental, safety and security-related technical information.

I’m proud of that announcement, and the widespread support it has received. But the market study covered more than that specific subset of the car retailing market.

The market study generated evidence of pressures faced by dealerships which were not anticipated in the initial focus of the study. Nonetheless, the ACCC’s findings about the pressures dealerships face was the one of the strongest and most prominent outcomes of its market study.

In a manner not dissimilar to how large agricultural suppliers can pressure farmers, the Commission’s market study found car manufacturers exert significant pressures on dealerships.

In the Commission’s words, ‘Commercial arrangements between manufacturers and dealers can constrain and influence the behaviour of dealers in responding to complaints’.

Such pressures have effects on how dealers respond to remedies for consumers under the Australian Consumer Law, particularly if the manufacturer is at fault.

Dealers are frequently under pressure, and struggle to balancing such consumer obligations with safeguarding their own financial interests and maintaining a long term commercial relationship with their manufacturer.

It is the manufacturers that generally write the terms of dealership agreements that cover consumer responsibilities, for which dealers are under pressure to agree with for threat their agreement may not be renewed.

In the study itself, the Commission made a series of recommendations, particularly directed at car manufacturers, on how to handle consumer issues, and suggested the 2020 review of the Franchising Code as an opportunity to address the matters raised by dealers.

While I’m sympathetic to those recommendations – and grateful for the Commission’s significant body of evidence – I find myself drawn to the same conclusion as the Dealer Association itself, which put the situation in much blunter terms:

There is a Power Imbalance in the Automotive Industry. [There is a] structural power imbalance between car Manufacturers (franchisors) and franchised new car Dealers (franchisees) [that] disadvantages both dealership businesses and consumers who purchase new vehicles from Dealers.

Many Dealers enjoy good relations with their respective Manufacturers and work in a mutually beneficial partnership, but there remain many instances where Dealers are subjected to treatment resembling a master/servant relationship.

This power imbalance manifests itself in a number a ways, and if it continues to go unaddressed, we may see an increase in either market concentration of dealerships, or in the market power manufacturers can exert, with an inevitable decline in positive outcomes for consumers and the family-owned and small businesses that serve them.

Because the terms of dealer agreements - the core contract between the manufacturer and authorised dealer that establishes the obligations of each party in relation to sales, parts and service facilities - are set by the manufacturer, Dealers can face pressures around:

  • Tenure, where agreements from manufactures can be as short as one year – despite dealers often being required to upfront massive amount of capital expenditure.
  • Non-renewal notices issued at short notice, even when dealers have met or exceeded performance targets.
  • End-of-term agreements that do not mandate the buyback of vehicle stock, parts, tools or equipment.
  • Agreement terms constraining the ability of dealers to respond to consumer complaints.

The ACCC report detailed instances where upstream suppliers were not transparent in their communications with dealers and consumers – ‘in one instance, a dealer referred a consumer to a manufacturer to request a refund or replacement car. The manufacturer only communicated with the consumer by phone, never in writing, and refused the consumer’s request for a refund or a replacement car. The consumer requested that the manufacturer put its decision in writing and include written reasons for its refusal, to which the manufacturer refused’.

The ACCC found features of warranty compliance policies and procedures of some manufacturers that may restrict a dealer’s ability to satisfy its consumer responsibilities in compliance with the Australian Consumer Law, or that otherwise prevent a dealer from being appropriately reimbursed for the cost of providing a remedy.

Some of the warranty compliance policies meant a manufacturer may:

  • Reject claims by dealers for reimbursement for consumer repair that are submitted outside of the claim submission period – sometimes within 10 days from the repair date – without a right of appeal.
  • Void a dealer’s entitlement to repair costs under warranty or goodwill in the event that a repair order does not contain a customer signature.
  • Reverse a claim during an audit if it is found that ‘white out’ has been used in any part of the technician’s story detailing the repair order.
  • Prevent dealers from making a claim for an incomplete or repeated repair or from submitting a second claim for any omissions.’

