New Car Retailing Industry

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New Car RetailingIndustryA market study by the ACCCDecember

Australian Competition and Consumer Commission23 Marcus Clarke Street, Canberra, Australian Capital Territory, 2601 Commonwealth of Australia 2017This work is copyright. In addition to any use permitted under the Copyright Act 1968, all material contained within this work isprovided 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 Commissiondoes 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 theCC 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 Car Retailing Industry – a market study by the ACCCii

ForewordMarket studies are used by the Australian Competition and Consumer Commission (ACCC)to help promote effective competition in markets. Studies are normally undertaken where anumber of concerns about market conduct have been raised, and a detailed examination ofmarket characteristics could help to determine whether market intervention, including newpolicy proposals, regulatory solutions or enforcement action is warranted.The ACCC’s market study into the new car retailing industry was initiated in response to anumber of concerns raised with the ACCC and other fair trading agencies related to theindustry, including issues about consumer guarantees and warranties, access to technicalinformation for servicing and repairing new cars, and fuel consumption and emissionsrepresentations. The purpose of this study was to gain a better understanding of how thenew car retailing industry operates, while focusing on key issues that have come to theACCC’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 anumber of key findings and recommendations for improving consumer protection andpromoting 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 groupsand government. We are grateful to all those stakeholders who participated in this studythrough meetings, attendance at the ACCC’s stakeholder forum and round table, and byproviding written submissions. A full list of market study participants are listed inAppendix A.Rod SimsACCC ChairmanNew Car Retailing Industry – a market study by the ACCCiii

ContentsForeword. iiiExecutive summary .iv1Key findings and recommendations . 4Shortened terms . 161.Introduction . 182.New car retailing industry characteristics. 243.Consumer guarantees and warranties. 464.Accessing technical information to repair or service new cars . 925.Parts needed to repair and service new cars. 1356.Fuel consumption and emissions . 1467.Other issues . 163Appendix A – Consultation . 173Appendix B – Government reviews relating to cars . 176Appendix C – Motor vehicle regulations and codes . 179Appendix D – Claim limits in tribunals and small claims courts. 181Appendix E – Types of technical information to repair and service new cars . 182Appendix F – Supporting information on access to technical information . 184Appendix G – EU and US models of technical information sharing . 187Appendix H – Regulatory options for sharing technical information . 191New Car Retailing Industry – a market study by the ACCCiv

Executive summaryThe new car retailing industryBuying a new car is a significant purchase for a consumer. The purchase of a car and itsongoing maintenance account for around five per cent of total average householdexpenditure annually, typically making it second only to housing expenditure in importance.Well-informed consumers and competitive new car retailing markets are therefore likely todeliver 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 andrepresentations made about car performance or emissions activities that occur at the time of the sale, including the sale of finance and insuranceproducts, representations on standard manufacturer warranties, and the sale ofadditional warranties post-sale activities which are closely linked to the new car sale, such as regularmaintenance 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 topost-sale activities. These statutory rights cover what consumers can expect from a good orservice and the remedies available to them if something goes wrong.The new car retailing supply chainA 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 manufacturersto supply as well as repair and service new cars independent businesses that repair and service new cars, or produce or supply partsand 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 newcar dealers operating more than 3500 retail outlets. Car dealer revenues in 2016–17 areestimated at 64 billion. New car sales also have flow on effects for car servicing and repairs, crash repairs andreplacement parts. Around 22 500 manufacturer-authorised and independent car repairand service businesses will earn revenues of around 18 billion in 2016–17 and close to11 000 crash repair businesses are expected to earn revenues of 6.8 billion.New Car Retailing Industry – a market study by the ACCC1

