III PRICE DIFFERENTIALS
11. The European Commission's figures are based on
the recommended retail prices submitted by European and Japanese
car manufacturers of their best selling models. Prices are adjusted
for equipment differences and are given in both local currency
and in ECU. In May 1993, after the UK had left the ERM and sterling
had depreciated, the UK was one of the lowest-priced car markets;
by May 1994 the UK was one of the highest priced markets;
by May 1996 after sterling had fallen once more, the UK had the
lowest prices for 16 of the 78 models surveyed, second only to
As sterling strengthened between 1995 and 1997, the relative UK
prices of many of the cars in the survey increased. By November
1996 the UK was the most expensive for 15 of 75 models,
by May 1997 the UK had the highest car prices for 54 of the 75
and by May 1998 that figure had risen to 60 out of 74.
12. The Commission determined that, to be tolerable,
net price differences between Member States (expressed in ECU)
should not exceed 12%, or over a period of less than one year,
18%. This was expressed in the Commission's Notice concerning
the original regulation and continues to apply under the new regulation.
As CA told us "we have seen sustained differences between
the United Kingdom and certain other European countries of 30,
40 and 50%".
The current price differentials between the UK and other EU
countries are far beyond those formally regarded by the EC as
13. There are factors that can influence the
validity of such price comparisons as well as factors that can
account for any inherent differences. The two main factors
that not only influence comparisons but also are put forward to
account for the price differentials are exchange rates and taxation
levels. Other reasons which may account for the high prices UK
consumers currently pay compared to other EU countries include:
manufacturers' policies, competition and discounts, fleet cars
and car specifications, the second hand car market, and the existence
of the Voluntary Export Restraint.
14. Exchange rates and relative currency strengths
have an obvious impact on price comparisons and differentials.
In the November 1996 report, the European Commission stated that
the new position of the UK as one of the most expensive places
to buy a car was "not only due to price increases by manufacturers
but primarily to the strong revaluation of the British pound".
The SMMT told the Committee that the "prime reason that the
prices in the UK appear high compared to Europe is that of currency
movement" and that actual car prices had risen by only 2.5%
in two years. 
However, CA stated that "50 % difference in the price of
a car here and Ireland, both right-hand drive markets, cannot
simply be a matter of exchange rates".
They also told us they have been looking at car issues for a considerable
time and that " fifteen years ago [we] railed against the
high prices that the United Kingdom were paying for their cars.
Unfortunately, we have seen very little change since then".
Exchange rates have varied considerably during that time.
15. In the November 1997 report the Commission stated
that "the price of some models has been lowered in the United
Kingdom....this is an appropriate response to the continuing strength
of sterling. However, most manufacturers have either not adjusted
their prices, or have, in fact, raised them for some models, thus
continuing to realise 'windfall' profits".
In May 1998 those cars with lowered prices on the British market
were the Peugeot 106 (by 7%), the Ford Escort/Orion (by 11%) and
the Renault Mégane (by 16%).
The argument that the UK's position as the most expensive place
to buy cars is primarily due to the strong pound is not substantiated
by the actions of the car manufacturers. The Chairman of Vauxhall
was recently reported to have admitted that manufacturers "had
not cut their prices as fast they could after they had gained
from increases in sterling".
Elementary economics suggests that in a competitive market a strong
currency means cheaper imports. Despite the fact that the UK imports
over 60% of its new cars,
there does not seem to have been any substantial drop in prices.
Either the market is not competitive or the strong pound is not
the main reason for the price differentials. As early as 1984,
the European Communities Committee during its consideration of
the draft block exemption regulation noted that "the suppliers
of  imports take advantage of the higher prices ruling in the
United Kingdom. They do this by following the prices set by the
market leader rather than using their cost advantage to charge
lower sterling prices".
Whilst we would not expect car prices to rise and fall directly
in line with exchange rates, the fact that consumers are not benefiting
from lower prices for imported cars indicates that relative currency
strengths do not account for underlying price differentials.
16. It is important to take into account the differing
levels of taxation on new car purchases in different EU countries
when making price comparisons. The Commission's figures specifically
exclude those countries (Denmark, Greece and Finland) where particularly
high taxation is applied. As the NFDA pointed out "a high
tax tends to amplify differences in prices quite dramatically".
Taxes levied at 57.6% in Ireland as opposed to 17.5% in the UK
do alter the Commission's figures.