I also find myself in a good deal of agreement with the AADA’s statement that the ‘The Franchising Code of Conduct has been unsuccessful in protecting franchised new car Dealers’.

The Franchising Code has shown itself unable to assist the 25 Australian dealers to whom one manufacturer issued non-renewal notices to, despite those dealers not breaching their dealership agreements, or not recouping their investment, or despite decades of profitability; in most cases with no explanation given.

The Franchising Code has shown itself unable to deal with the manufacturers who create dealership codes with an effective term of one year, despite the capital expenditure invested upfront by dealers requiring several years of tenure to recoup.

The Franchising Code has shown itself unable to deal with unfair contract terms that use loopholes to claw-back warranty payments, even when a consumer can demonstrate the repair work was carried out.

What is the next step? Do we leave the issue for another two years, and hope to have it dealt with in the planned 2020 review of the Franchising Code?

I don’t think that is acceptable, and I am not convinced that would addressed the industry-specific dynamics in car retailing, and the pressures dealerships face.

That is why I am proud to announce that a Shorten Labor Government will implement an industry-specific auto dealership code.

Industry-specific codes are somewhat rare, and exist in areas with sufficient market power imbalances to warrant such intervention such as the Wheat Port Code, the Horticulture Code, the Oil Code (regulating the conduct of wholesalers and fuel resellers), and the Unit Pricing Code.

The ACCC regulates mandatory industry codes that are prescribed under the Competition and Consumer Act 2010. In Government, a Shorten Labor Government would task Treasury to work with the ACCC, dealerships, and manufacturers, to develop and draft a legislative instrument for a mandatory code.

Consumers and the industry need such a code to give clear guidance on how the issues and pressures I’ve mentioned are dealt with between dealers and manufacturers, with compliance with the Australian Consumer Law being first and foremost.

A code will deliver clear ground rules for manufacturers and dealerships, including obligations under the Australian Consumer Law and consumer complaints, warranty and repair processes, dealership agreements and the ability to make variations to them, and termination notices.

While this code could be drafted parallel to the policy for sharing information for independent car mechanics, careful consideration needs to be given during implementation to ensure that the related but distinct issues are dealt with appropriately.

This code will give dealerships real backup when you’re looking to speak up for the rights of your customers. It will ensure that manufacturers work fairly with dealers to fulfil consumer rights. We know dealers want to work with drivers to meet public expectations around consumer complaints, warranties and repairs. This code will help you help your customers.

I also must express some disappointment in the Government in its response, or lack thereof, to the Car Retailing Industry market study. Our understanding is that the Government has tasked just one full-time Treasury employee to look at possible policy options on access to service repair, and that they are yet to do anything on the issue of a code for authorised dealers, or proposed amendments to the franchising code. When Scott Morrison replaced Malcolm Turnbull as Prime Minister, he demoted the assistant minister who was formerly responsible for this area to the backbench.

David is quite right to draw attention to the importance of political stability to businesses and consumers. Stability allows elected officials to carefully engage with stakeholders, and give a proper hearing to the issues that affect them.

There is no doubt that we in Labor went through a period of leadership instability, and paid the price in the 2013 election. But since then, we have been united behind Bill Shorten. At the next election, he will lead an opposition with more positive policies than any other in the past generation.

Because we have not been distracted by leadership issues, we have knuckled down to work on policy. Many of us have held the same portfolios for the past five years. For example, I have been responsible for competition policy throughout our time in opposition. This has given me the chance to understand the issues, and to listen to stakeholders such as AADA. I particularly want to acknowledge Milton Dick, Labor member for Oxley, who has championed your interests consistently. No-one in Labor deserves more credit than Milton for today’s announcement.

I thank David, James and the AADA team for your strong advocacy, which has delivered today’s policy commitment. If we win office, I look forward to continuing to work with you to implement it, and to ensure that we drive a better deal for Australia’s auto dealers.

ENDS

Authorised by Noah Carroll, ALP, Canberra.
 


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