A Senate Inquiry in Canberra has been told new-car prices will likely rise under a radical plan by Honda and Mercedes-Benz to change the way they sell vehicles in Australia – amid renewed calls for the Federal Government to introduce legislation to better protect consumers and local businesses.
Japanese car maker Honda is in the process of scaling back the number of showrooms nationally, and from the middle of next year will switch to a fixed-price “agency” model – which means customers will not be able to negotiate new-car prices with dealers.
German car maker Mercedes-Benz is also poised to move to the fixed-price “agency” model from the beginning of 2022, unless laws are introduced to prevent car companies from doing so.
Under the new arrangements, Honda and Mercedes dealers will be paid a flat fee to handle the sale and delivery of each new vehicle and won’t have the expense of carrying millions of dollars worth of stock – but they won’t be able to negotiate with customers on price.
To date, no other multinational car giants have expressed interest in adopting the fixed-price “agency” model in Australia, however there are growing concerns among dealers that others could follow.
A representative for the world’s largest car dealer body, the National Automobile Dealers Association (NADA) – which represents 16,000 showrooms with more than 1 million employees in North America – told the Senate Inquiry that research shows small dealer networks reduce competition and increase prices.
“As the Ford dealer will tell you his greatest competition is not necessarily the (General Motors) dealer or the Honda dealer, it’s the Ford dealer down the street who is going to be his greatest competition,” said Andrew Koblenz, executive vice president, legal and regulatory affairs, for NADA.
Mr Koblenz said a study of Honda vehicles in Texas found locations “where there was only one Honda dealer within a 30-mile radius, prices were $500 higher than in those markets that were served by two or more Honda dealers”.
“So I think you would see that the absence of inter-brand competition would tend to increase the price of cars,” said Mr Koblenz.
When asked by the Senate Inquiry via video link if some US states ban direct sales – similar to the fixed-price “agency” model about to be implemented by Honda and Mercedes-Benz in Australia – Mr Koblenz said:
“Some states ban direct sales without regard to whether the manufacturer has a dealer network. These are public policy decisions in the states, with good justification. The presence of inter-brand competition lowers the prices that consumers pay. The elimination of inter-brand competition … would raise the prices of cars for consumers.”
Mr Koblenz said the introduction of a process similar to a fixed-price agency model would remove the opportunity for customers to negotiate a better deal.
“(In the US) there are generally advertised prices, and no-one will ever prevent you from buying the car at that price,” said Mr Koblenz. “But the system we have (in the US and Australia currently) is one where you can come in and obtain a discount, which obviously benefits the consumer.”
Senator Deborah O’Neill then asked the NADA representative: “So, in the absence of the state legislatures coming in and providing a more level playing field by legislating to protect the dealer network, the cost of cars would rise? Is that it in a nutshell?
Mr Koblenz responded: “Yes, that's it in a nutshell.”
The Australian Automotive Dealers Association (AADA), which represents 3100 dealerships nationally in almost every electorate – who have approximately 60,000 employees – is concerned other car brands could adopt a fixed-price “agency” model.
Speaking outside the Senate Inquiry, James Voortman, the chief executive officer of the AADA, said: “The car companies who want to move to (a fixed-price “agency” model) will tell you they have research that shows most customers don’t like to negotiate on price. However I am concerned prices may go up and am not convinced the consumer will always be better off.”
Mr Voortman told the Senate Inquiry some dealerships may go out of business under the proposed fixed-price “agency” model, which would wipe out jobs in showrooms and service departments – and inconvenience car owners who may have chosen to buy a particular vehicle based on local servicing and support.
The fixed-price “agency” model “could have significant implications for commercial viability of dealers which do become agents,” Mr Voortman told the Senate Inquiry.
“We do not dispute the right of (car) manufacturers to change their distribution models, but when these fundamental changes are made to the business it should be done in a fair manner,” said Mr Voortman.
“In particular, dealers deserve full transparency and should be notified with the maximum amount of notice and they should receive adequate compensation. Unfortunately, the practices we are hearing about from some manufacturers are anything but fair.”
General Motors paid tens of millions of dollars in compensation to Holden dealers for winding up operations in Australia by the end of this year.
Honda is in the process of offering an undisclosed amount of compensation to dealers whose franchise agreements will be terminated early. As with Holden, a number of Honda dealers are disputing the compensation offer through legal channels.
Mercedes has so far said it will not compensate dealers whose franchise agreements are not renewed, or who don’t sign up to the new fixed-price agency model.
Honda Australia is due to appear before the Senate Inquiry this week.
Meanwhile, in an interview with Australian media earlier this year, the global boss of sales and marketing for Mercedes-Benz, Britta Seeger, said the fixed price “agency” model will go ahead unless changes to Federal Government regulations prevent it.
“As soon as a regulator (or) government is changing legal circumstances, we need to assess this again,” said Britta Seeger, member of the board of management of Daimler, Mercedes-Benz Cars, marketing and sales. “If this would be the case in any of the markets, we would need to reassess.”
While Mercedes has already rolled out its fixed price “agency model” in South Africa and Sweden over the past two years “after some intense discussion” with dealers – and it plans to adopt the scheme in other countries in the coming years – US law does not allow such an arrangement.
“The US has very special franchise laws, so some of the logic that we can apply in some (countries) will not apply to the US,” said Ms Seeger. “So currently we are investigating what would be the right future business set up.”
At the time a statement from the Australian Competition and Consumer Commission (ACCC) said it is “aware of announcements by some vehicle manufacturers to restructure how motor vehicles are sold to Australian consumers. In other industries, manufacturers have used an agency model to market and sell products."
The peak consumer and business watchdog said it will “continue to monitor these changes, particularly any impact on consumers and small business motor vehicle dealers.”