Partner Piece – Competition Law and the Motor Industry
January 18, 2018
Competition Law and the Motor Industry
The Competition and Markets Authority (CMA) is the UK’s competition regulator and their primary duty is to seek to promote competition for the benefit of the consumer. This work includes investigating mergers which could restrict competition.
The motor industry attracts its fair share of interest from the CMA and there has been a steady flow of investigations in the sector. Unfortunately for those in the industry, this will likely continue as many of the attributes of the motor trade lend themselves to being considered for investigation. The risk of such an investigation should not be taken lightly as the CMA holds significant power to correct what it identifies to be a substantial lessening of competition. This is demonstrated well in the recent acquisition of Andrew Page by Euro Car Parts (ECP). Following a finding of a substantial lessening of competition the CMA has ordered that ECP must dispose of 9 of the acquired depots to a buyer approved by the CMA, effectively reversing part of the acquisition.
What’s the problem with the Motor Industry?
Many in the industry will attest to this being a very competitive market, with the number of new and used vehicles available to consumers. The CMA tests for identifying potential competition concerns are designed to find large deals. However, many of these tests mirror closely inherent features of the motor industry.
CMA Tests
In order for the CMA to investigate a transaction it must identify it has the necessary jurisdiction to do so. The CMA can determine it has jurisdiction in two circumstances:
- The Share of Supply Test: is satisfied where the enterprises which cease to be distinct supply or acquire goods or services of any description and, after the merger, together supply at least 25% of all those particular goods or services in the UK or a substantial part of the UK; or
- Turnover Test: when the annual value of UK turnover of the enterprise being acquired exceeds £70 million.
The Turnover Test threshold is intended to target larger deals, however, the motor industry can fall foul of this test due to the high value of its products despite its low margins. It is not uncommon for motor groups to exceed this turnover target whilst having comparatively lower profit. For example, the group operating profit of a large UK dealership group represented only 1% of gross turnover.
You are not out of the clear though if your turnover falls under £70 million! You must also consider the Share of Supply test and it is at the discretion of the CMA to determine what is meant by a ‘substantial part of the UK’ in assessing this. The impact of this is vast as you may consider yourself to represent a small percentage of the national market, but what about in your local county, or even your town? This can quickly increase your share of supply and pull you within the CMA’s jurisdiction to investigate. For example in the 2014 Eden (GM) Limited investigation, the operator of 2 Vauxhall dealerships acquired two further dealerships from Riders Garages Limited. It was estimated that Eden’s share of supply in the Exeter, Torbay and Newton Abbot areas was as high as 55-65%, whereas 2 Vauxhall dealerships nationwide would represent 0.5% of UK Vauxhall dealerships alone, let alone the national UK car market. Ultimately the CMA held that the deal was too small with an annual affected market estimated at £1.5million; and so the investigation was successfully cleared.
DISTRIBUTION OF DEALERSHIPS
Consumer purchases of vehicles are typically infrequent but represent large purchases for them and so dealers are competing for a relatively small number of sales within a given area. As a result, the distribution of direct competitor dealerships (same brand) are generally evenly distributed across the country. This has historically been of less concern to the CMA when looking at competition concerns for new and used cars. The CMA has previously considered that with the prevalence of online purchases and ability to buy vehicles from further afield, there are generally no competition concerns here as this is a national market.
However, the CMA has also considered that all brands compete with one another and so in any town or city it will find numerous competitors. This suggests that a mass market hatch back is considered to compete with a high end sports car. This interpretation seems at odds with public perception and the CMA has not had to consider this specific point to date, however, it’s possible in a future matter that this perceived national broad competition could be narrowed.
The distribution of dealerships becomes of greater concern when the CMA considers the effect on competition in relation to maintenance, repair and servicing following a transaction. The CMA has previously found that while consumers may travel to purchase a new vehicle to find the best price on a large capital outlay, they stay closer to home for maintenance. This is not particularly ground-breaking and we only have to consider our own busy schedules to know consumers will head to convenient dealerships and garages for maintenance.
The CMA has also noted that despite the fact consumers can maintain the warranties on their new vehicles by using independent authorised garages, the public perception is still strongly that servicing must be carried out at the local authorised dealer in order to maintain this warranty. It is here that the even distribution of dealerships comes into play. Where a consumer lives between two towns they may have a choice of two garages of the same brand and of a similar distance from home. These dealers therefore compete. However, were one dealership to acquire the other this customer now has only one choice for its perceived servicing needs as there is not another same brand dealership until the next major town some significant distance from home.
