Irish franchise dealers have warned that the multi-million euro investments they have been forced to make to their premises will eventually result in more expensive cars.
Changes to EU rules known as the Block Exemption Regulations aimed at bringing more competition to car sales and repairs and obliged Irish franchise dealers to invest huge amounts in premises and staff over the past two years. Many now complain that the changes have substantially increased their overheads but have done nothing to improve competition or cut prices.
A comprehensive survey of Irish franchise dealers by Pragmatica Business Solutions has found that they are far from happy.
"The industry at retail level believes that the removal of the Block Exemption Regulations has only served to increase their costs and has done little or nothing to provide a level playing field for the industry either nationally or on a pan-European basis," said Pragmatica's Pearce Flannery. "Irish retailers don't feel they are competing in an open European market, rather they feel that the excessive cost structures of much larger markets such as Italy, Germany, France and Britain have been foisted upon them without any of the benefits."
The survey of over one-third of Ireland's franchise dealers revealed that they have all been forced to invest between €50,000 and €5,000,000 upgrading their premises. The vast majority have also hired more staff and increased staff-training budgets. It's expected that these costs will filter through as higher new car prices.
However, Cyril McHugh, chief executive of the Society of the Irish Motor Industry (SIMI), does not see new car prices rising rapidly. "While dealers' investment has been significant, it's a long-term investment," he says. "In this context we will see inflation in the car business continuing its trend of being close to or below the general level of inflation."
Despite the huge investments in premises and staff, almost all dealers say the change of regulations has not put them in a stronger trading position - nor has it resulted in increased profitability. Indeed, more than half of Irish dealers believe that their profitability has actually decreased as a result of the changes. "These results indicate that the EU's attempt to standardise the industry has been counterproductive in Ireland," says Flannery.
Many dealers still fear the emergence of car supermarkets in Ireland. They also fear that some large British and European dealer groups will set up outlets here. However, industry commentators believe this is unlikely in the near future because of low volumes sold by Irish dealers, the high cost of setting up in business here, and the Government's insistence on charging vehicle registration tax (VRT).
The Government is coming under pressure to reduce VRT, which it is claimed is anti-competitive, damaging the motor industry and placing an unfair burden on motorists. "While the EU is making great efforts to open up the single market, the Irish Government continues to impose VRT which actually reinforces borders and acts against the work of the EU," said McHugh. "This is why the EU has come out so strongly against VRT."
In its pre-budget submission is to be presented to the Government shortly, the SIMI says there is clear scope for a VRT reduction. It says that in 2004 the exchequer enjoyed a windfall when motorists paid an extrs €600 million in motor related taxes. In 2004, a total of €4.6 billion was collected from motorists, compared to €4 billion in 2003. It is predicted that motorists will be taxed even more this year.
Much of the increase can be attributed to Block Exemption, which meant pre-tax prices of cars were harmonised across the EU. This has resulted in higher new car prices here and therefore a larger tax take. Taxes on fuel have also boosted the Government's coffers in recent months.
The SIMI is now beginning a campaign urging motorists to contact their TDs to demand the Government reduces VRT in the next Budget.
As it becomes clear to many that the changes to the EU regulations have been counterproductive in Ireland, dealers are preparing for the final stage of the EU's drive to introduce more competition. In one month, the EU will scrap the location clause - the move will allow franchise dealers to set up outlets anywhere in Europe regardless of whether a dealer is serving that area.
The motor industry - and car-makers in particular - have campaigned against this. Their last and probably final volley came recently when EU Competition Commissioner Neelie Kroes was reported as saying she would allow car-makers to retain the clause. However, the Commission has emphatically denied this.
"The location clause will enter into effect on October 1st, 2005," said EU competition spokesman Jonathan Todd. "To the Commission's knowledge, all car-makers intend to remove location clauses in agreements with car dealers by October 1st." Those who fail to do so can be fined up to 10 per cent of their global turnover, he warned.