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Auto in-Brief: April 2022

To watch the video, please click here.

Video Transcript

Hi everyone. My name is Sotheary Bryant. I’m the National Practise Group Head of Commercial Law at FCW Lawyers. I’m here today with Bob Gardini of Gardini Consulting. Bob is a consultant to the auto industry.

Today we will be speaking about key issues impacting car dealers and sharing some insights.

The first key change is changes made by distributors to the franchise business model. And as we all know, the current form is that one of a move to agency arrangements. The second significant change to the trading environment is the increasing take up of electric vehicles. And also, in other words there are technological changes being made as well as the introduction of new IT platforms which are having an impact on the trading environment. Finally, we have regulatory changes and there’ve been a raft of those over the last two years. The key question for dealers is what they need to do to actually take advantage of them to better protect their own commercial interests.

Now in considering each of these three changes, and there are obviously more changes impacting on the industry, but for the purpose of today we’re focusing on these three key ones and it should be noted that they are not to be also taken separately but there is some interaction. That’s the key focus for today’s discussion. I think agency is front of mind for many dealers. There’s certainly speculation as to whether more brands will change models, whether that’s agency or something else. The key thing is that different models will lead to different financial outcomes and may also impact ownership rights to good will and customer data. I’ll quickly list some key concerns that I see arising from agency arrangements.

Firstly the financial aspects. There’ll be a decrease in revenue from new car sales as well as service and parts. But I also think there are other risks associated with property and staff. The expected lower financial returns under agency may not support the property costs and investments dealers have made in the dealership.

There are also risks connected with staffing. A dealer may likely require less sales staff and be forced to undergo a redundancy.

One other thing that jumped out when we reviewed terms and conditions of agency was the impact on good will. I think there may be a loss of good will to the distributor and a negative impact on ownership rights over customer data. Some of the agency agreements we have seen actually required dealers to transfer their rights to existing customer database to the distributor for nil consideration.

The issues I’ve outlined raises some serious questions as to what the value of a dealership will be under the agency model and creates uncertainty about the value of any good will associated with dealerships that operate as agents.

So firstly, dealers must seek to fully understand whether they will be worse or better off under a new model. The litigation initiated by a group of Mercedes-Benz dealers indicates that dealers believe their financial position under agency will be materially worse off. In depth, financial modelling and analysis by an independent expert is required. Dealers must not rely solely on the information disclosed by a distributor about a new model. More materially I think dealers should now be on the lookout for signs that may indicate their distributor is seeking to change models. For example, are there common start and end dates for dealer agreements across the network? Are there clauses in the dealer agreement that allow the distributor to sell cars direct?

Secondly, what does the dealer agreement say about ownership of good will and are there clauses in the dealer agreement that grant the distributor rights to access customer data other than for the purpose of warranty claims? As we’ll touch on later, dealers can use the collective bargaining class exemption to negotiate fairer terms in agency arrangements and appoint their dealer council to help with that process. As the take up for electric vehicles increases the first likely change to impact on dealers is a loss of revenue in relation to service and spare parts. When you also add the loss to dealers from finance and insurance that’s now impacting on three revenue streams for dealers.

So these are substantial challenges to the revenue streams and ultimately the profitability of dealerships. These need to be considered by dealers as to whether or not in terms of the future trading environment, they can continue to trade or wish, or whether particularly smaller family businesses wish to sell both the dealership and the property assets or just merely sell the dealership and retain the property assets.

In relation to the electrification of motor vehicles, some consultants are also suggesting that there now is a lesser argument to have restrictions on the direct importation by consumers of vehicles on the basis that as vehicles become more generic, the public interest grounds of the safety of vehicles somewhat falls away. So this is another aspect to consider.

Along with the move, I think by some businesses now to kind of focus on used car sales, as in the last couple of years sales have increased, margins have increased on the used car side. However, all is not plain sailing on the growth of used car sales in that we’ll say we’re presently seeing new IT platforms which are becoming disruptive to the industry which are providing for new ways of selling used cars without interaction by dealers with consumers. But in the shorter term we know family businesses with strong connections with their customer base can leverage off that.

So there are indeed challenging times for car dealerships and the necessary takeaway is to consider how such businesses can survive in these challenging times and the need to seek legal and accounting advice as to the structure of their businesses, whether they sell them both the dealership and the assets, or only the dealership and become landlords, et cetera. So I think that’s the main takeaway given these changes.

So firstly, the ACCC introduced a class exemption to allow dealers to collectively bargain with their distributor.

Secondly, certain parts of the code were reformed. There are now limitations and greater controls on capital expenditure requirements directed by distributors. The code also requires new dealer agreements to incorporate six best practice principles.

Lastly, the unfair contract term laws were amended so that more dealers will be in a position to require distributors to negotiate terms in dealer agreements or agency arrangements that may be unfair within the meaning of the law. I think the class exemption for collective bargaining empowers dealers to improve their bargaining position and can be used by dealers and dealer councils to achieve the best practice terms in dealer agreements and also fairer outcomes where, for example, the distributor proposes a new model and also on commercial issues such as financial matters to do with parts inventory, sales and bonus and incentive arrangements, as well as on performance matters. They can also be bargained about such as sales targets and other KPIs, the dealer must comply with.

Secondly, I think the new CapEx provisions in the code present dealers with a significant opportunity. Dealers can now require detailed disclosures from the distributor so they can fully understand the risks, anticipated outcomes, and benefits of proposed expenditure before committing. Dealers can also insist upon the distributor to engage in discussions about those issues to do with the CapEx direction.

Lastly, I think dealers should engage with industry associations to lobby Government on regulatory issues. For example, in my view there should be a push for an enhancement to the collective bargaining exemption to compel distributors to agree to bargain with dealers.

So to summarise, I think now is the time for dealers to take action. The key takeaway message is that there are now a number of resources available to dealers and dealer councils to leverage. In order to maximise their benefit, dealers must be proactive. I think the current regulatory ecosystem for dealers is markedly improved. If dealers do not use these laws and resources as intended then further reform for additional dealer protections may not evolve.

For more information, contact Sotheary Bryant.