The ACCC’s key market observationsAnalysis for this study has revealed a number of problems that are harming consumers andhindering 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 arematerial deficiencies in the way that consumers are able to enforce their rights, andthe way these rights are represented to them by manufacturers and dealers.The ACL provides protections to consumers through the consumer guarantees. Despitethese protections, there are a number of systemic problems in the new car industrypreventing consumers from obtaining the remedies to which they are entitled when their carexperiences a problem. The biggest obstacle to consumers not receiving the remedies towhich they are entitled under the ACL is the conduct of manufacturers in the handling ofconsumer guarantee claims. Manufacturers’ complaint handling systems, policies andprocedures across the new car industry fail to adequately take consumer guarantees intoaccount. Commercial arrangements between manufacturers and dealers which focus onwarranty rights to the exclusion of consumer guarantees can also constrain and adverselyinfluence the response of dealers to customer complaints.ACCC response: The ACCC considers that ACL compliance issues can be readilyaddressed by manufacturers updating their complaint handling systems and transformingtheir approach to consumer guarantee claims, as well as reviewing their commercialarrangements with dealers to ensure that these provide for due consideration of consumerguarantee rights. The ACCC will continue, through its compliance and enforcement work, totarget manufacturers’ complaint handling systems, policies and procedures that do notcomply with the ACL.The ACCC has recently instituted proceedings in the Federal Court against Ford, and hasaccepted a court enforceable undertaking from Holden in relation to its concerns aboutalleged ACL non-compliance issues. Other investigations are continuing, and the ACCC willcontinue to actively monitor complaints and emerging issues in the sector, and take furthercompliance and enforcement action where necessary.The ACCC will also work with other ACL regulators and the industry to publish guidance forconsumers on their rights in the event there is a problem with their new car, includingguidance 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 whichare aimed at providing greater clarity to the application of consumer guarantees. The ACCCrecommends that further consultation on the ACL proposals relating to major failure occur onkey issues raised by manufacturers and dealers.In addition, in the course of this study the ACCC has become aware of certain issues raisedby dealers relating to the imbalance of power in their commercial arrangements withmanufacturers. These issues go beyond the impacts on ACL compliance, which has beenthe focus of the ACCC’s review of these commercial arrangements and may require furtherexamination. One option for consideration of these issues is the next review of theFranchising Code of Conduct.Concerns remain about the effect of limited access to information and data requiredto repair and service new cars.The repair and service of new cars is increasingly reliant on access to electronic informationand data produced by car manufacturers. Independent repairers, which are not authorised oraffiliated with car manufacturers, are reliant on car manufacturers voluntarily sharinginformation and data. Around one in ten new car buyers have their car repaired or servicedNew Car Retailing Industry – a market study by the ACCC2

with an independent repairer. The ACCC is of the view that the competitive disciplineimposed by independent repairers on the aftermarkets for the repair and servicing of newcars remains valuable and of benefit to consumers, and that consumers also benefit fromhaving a choice of providers to repair and service new cars.While voluntary commitments have been offered by car manufacturers to provideindependent repairers with the same technical information to repair and service new carsthat they provide to their dealers, problems with the breadth, depth and timeliness of thetechnical information offered appear to be enduring.The ACCC has found that some car manufacturers provide independent repairers withaccess 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 deemas being environmental, safety or security-related, due to the perceived risks of increasedcar thefts and unauthorised modifications arising from the release of these types ofinformation. Despite some car manufacturers providing a good level of access to technicalinformation, the ACCC is concerned that most car manufacturers do not provideindependent repairers with the same level of access to technical information to repair andservice new cars as they do to their dealer and preferred repairer networks.ACCC response: The ACCC considers that consumers benefit from competitiveaftermarkets and by having a choice of providers to repair and service new cars, and thatvoluntary commitments to share technical information have not been successful in meetingtheir aims. As there has been only a limited improvement in access, the ACCC recommendsregulatory intervention to mandate the sharing of technical information with independentrepairers on ‘commercially fair and reasonable terms’, subject to appropriate safeguards toenable the sharing of environmental, safety and security-related technical information.Consumers are not receiving accurate information about the fuel consumption oremissions performance of new cars.Current fuel consumption and emissions testing procedures rely on laboratory testing ratherthan testing in real-world driving conditions. Manufacturers may therefore claim results forfuel consumption and emissions based on laboratory tests that are significantly better thancan be achieved in real-world driving conditions. This is unlikely to meet consumerexpectations and has the potential to be misleading.Research from the Australian Automobile Association (AAA) indicates that real-world fuelconsumption is on average 23 per cent higher than official laboratory test results. The size ofthe gap between laboratory and real-world fuel consumption tests is not consistent acrosscar types or brands, and has been increasing in recent years, casting doubt on thecomparative value of fuel consumption figures currently displayed in fuel consumptionlabelling. The ACCC notes the AAA’s proposal for the Government to introduce independentreal world fuel consumption and emissions testing in Australia.Consumer detriment may also occur when manufacturers fail to appropriately qualify fuelconsumption claims. While the information supplied through mandatory fuel consumptionlabelling is primarily designed to help consumers make comparisons between different cars,the use of absolute values for fuel consumption and emissions may contribute to consumermisunderstanding.ACCC response: The ACCC supports moves to enhance the quality of information suppliedto consumers currently being considered by the Ministerial Forum into Vehicle Emissions,including the introduction of a more realistic laboratory test and real driving emissionstesting. The ACCC also considers there may be additional benefits to consumers from anAustralian real driving emissions test, and recommends that the Ministerial Forum considerthe costs and benefits of an Australian real driving emissions testing program as proposedby the AAA.New Car Retailing Industry – a market study by the ACCC3

