EU reforms likely to cut car prices despite trade view

Though not a driver, this writer was intrigued by the response of the Society of the Irish Motor Industry (SIMI) to new EU rules designed to increase competition in the car market.

Such was the noble aim of the Competition Commissioner, Mr Mario Monti, yet the conclusion of the Irish industry was that prices were likely to rise.

Yet another ruse to outwit Irish consumers into accepting high prices? It seems a reasonable hunch. After all, Irish inflation is the highest in Europe, and certain supermarkets are dearer than St Tropez. House prices are still soaring, remember, and the motor insurance business has been 10 times more profitable in absolute terms than its British counterpart. With all the signs indicating that Ireland is becoming an increasingly dear place to live, little wonder that car-sellers say sweeping reform of the business won't work.

How come? Mr Monti's new rules foster competition. But for two reasons linked to tax, SIMI chief executive, Mr Cyril McHugh, claims the upshot of reform will be higher prices.

His arguments are based on the premise that Mr Monti's reforms will ultimately harmonise prices, which vary in the EU by up to 50 per cent for the same model. First, he says the most comparable EU market to Ireland is Britain, because motorists there also use right-hand drive vehicles. The British market is many times bigger than the Irish one so conditions there will have a dominating influence if prices converge. Before taxation, prices are higher in Britain than in the Republic. In that context, Irish prices would push upwards.

Second, Mr McHugh says manufacturers are effectively subventing high-tax markets such as the Republic and Denmark by offering comparatively low wholesale prices. Harmonisation in this context would tend to increase Irish prices too.

Because prices are a matter for individual dealers, Mr McHugh says he is speculating on the likelihood of such scenarios, not predicting them. But these are still attractive arguments for an industry that has been a significant beneficiary of the boom. For example, car sales increased almost threefold between 1990 and 2000, according to SIMI's own statistics. Some 86,905 new vehicles hit the road in 1995. By 2000, a record year for the business, this figure had increased to 230,804. The market soared at all levels. In 1990-1995, five new Porches were registered. This increased to 88 in the 1996-2000 period.

Needless to say, the growth fostered something of a bonanza for the taxman. With VAT on cars at 21 per cent and vehicle registration tax (VRT) on the most powerful motors reaching 30 per cent of the selling price, the car boom has kept the Revenue Commissioners busy. In 1995, they collected €366.7 million in VRT and estimated VAT payments on motor vehicles to be about €210 million. VRT receipts increased to €1.001 billion in 2000 and the VAT estimate was €562 million.

So the tax-take is huge. But is Mr McHugh correct to state that the only way to reduce prices is to reduce the taxes? If tax reductions were passed on to consumers they would certainly reduce the price of cars. However, the argument is highly self-serving in that it does not demand action of the motor business.

Though watered down somewhat in the lobbying process, Mr Monti's new rules demand real change of the industry. The Irish market will not be immune.

From October next year, dealers will be able to store different brands in separate areas of the same showroom rather than in separate buildings. The obligation on dealers to repair cars will be scrapped, provided a suitable garages can offer the same service. In addition, independent repairers will have the right to the same technical information as garages authorised by car-makers.

Such reforms are designed to give consumers more choice of dealers and brands. In theory, they stimulate competition and, accordingly, lower prices. This argument is probably more valid than that of SIMI in the first instance because it is on the floor of the forecourt that the reform begins. Mr Monti has no control over the prices charged by car-makers. They are dictated by the market. Thus it is the market mechanism that Mr Monti is reforming. The outcome of that process should be lower prices, tending towards a lower harmonised level.

The SIMI argument presupposes that low Irish wholesale prices will increase as part of this harmonisation. It appears to discount the very strong possibility that competition on the forecourt might reverse that trend, driving down purchase and repair prices.

After all, the new rules weaken the power of car-makers over their networks of dealers and repairers, denying them the ability to separate different brands in separate showrooms. From a competition perspective, that is a positive development. Yet SIMI resorts to self-interested analysis.

Be in no doubt that the motor industry has watched Mr Monti's reform process very closely indeed.

Just as motorists complain of high prices, car-markers are struggling with a downturn in the market. As a major industry commanding 1.6 per cent of gross domestic product in the EU, it is in a strong position to influence the European Commission. Thus wider reforms were postponed until October 2005. But these too seem to be discounted in the SIMI argument.

On the face of it, however, these are indeed sweeping. New car dealers will be allowed to advertise and open showrooms wherever they want in the EU. Car-makers will lose the power to stop them. In addition, supermarkets will be allowed to become dealers if they meet manufacturers' quality criteria. Manufacturers will be obliged to give dealers a contract of at least five years and to explain in writing the reasons for termination.

Mr Monti says these reforms were "bold and balanced". A measure of their strength is that they were strongly opposed by Germany and France, two countries with major car industries.

Late last year, I resolved to learn to drive. With August almost upon us, I still haven't started. Perhaps it's worth waiting until 2005. Maybe then I'll be able to buy a car in a supermarket. In St Tropez. Mine's a Lamborghini, s'il vous plait.