The SMMT list taxation, along with exchange rate fluctuations,
as one of the underlying causes of price differences stating that
"in low volume markets where taxes are high manufacturers
set local prices to support sales and dealer viability in the
As the NFDA put it "Consumers in countries with high car
taxes are being subsidised by consumers in countries with low
In countries where high taxes are in place, list prices for cars
are lower than in the UK because consumers in those countries
would not buy a car priced at UK pre-tax levels. The SMMT, along
with ACFO, suggest that tax harmonisation is a remedy for the
problems of high price differentials. The ramifications of such
a move would, of course, stretch well beyond car price differentials.
We are disturbed to have discovered that consumers in lower
tax countries such as the UK are, as a result of manufacturers'
policies, paying higher prices for new cars than their neighbours
so that the national treasuries of those higher taxed countries
can be assured of more revenue.
17. There have been some suggestions that the higher
prices faced by UK consumers are simply due to the manufacturers
themselves. As CA put it, "the primary bodies responsible
for the situation are the manufacturers, that is fairly clear"
due to their ability to "restrict the market".
The Commission stated in its first price comparison of May 1993
that "it is not possible to distinguish between the purely
mechanical effects of the devaluations on the prices in ecus and
the consequence of manufacturers' commercial policies".
ACFO differentiate between factors which affect list prices and
those which affect transaction or invoice price levels. They state
that, in their view, "the largest single factor leading to
price differentials at list price levels is the manufacturers'
aspirations for its model range across different markets".
During oral evidence the NFDA told us "we are, we believe
... subsidising other export markets" and "you will
find products produced in this country, landed in that country
at a price well below that which is in place in this country.
This is because the manufacturer has chosen to subsidise that
market to obtain market share... In turn, they look at this market
and, over a number of years, have succeeded in keeping prices
As they stated in written evidence, " we have a perfect scenario
for higher than average prices, as manufacturers seek to balance
volume and profit opportunities across the whole of the EC".
Whilst manufacturers will, of course, price goods according
to a range of variants such as market share and customer demand,
we are concerned that UK car buyers appear to be suffering as
a result both of car manufacturers wishing to increase their market
share elsewhere, and of manufacturers' confidence, well-founded
or not, that UK new car buyers will be willing to go on paying
over the odds.
Competition and discounts
18. The motor vehicle industry is characterised by
over-supply. It is suggested that there is potential manufacturing
over-capacity of 5 million units per year worldwide and a "constant
tendency to produce rather more than is truly required to satisfy
Nonetheless, it is still claimed by both car dealers and manufacturers
that it is an "ultra competitive environment".
The opposite view is held by CA who stated "you do not see
enormous price competition in this market".
To understand the divergence of opinion on the issue of competitiveness,
it is important to distinguish between inter-brand and
intra-brand competition. Whilst the number and variety
of models available points to the existence of inter-brand
competition (ie between manufacturers of different brands), the
tendency towards consolidation creating fewer, but larger, dealer
territories has led to a reduction in intra-brand competition
(ie between different retailers of the same brand).
19. The car dealers maintain that there "are
more brands represented in the United Kingdom than any other market"
with around 55 brands and well over 1,500 variants in the price
They also argue that new products coming on to the market are
generally "being brought in by manufacturers at very competitive
prices, probably with more specification, no increase and maybe
in some cases a decrease".
However, the operation of the current arrangements means that
the manufacturers set the wholesale and list prices leaving very
little margin for car dealers. Over the years, dealers' margins
have been systematically squeezed, leaving them with "arguably
the lowest margins in Europe".
The NFDA state the benefit from this is "consistent national
CA's view is more critical stating that retailers are not free
to sell cars at the prices they wish as "undue pressure [is]
put on them to sell cars at the price that the manufacturer wants
20. ACFO assert that " a single retail customer
can normally negotiate substantial discounts for a single transaction-provided
he has no trade in".
However, CA describe "a culture of discounting" that
is actually an "illusion".
The dealers find it difficult to offer discounts because they
are being "squeezed" and this "creates a structure
which stops consumers being able to negotiate a good deal".
Any discounts that are offered to consumers will be constrained
by the margin of the car dealer, normally around 10%.
The control exercised by manufacturers over dealers' margins
has taken the possibility for varying the invoice price out of
the dealers' hands. The nature of the relationship between
manufacturers and dealers means that the manufacturers have dominant
power over retail prices.
