Luxury Car Crackdown Shifts To Transparency Drive
The largest in a string of Chinese antitrust investigations this year has begun nearing closure, with word that Beijing regulators are crafting new rules that will require greater transparency from luxury car makers regarding their pricing policies. The new rules would follow a series of massive fines against both luxury automakers and their parts suppliers, who were penalized for charging excessively high prices for after-sales replacement parts and maintenance services.
The call for greater transparency comes as Beijing considers other measures to improve competition in the sector, such as ending the current practice that lets car makers exclusively decide who can perform and supply after-sales parts and services for their vehicles. Beijing should be commended for this approach, which aims to boost transparency and boost competition in the opaque market for auto parts and services.
Other Beijing regulators should take their cue from the consortium of regulators that is pushing for the greater transparency and a more competitive business environment. But at the same time, regulators should move slowly and carefully to craft smart and well-conceived solutions to fix such situations, or risk creating chaos and confusion that could harm both consumers and manufacturers.
The antitrust investigation against luxury automakers first splashed into the headlines 2 months ago, resulting in a wide range of probes against car manufacturers and their parts suppliers. Nearly all the major brands have been probed by the National Development and Reform Commission (NDRC), one of China’s main antitrust regulators, including Audi (Frankfurt: VOWG), BMW (Frankfurt: BMWG), Mercedes (Frankfurt: DAIGn) and Lexus (Tokyo: 7203).
The NDRC began meting out its first penalties earlier this month, including a 248 million yuan ($40 million) fine against Audi and its Chinese partner FAW, and a collective $200 million in fines against 12 Japanese auto parts suppliers. The fines were large but also relatively modest for companies of that size, indicating the regulator was just as interested in fixing the problem as it was on punishing companies that were already operating in a fairly competitive environment.
At the heart of the matter is the business model used by not only the luxury car makers, but also a wide range of other western companies whose customers require large amounts of replacement parts and maintenance services after an initial product sale. That practice often sees manufacturers sell their new products at very low profit margins in order to attract customers.
Once the sale is closed, however, those same companies then earn big money by forcing customers to pay premium prices for replacement parts and services. Companies that engage in similar practices run a wide range, from names like Apple (Nasdaq: AAPL) that charges big premiums for replacement batteries for its iPhones, to Hewlett-Packard (NYSE: HPQ), which charges steep prices for replacement cartridges for its popular printers.
In its bid to improve the situation, the NDRC has reportedly joined hands with about a dozen other government agencies involved in everything from transport to law enforcement to craft a new policy aimed at bringing more transparency to the sector’s pricing policies. (Chinese article) Under the policy, starting next year all automakers will be required to tell buyers exactly what prices they will be asked to pay for various parts and services after a sale.
The regulators are currently consulting with the automakers to create a policy that will be agreeable to everyone, in a bid to ensure the new policy will be practical and effective. Regulators are also reportedly considering other moves to improve the situation, including one that would end the current monopoly that many luxury car makers have on designating who can supply after-sales maintenance services and parts for their cars.
The move to greater transparency is a good one, as it will help consumers to truly understand the long-term costs they face when purchasing a new car, which could influence their buying decisions. Regulators in other industries should follow this lead, and demand more transparency from other companies that currently engage in similarly opaque practices. These run the range from service websites that give preferable placement on their websites to advertisers, to banks that charge service fees without notifying customers.
Solutions like allowing unauthorized parts makers can also help to improve the situation, though such measures need to be carefully considered to avoid creating chaos and danger to consumers by allowing inferior parts and services into the market. With the proper foresight and consideration, all of these tactics can help to improve the business environment for consumers and also manufactures, who will reap higher satisfaction levels from their better informed customers.
Bottom line: A new drive by China’s regulators too boost pricing transparency in the car sector is a better way to boost competition over antitrust probes and fines.
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