Key findings and recommendationsChapter 2: New car retailing industry characteristics Car manufacturers and authorised dealers are typically active in both the manufactureand 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 fromaftermarket services than from new car sales. For dealers, although parts sales andrepair and service account for 15 per cent of revenue, these aftermarket servicescontribute to 49 per cent of gross profit. The average net profit margin for dealers isapproximately 1.7 to 1.8 per cent. A common pricing strategy for car manufacturers and authorised dealers is to discountnew car prices to maximise sales of aftermarket services. This strategy reflects thatconsumers have more choices available at the time of the new car sale than they do inaftermarkets for repair, service and replacement parts after the sale. Retail markets for the supply of new cars in Australia are generally competitive, primarilyindicated by low market concentration of car brands and dealers. Competition in markets for the supply of aftermarket services is less competitive as aresult of factors including:othe ability and incentives of car manufacturers and their dealers to impedecompetition in profitable aftermarkets by controlling access to necessary inputssuch as the technical information needed to repair and service a new caroconsumer misunderstanding about warranty and servicing requirements (includingthe misconception that manufacturer warranties require new cars to be serviced ata dealership)ohigh switching costs once consumers have purchased a particular brand or makeof car.Chapter 3: Consumer guarantees and warrantiesThe ACL provides statutory protections for consumers The ACL is Australia’s national law for fair trading and consumer protection and plays acritical role in providing protections to consumers in their dealings with business and inthe event that there is a problem with a good or service, including new cars. Theconsumer guarantees provided by the ACL cannot be displaced. Manufacturer warranties provided with the purchase of a new car, and extendedwarranties offered by the dealer or a third party, provide additional protection toconsumers 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 toremedies or other forms of redress in the event that a new car is defective or fails toperform as promised.New Car Retailing Industry – a market study by the ACCC4