It is in the areas of maintenance, repairs and servicing that CMA investigations have tended to focus for the reasons set out above. Numerous parties investigated by the CMA in the motor industry have been found to have had a negative impact on competition in respect of maintenance, repairs and servicing and it has often been the issue of high turnover vs. low market value affected that has seen these transactions cleared, such as the Eden/Rider acquisition noted above.
However, it is not enough to rely on the deal being considered ‘insignificant’ in the context of larger corporate transactions having an anti-competitive affect. As the CMA’s interest continues in the motor sector, it is perhaps just a matter of time before a big player in the game falls foul of the CMA.
CMA POWERS
The CMA has extensive powers available to it as the UKs leading competition authority. These include the powers to:
- Prevent the merged businesses from taking actions that may pre-empt the CMA’s eventual decision. I.e. prevent further integration of the businesses such as letting staff go, or moving to sole suppliers for internet or payroll. The businesses will have to be maintained as though still operating independently;
- Reverse any pre-emptive action where it has already taken place, such as that described above;
- Appoint a trustee at the acquirer’s expense to ensure that pre-emptive actions aren’t taken. This can be costly as the investigation will last at least a number of months;
- Force the disposal of the business or elements of the business if the merger is prohibited. Effectively, the CMA can undo the merger (or parts of it) to remove any competition concerns.
The CMA’s powers should therefore not be taken lightly and ultimately they can unravel an acquisition with no guarantee the acquirer will recover their money as it may be necessary to sell at a loss. This also does not take into account the lost fees and other expenses incurred in acquiring the business in the first place, or in reversing the acquisition. With this in mind, what then should you do?
INFORMAL DISCUSSIONS/PRE-NOTIFICATION
The UK has a voluntary merger notification scheme and so it is not necessary to inform the CMA of your proposed transaction, however, the CMA has the power to investigate an acquisition after the event if it becomes aware of the deal.
Alternatively, you can acquire advance clearance and confirmation the acquisition does not give rise to any competition concerns giving you peace of mind. You can ask the CMA to consider a merger in a number of ways, including:
- Informal advice (used to obtain the CMA’s views of likely competition issues);
- Pre-notification discussions (these take place when the parties have decided to notify the CMA and help to frame the notification, including its rationale, the relevant markets and the contents of the draft notification); or
- Making a voluntary merger notification. (This pre-merger process has very similar requirements to meet as a post-merger investigation. However, you have some greater ability to manage the timeframes and work with the CMA in their investigation, rather than being on the back foot.).
These processes will however, bring the proposed merger to the CMA’s attention. Furthermore, the merger notification could result in the CMA finding a substantial lessening of competition and so preventing the merger from even getting off the ground. If this is the case, you are still responsible for the CMA fee (as below). This can therefore be a costly exercise and to no avail.
Fees and Costs
Fees are payable to the CMA whether a case is voluntarily notified or investigated by the CMA on their own accord. This fee is payable regardless of whether the CMA finds any competition issues or not. The fees (correct as of date of publishing) are as set out below:
The fees payable for a CMA investigation demonstrate again the focus on turnover as the basis for CMA investigations. The effect on the motor industry is that those investigated will typically find themselves paying fees above what may represent a fair proportion of the business’s profit as a result of the industry’s high turnover figures.
Summary
It is crucial to understand the market your business operates in both generally and within specific work flows. In particular for the motor industry, careful consideration should be given to the effect of a transaction on the provision of maintenance, servicing and repair. Similarly, where the dealership’s turnover exceeds the £70 million threshold the effect on competition should always be considered. This can be a very complex task and it is best to take expert legal and competition economics advice from specialists.
The fees and amount of work involved in notifying the CMA or later being investigated are broadly similar. Informal discussions with the CMA can be useful to gain their initial high level assessment of the key issues, but as noted this will alert the CMA to the proposed merger.
Ultimately, where it is considered that competition concerns may be a serious risk in a proposed acquisition, the merger should be made conditional on receiving CMA approval.
By Gurpreet Sanghera, Corporate Principal at EMW
