BRUSSELS - European carmakers are revamping and slimming their distribution networks as distribution costs mount. They are also preparing for the likely abolition of block exemption - the rules governing car retailing - in 2002.
In the past, many carmakers have invested huge sums acquiring their local distributors from independent groups. Now the pace of those acquisitions has slowed.
Manufacturers are still buying up some of their distributorships from independent companies. Indeed, only half of the European distribution system is currently owned by carmakers. But many of the changes in ownership are now the result of global mergers or acquisitions, such as Ford's purchase of Volvo and BMW's buyout of Rover. This is forcing auto groups to decide whether they need separate distributors for individual brands.
Even the Japanese, whose import sales in Europe are controlled by quotas until the end of 1999, have slowed the pace of buying distributors.
In the future, it may no longer be necessary for carmakers to keep large stocks of vehicles in each country. The creation of common technical standards, an open market and the impending arrival of the euro as a single currency will likely force a change in traditional distribution methods.
Honda Motor Europe has been one of the first makers to look at Europe as a series of regions rather than individual national markets. Honda has created three regional offices to handle its European car distribution, taking the function away from separate national sales companies.
Honda said the creation of these regions would eliminate unnecessary layers and simplify the buying process.
'Manufacturers are concerned and want to rationalize their distribution system to make it cost less and be more effective,' said Philip Wade, an analyst at Harbour Wade Brown, a UK specialist in automotive marketing and distribution.
'Secondly, they want to be sure they don't lose control of it, whatever the outcome of the block exemption review.'
What will happen to the block exemption, the regulation allowing makers to maintain exclusive distribution and sales networks, isn't clear.
The European Commission will prepare a report next year reviewing whether to continue the exemption, which was extended in 1995 until autumn 2002.
In return for this exemption, carmakers agreed not to stop cross-border shopping and to keep the difference in car prices in the European Union to about 12 percent.
But there are increasing doubts that makers have honored their end of the deal. The gap in prices has not decreased. Indeed, it has grown with expensive markets such as the UK and Germany.
And carmakers have breached the cross-border shopping rules. Volkswagen AG was hit with a record fine in 1998 for violations. DaimlerChrysler and Adam Opel AG are facing similar allegations. Investigations are under way alleging Renault and Peugeot broke the rules. A second investigation into VW practices has also been launched. The signals from Brussels are that if block exemption isn't taken away, the rules will be changed anyway.
In the long term, observers say distribution will likely be rationalized in a similar way to parts supply. Instead of distributors taking stock and passing it along to dealers, the European system is increasingly moving toward building cars only to order.
'Direct factory ordering is where we are headed within the next five years,' said Wade.
Reconfiguring the system would require makers and dealers to work more closely together and share marketing and customer information. The growth of the Internet and sophisticated computing systems will allow this to happen, said Wade.
'Europe is pulling away faster than the USA from a system based on dealer stock, and away from dealers to distribution centers,' said Wade.
This won't give distributors more power, but less. 'The search is to see where the costs can be taken out by moving things upstream to European headquarters or downstream to dealers or third parties,' said Wade.
The more immediate distribution revamps will likely be driven by partners trying to find economies of scale. BMW is merging its distribution system with that of Rover. DaimlerChrysler is doing the same with Mercedes-Benz and Chrysler distributors and importers. Chrysler's link of the D/C distribution chain is the weakest. But before the merger, the US maker had already been buying its independent distributors.
Ford is expected to do the same with Volvo and Jaguar distribution systems by rationalizing operations that aren't visible to the end customers.
Nissan could merge its distribution network with Renault's more extensive and company-owned system. This wouldn't mean buying out the independents. Nissan could simply choose not to renew the contracts of its independent distributors.
'All importer contracts are two or three years. Clearly, it's easy to engineer changes of ownership. You don't have to go out and make public offers,' said John Lawson, an analyst with Salomon Smith Barney in London.
The reluctance of Japanese makes to continue gobbling up national distributors is wise, said Lawson. 'It is probably better not to have too much invested in this business at the moment.
It will not necessarily be an advantage to have a lot of assets in national country distribution and national stock. It doesn't make economic sense to have 17 little pools of inventory.'
The Korean makes are further behind in streamlining their distribution networks than either the Europeans or Japanese. Most still use primarily independent distributors.
Daewoo owns its UK importer and sells directly to consumers, eliminating the cost of the middleman. But Daewoo hasn't applied this model elsewhere in Europe where it still relies on the independents.
Another important question is how long the PSA group can afford to run separate distribution systems for its Peugeot and Citroen brands. Peugeot and Citroen's ranges and market positions are very similar. Like Renault, PSA also still owns many dealerships in both France and UK.