Recommendations on proposed amendments to enhance the ACLRecommendation 3.1The ACCC supports the amendments proposed by Consumer Affairs Australia and New Zealand(CAANZ) in the recent ACL Review to enhance the ACL and address any uncertainties about theapplication of consumer guarantees. Of particular relevance to issues arising in this study, the ACCCsupports proposals 1, 2 and 3 in the final report on the ACL Review:Proposal 1: Where a good fails to meet the consumer guarantees within a short specified period oftime, a consumer is entitled to a refund or replacement without needing to prove a ‘major failure’.Proposal 2: Clarify that multiple non-major failures can amount to a major failure.Proposal 3: Enhance disclosure in relation to extended warranties by requiring: agreements for extended warranties to be clear and in writing additional information in writing about what the ACL offers in comparison to the extendedwarranties a cooling-off period of ten working days (or an unlimited time if the supplier has not met theirdisclosure obligations) that must be disclosed and in writingRelevant stakeholders, including manufacturers, dealers and consumer representative bodies, areencouraged to participate in the further consultation process on the ACL reform proposals to beconducted by CAANZ to express their views on issues which may arise in the application of the ACLto a car related complaint.Consumers are not receiving balanced information about their rights Consumers are not receiving adequate information about consumer guarantees at thepoint of sale of a new car. The information provided is generally very limited and isusually not provided in a form consumers can retain, and refer to later. An oral explanation is not sufficient. Consumers need information in a form that can bereferred to at any time during their ownership of their car. The ACCC considers that it isbest practice for dealers to provide an explanation about consumer guarantees in writing. A balanced provision of written information about consumer guarantees requires not onlyan explanation of the statutory rights available to consumers, but also an explanation ofthe statutory obligations of manufacturers and dealers. It also requires an explanation ofthe potentially complex interaction between consumer guarantees and other consumerrights available under warranty in the event of a problem with the car.ACCC action on consumer understanding of their rightsACCC action 3.1The ACCC will work with manufacturers and dealers to develop a concise and simple explanation ofconsumer guarantees and their interaction with warranties, which should, as industry best practice, beprovided to consumers at the point of sale of a new car. Most consumers have a reasonable level of awareness of their consumer rights whenthey purchase goods or services in Australia. There are a variety of sources ofinformation for consumers seeking to improve their understanding of their rights withrespect to the purchase of a new car. This study has found that many consumers face difficulties in understanding theapplication of the consumer guarantees to their new car purchase and the distinctionbetween consumer guarantees and warranties. Such difficulties impact the ability ofconsumers to accurately assess the value of any additional consumer protections offeredby extended warranty products compared to the rights they already have under theconsumer guarantees or the manufacturer warranty.New Car Retailing Industry – a market study by the ACCC5

This appears to be in part the result of a focus by dealers at the point of sale on themanufacturer’s warranty and the potential sale of an extended warranty. Dealers havecommercial incentives, as the result of commission-based remuneration, to maximisetheir sales of extended warranties. The majority of consumers take their new cars to manufacturer authorised dealers forrepairs and service. This appears to be, in part, the result of a mistaken belief that themanufacturer’s warranty requires them to only use an authorised dealer. Contributing to this misunderstanding are direct and implied representations made by anumber of manufacturers in their logbooks and service manuals to the effect thatauthorised dealers must carry out services or repairs (or that original equipment (OE)parts must be used). Many of these representations are likely to contravene theprovisions of the ACL, and may also raise competition concerns under the CCA.ACCC action on consumer understanding of their rightsACCC action 3.2To assist consumers better understand their rights when it comes to new car defects and failures, theACCC will work with other ACL regulators to publish an updated version of Motor vehicle sales &1repairs – an industry guide to the Australian Consumer Law (August 2013) to ensure that thispublication addresses the issues identified in this study, including specific guidance on criteria fordetermining a ‘major failure’. Guidance may also be designed for use by businesses, includingdealers, regarding their rights and obligations under the ACL.ACCC action 3.3Instances of misleading or deceptive conduct, or misrepresentations, in relation to the use ofindependent repairers or non-OE spare parts will be targeted through action by the ACCC, includingenforcement action where appropriate.Consumers face significant obstacles to enforce their ACL rights A significant body of evidence suggests systemic failures in the ability of consumers toenforce their consumer guarantee rights after the purchase of a new car. The ACCC hasseen many examples of practices by manufacturers in dealing with consumer complaintsthat raise concerns under the ACL provisions, including the failure of manufacturers’complaint handling systems to adequately take consumers’ ACL rights into account. The recent review of the ACL has proposed a number of amendments to enhance thelaw and provide greater clarity to the application of consumer guarantees. The proposedamendments include reforms aimed at assisting consumers understand and choose aremedy if things go wrong with a good or when a good, including a new car, has multipleand ongoing issues. While the proposed ACL reforms would strengthen and provide greater clarity about theapplication of consumer guarantees, the existing law already provides remedies for faultycars.The ACCC has identified five key issues contributing to the difficulties experienced byconsumers in enforcing their consumer guarantees:1omanufacturers’ focus on warranty obligations to the exclusion of their consumerguarantee obligationsomanufacturers’ responses to ‘major failures’othe widespread use of non-disclosure agreements by manufacturers whenresolving complaintsACCC, Motor vehicle sales and repairs: a guide for industry to the Australian Consumer Law, 2013.New Car Retailing Industry – a market study by the ACCC6