21. Fleet cars account for a substantial percentage
of the new car market in the UK. One of the MMC's principal findings
in 1992 was that the company car was "far more significant"
in the UK than in the rest of Europe.
The NFDA argue that the fleet buying power means fleet operators
are able to attract discounts of "20% and 40%"
and that "the retail customer was subsidising the discounts
to the fleet and corporate market...this fact continues to be
the principal reason behind the current price differentials".
They reiterated in oral evidence "we suggest most strongly
that retail customers who have to pay closer to high list prices
have been subsidising the large corporate fleet buyer".
However, ACFO stated in their evidence that a 30% to 35% discount
from a list price would be considered "exceptional"
even for a very large fleet and the "majority of fleet operators
buy the majority of their vehicles at discounts ranging from between
5% and 11%".
They deny that most fleet buyers are regularly receiving large
discounts, while conceding that "a small number of very large
fleets, buying several thousand vehicles from a single source
each year, command significant discounts".
22. Large buyers are also increasingly dealing directly
with manufacturers, thus reducing the role of the car dealer to
that of facilitating the distribution and delivery of the vehicles.
ACFO state "there are occasional very exceptional deals,
normally associated with wholesale clearances of manufacturers'
The overcapacity in the market means that if manufacturers acquire
a large stock of unsold cars then these are "distressed marketed".
A fleet operator who is willing to accept large number of these
cars "thereby relieving the manufacturer of an inventory
problem, would expect to be rewarded for this through discounts".
ACFO also state that other production-surplus vehicles are registered
to the dealer or manufacturer, thus appearing to be fleet purchases,
and then are sold as 'used' or 'delivery mileage only' cars. This
puts the UK consumer "at no disadvantage to the typical UK
In a market characterised by over-supply, such sales are to be
23. The MMC report found that the size of the company
car market has "created a class of professional buyers who
are able to secure greater discounts than are generally available".
The report went on to say "The higher prices paid by the
private consumer finance the discounts given to company car buyers".
Given the size of the fleet market, it would seem inevitable that
fleet buyers will be in a position to negotiate substantial discounts:
that the manufacturers seek to recover from other sales some of
the profit foregone: and that as a result consumers find themselves
paying considerably higher prices.
24. Both the SMMT
and ACFO state that UK customers show a consistent preference
for high specification vehicles. ACFO refer to a "powerful
body of evidence" that Japanese marques made great inroads
in the UK market because they were "fitted with all the bells
Common sense would dictate that if Japanese cars had all the 'extras',
were reliable and competitively priced, they would do well in
any market-price and reliability are likely to be key determining
factors despite the assertion that on mainland Europe cars tend
to be regarded as more utilitarian.
The NFDA believe that the manufacturers' desire to gain a greater
share of the fleet market was behind car upgrades, forcing greater
competition within specifications. As they put it "the first
manufacturer to include sun roofs within in their standard specification
gained market share over those without. Over a period of years
we saw the addition of sun roofs, alloy wheels, metallic paint,
fog lights and now air conditioning, added in an attempt to entice
more custom from 'user choosers'".
These items were extended across the manufacturers whole range
and list prices were increased. It is suggested that "fleets
paid no more" and the final cost burden fell on the domestic
consumer. "It is very clear that the retail customer was
confronted with a higher list price with little or no scope for
In 1992 the MMC concluded that the power of the company car buyer
was such that it had a distorting effect on the market in that
it encouraged high specifications and was one of the main reasons
why United Kingdom cars were so much more richly specified than
their continental equivalents.
25. In their evidence to us, both car dealers and
car manufacturers cited residual values as a key concern, arguing
that lower list prices for new cars in the UK would have an adverse
effect on the used car market. The SMMT state that part exchange
prices have traditionally been higher in the UK than elsewhere
and that "manufacturers are keen to protect residual values,
to maintain and improve their market competitiveness and promote
affordability by reducing the cost to change to a new car".
In oral evidence they told us that part of their pricing policy
was to "protect" second-hand car prices and that they
are "responsible for all the customers who buy our products
in terms of giving them service throughout the ownership experience.
That includes making sure we, as manufacturers, do not do anything
to undermine the fundamental value of their vehicles".
Whilst residual values are important, particularly for those
who wish to trade in their existing car for a new one, and
whilst lower new car prices might indeed lead to lower second-hand
car values, this in itself is not a justification for high car
prices. Consumers are not the ultimate beneficiaries of high prices
in the second-hand car market.
26. The current structure of the market means that
whilst the car dealers may lose out on large sales between the
manufacturer and the fleet operator, they may gain through the
second-hand market when fleet cars are auctioned. The NFDA told
us that "the fleet operator wishes to dispose of those vehicles
in very large quantities in a way a member of the public could
not do" and that "our aim is to buy those vehicles in
large quantities and distribute them round our dealerships for
onward sale at very competitive prices".
Voluntary Export Restraints
27. In order to protect UK manufacturers, Japanese
exports of cars to the UK have been the subject of Voluntary Export
Restraints since the end of 1975. The intention was to limit Japanese
new car imports to about the share of the UK market that they
held in 1975, ie around 11%.
The agreement, negotiated between the SMMT and Japanese Automobile
Manufacturers Association (JAMA) (and with the support of the
meant that over the years 1976 to 1990 the Japanese penetration
of the UK new car market has fluctuated between 9.3 and 11.9%
The restriction fell to around 7.3% in 1998,
to allow for Japanese cars manufactured in the UK. Subaru stated
in their Memorandum to the Committee that they "continue
to be severely hampered by continuing and tightening restrictions
on the import of Japanese vehicles". The restriction is due
to be lifted at the end of 1999 although Subaru are sceptical:
"Official statements that the quota system will end in 1999
are treated with considerable scepticism. We have heard this all
28. Four other European Member States have national
restrictions on new car imports from Japan. In France the Japanese
share of the market is limited to 3%, in Italy a quota agreement
means that overall, Japanese penetration is less than 1%, in Spain
the quota amounts to less than 1% of the market and there is a
small quota in Portugal.
The MMC looked at the situation in its 1992 report and concluded
that "VERs on imports of Japanese cars are the principal
restriction of competition in new car sales in the United Kingdom,
and the main factor in prices being higher than they otherwise
should be, through reduced competition and because there is less
incentive for Japanese suppliers to cut prices or sell cheaper
models as the number of cars they can export is restricted".
We noted with surprise during evidence from the Secretary of
State for Trade and Industry on 4 November 1998 that the question
of the expiry of the Vertical Export Restraint had not been addressed
However, we welcome the statement in the Pre-Budget Report of
3 November 1998 that the expiry of the VER was "fully supported
by the Government",
and the subsequent confirmation of the Secretary of State's support
in a note to the Committee and in a written answer.
32 IP/93/545 Back
33 IP/94/704 Back
34 IP/96/772 Back
35 IP/97/113 Back
36 IP/97/640 Back
37 IP/98/652 Back
38 IP/95/768 Back
39 Q7 Back
40 IP/97/113 Back
41 Q88 Back
43 Q1 Back
44 IP/98/154 Back
45 IP/98/652 Back
Guardian 12/11/98 Back
p60, para 11 Back
Servicing and Pricing of Motor Vehicles. Twenty-Seventh Report
from the European Communities Committee. HL302 1983/4,
pxi, para 19 Back
49 Q46 Back
p37, paras 38 - 39 Back
p35: Ev, p37 Back
53 Q33 Back
54 IP/93/545 Back
p87, para 19 Back
56 Q38 Back
58 Ibid Back
p18: Ev, p33 Back
60 Q24 Back
64 Ibid Back
65 Q2 Back
p86, para 10 Back
67 Q23 Back
68 Ibid Back
69 Q57 Back
Report, New Motor Cars. Volume 1, p2, para 1.7 Back
71 Q57 Back
73 Q37 Back
p86, para 8 Back
75 Ibid Back
p86, para 9 Back
77 Ibid Back
p86, para 10 Back
Report, New Motor Cars. Volume 1, p2, para 1.7 Back
p33, para 6 Back
p86, para 11 Back
82 Ibid Back
84 Ibid Back
Report, New Motor Cars. Volume 1, p2, para 1.7 Back
p34, para 9 Back
- 100 Back
88 Q77-78 Back
MMC Report, New Motor Cars. Volume 1, p368, para13.22 Back
MMC Report, New Motor Cars. Volume 1, p368, para13.23 Back
MMC Report, New Motor Cars. Volume 1, p151, para 9.9 Back
93 Ibid Back
Report, New Motor Cars . Volume 1, p152, para 9.17 Back
Report, New Motor Cars . Volume 1, p5, para 1.19 Back
Evidence 4/11/98 Q14 Back
- Budget Report . HM Treasury,
November 1998, p43 Back