othe lack of effective independent dispute resolution options for consumers, andoparticular features of the commercial arrangements between manufacturers anddealers. Manufacturers’ complaint handling systems require dealers to check whether a car isunder warranty before decisions are made as to an appropriate response to thecustomer’s complaint. This means interactions with the consumer take place within themanufacturer’s warranty framework to the exclusion of the consumer guarantees. There is a dominant ‘culture of repair’ underpinning manufacturers’ systems and policiesfor dealing with car defects and failures, even where cars have known and systemicmechanical failures which would entitle a consumer to a replacement or refund under theconsumer guarantees. The widespread use of non-disclosure agreements when resolving consumer complaintssuggests that consumers are not entitled to their consumer guarantee and warrantyrights unless a non-disclosure agreement is signed when this is not the case. Nondisclosure agreements also substantially reduce information in the marketplace for newbuyers about defects and safety issues that are common to a particular car. Independent dispute resolution options are providing little incentive for manufacturers toimprove their ACL compliance. These options do not effectively enable consumers toobtain the remedies they are entitled to under the consumer guarantees. This createslittle incentive for a manufacturer or dealer to offer these remedies at an earlier stage in adispute.ACCC action on the consumer experience of enforcing their rightsThe ACCC has recently instituted proceedings in the Federal Court against Ford, and it has alsoaccepted a court enforceable undertaking from Holden, in relation to its concerns about alleged ACLnon-compliance issues.ACCC action 3.4The ACCC will continue to actively monitor complaints and emerging issues in the sector, and takefurther compliance and enforcement action where necessary.Manufacturers’ complaint handling systems, policies and practices that do not comply with theconsumer guarantee requirements of the ACL will continue to be targeted through action by theACCC and fair trading agencies, including enforcement action where appropriate.Such action may also address any instances of non-compliance by dealers. The ACCC is particularlyconcerned about manufacturers and dealers engaging in conduct that may be misleading orunconscionable.New Car Retailing Industry – a market study by the ACCC7

Commercial arrangements between manufacturers and dealers can constrainand influence the behaviour of dealers in responding to complaints Dealers, as retailers of new cars, have direct responsibility to provide remedies toconsumers under the ACL. Dealers also have a right to recover the costs of remediesfrom manufacturers, where the manufacturer is responsible for the failure. Given the nature of commercial relationships between manufacturers and dealers,dealers are frequently in the challenging position of balancing their ACL obligations tocustomers, safeguarding their own financial interests and maintaining a long termcommercial relationship with their manufacturer. These commercial arrangements canhave the effect of denying or making it difficult for consumers to readily access theremedies to which they are entitled. Dealers respond to consumer guarantee or warranty claims within the framework of thepolicies and procedures set by the manufacturer. Dealer agreements, policies andprocedures commonly provide manufacturers with broad discretion to direct a dealer’shandling and resolution of customer complaints. This can further constrain and adverselyinfluence the response of dealers to customer complaints and have the potential toprevent dealers from satisfying their ACL responsibilities. Dealers are often under commercial pressure to comply with manufacturer requirementsin order to maximise the likelihood that their dealer agreement will be renewed. This mayhave consequences for how a dealer responds to consumer guarantee claims that arenot adequately covered by a manufacturer’s systems, policies and procedures. Manufacturers’ complaint handling policies and procedures primarily focus on handlingclaims within the manufacturer’s warranty framework, without due consideration of aconsumer’s statutory rights under the ACL. Similarly, the handling of consumer guarantee claims within the parameters of amanufacturer’s goodwill policy appears likely to undermine the consideration of thestatutory rights to which a customer is entitled to under the ACL. The commonrequirement for dealers to seek prior approval to make a goodwill contribution may alsolimit a dealer’s ability to comply with the ACL. Unnecessarily complex warranty claim processes, including arbitrary or immaterialadministrative and technical requirements, have the potential to result in dealers beinginadequately indemnified for remedies they have provided in compliance wi

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 . New Car Retailing Industry - a market study by the ACCC 3 with an independent repairer. The ACCC is of the view that the competitive discipline

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