By Xu Ping  Yao Lijuan  King&Wood Mallesons’ Mergers & Acquisitions Group

In the wake of recent heightened anti-monopoly investigations and enforcement in the PRC auto industry, there have been a number of new regulations being passed by the legislators particularly in the auto distribution and aftermarket sector. It is envisaged that a new regulatory framework over auto distribution and aftermarket may take shape in the near future.

1. New Legislative Developments

(1) Abolishment of the SAIC Record-filing of Auto Brand Authorized Dealers

On July 31, 2014, the State Administration for Industry and Commerce (the “SAIC”) published an Announcement on the Abolishment of Implementation of Record-filing of Automobile General Distributor and Automobile Brand Authorized Dealer (“SAIC Abolishment Notice”). According to the SAIC Abolishment Notice, the record-filing of the Automobile General Distributor and the Automobile Brand Authorized Dealer with competent SAIC, which has been implemented for almost a decade, will be abolished starting from October 1, 2014. Meanwhile, in the business license of an automobile distributor, the description of its business scope will be changed from “XX brand automobile distribution” to a more generalized description “automobile distribution”.

Once the SACI Abolishment Notice becomes effective, it is expected that the auto dealer will be permitted to distribute multiple brands of automobiles in China. However, since there has been no amendment to the Implementation Measures for Administration of Automobile Brand Distribution, jointly issued by Ministry of Commerce (“MOFCOM”), National Development and Reform Commission (“NDRC”) and SAIC in 2005 (the “2005 Brand Distribution Measures”), the auto dealers are still required to obtain authorization from the specific auto manufacturers or auto general distributor to distribute cars pursuant to the 2005 Brand Distribution Measures despite the SAIC Abolishment Notice. Hence, the abolishment of record-filing with SAIC and the description change in the business scope will not be enough to change the status quo and reshape the current legal landscape.

(2) Independent Automobile Maintenance and Repair Market

On September 18, 2014, the Guiding Principles on Promotion of Transformation and Upgrading of Automobile Maintenance and Repair Industry was jointly issued by NDRC, MOFCOM, SAIC and other relevant government authorities (“Guiding Principles”). The Guiding Principles emphasizes upon the establishment of a fair and transparent auto aftermarket in China and explicitly supports the fostering of brand names in the auto aftermarket. The Guiding Principles proposes, for the first time, the concept of “same quality spare parts” with the aim to remove discrimination against spare parts that are not manufactured by the auto manufacturer or authorized spare parts supplier. This signifies the policy trend and government attitudes toward the segregation of the automobile repair aftermarket from the auto sales market and to eliminate the monopoly by the authorized dealers in the auto aftermarket sector. The highlights of the Guiding Principles include:

  • Protection of consumer’s right to repair

The auto manufacturers (including auto importers), their authorized dealers and repairers cannot abuse the use of automobile maintenance clause to interfere with or restrict the consumer from choosing repairers or repair services.

In practice, in order to encourage the distribution of the manufacture-made spare parts, the auto manufacturers and brand authorized dealers may request the consumers to procure repair services from the brand authorized dealers or authorized repairers in the contracts; otherwise, the auto quality warranty may be void. The new principles lay out the legal basis for consumers to seek alternative auto repair services outside the dealership system authorized by the auto manufacturers.

  • Public disclosure of auto repair technology information

Starting from January 1, 2015, the auto manufacturers are required to publicize the auto maintenance and repair technical information of newly launched cars to both the authorized dealers and independent repair operators (including repair companies, repair equipment manufacturers, repair information publications and repair training institutions), without any discrimination or any undue delay, through a convenient information channel and at a reasonable price; if the maintenance technology information is not duly publicized within 3 months of the new car launch, the Automobile Manufacturer and Automobile Products Announcement and 3C Certification for the new car will be revoked. The product manual provided to consumers must also specify the automobile type verification certificate information, the emission maintenance technology specifications, the manufacturer, types and shelf life of emission control key spare parts.

In addition, the latest maintenance and repair technical information of all autos listed on the MIIT Automobile Manufacturer and Automobile Products Announcements prior to December 31, 2015 are also required to be publicized.

The Ministry of Transport will take lead in formulating the Implementation Rules on the Auto Repair Information Disclosure to provide further guidance on the disclosure of repair technology information.

The compulsory disclosure of auto repair technology information is also prevalent in European Union and United Sates of America as a measure to prevent monopoly by auto manufacturers. Due to serious safety and maintenance concerns with regard to automobiles, if the auto repair technology information is not made publicly available, it will essentially weaken the creditability of the repairers which are not authorized by the manufacturers. The public access of auto repair technology information makes it possible from the technical perspective for the independent repairers to compete with the authorized dealers or repairers.

  • Supply of auto spare parts

Both the manufacturer-made parts and the independent-made parts under self-owned brands should be made available to the auto aftermarket. The authorized spare parts distributors and the authorized maintenance companies are permitted to re-sell the manufacturer-made parts to the non-authorized repair companies and consumers. In addition, all repairers and consumers shall have the right to use the same quality spare parts.

Under the new auto spare parts supply policy, the current barrier of free flow of manufacturer-made parts between the authorized dealers and the independent repairers will likely be eliminated. A fair market for “same quality spare parts” produced by companies other than auto manufacturers or their authorized spare parts suppliers will be formed. This will further promote competition between manufacturer-made parts and the “same quality spare parts” as well as competition between the authorized dealers and the independent repairers.

2. Background of Legislative Changes and Future Outlook

The auto brand authorized dealership was established under the Automobile Industry Policy issued by the National Development and Reform Commission (“NDRC”) in 2004 as well as 2005 Brand Distribution Measures. A brand authorized dealer or a 4S store integrates the functions of new car distribution with after-sales services, including sales, spare parts, service and surveys. More importantly, the authorized dealer operates in consistent with the requirements of auto suppliers. In the initial stage, the brand authorized dealership has played a positive role in establishing a nationwide specialized automobile distribution network and ensuring the automobile maintenance service quality. However, due to lack of restrictions on the auto manufacturers’ power and regulatory supervision, the authorized dealership has embedded defects in granting excessive power to the auto manufacturers.

Under the brand authorized dealership, the automobile manufacturer or the general distributor could decide whether a dealer can distribute its brand of automobiles. Article 6 of the 2005 Brand Authorized Measures stipulates that the network planning of a single auto brand shall be formulated and implemented by either the auto manufacturer or the auto general distributor. In fact, most automobile manufacturers often use its affiliate as the auto general distributor. The authorized dealers are explicitly required to strictly comply with the authorization contracts with the auto manufacturer or general distributor. More importantly, the 2005 Brand Authorized Measures request the auto manufacturer or general distributor not to supply auto resources to companies which are not authorized brand dealers or which do not satisfy the operation requirements. Through the manufacturer authorization and supply chain control, the auto manufacturer has substantial influence and control over the distribution policies, including the sales price, distribution geographic region and source of spare parts and components. This has particularly severe problems such as price inflation on autos and spare parts.

Another immediate effect of the 2005 Brand Authorized Measures is that the authorized dealer can only become an exclusive distributor of a single automobile manufacturer. This leads to repetitive construction of 4S stores, which became waste of resources particularly in the increasingly populated cities in China with the “vehicle purchasing restrictions.”

In the aftermarket market, since the auto manufacturers are required not to supply auto resources to non-authorized companies, the auto manufacturers will exclusively supply the spare parts produced by manufacturers or authorized parts producers to authorized dealers. The authorized dealers can only procure spare parts from manufacturers’ authorized channels. This leads to pricing control by the manufacturers over spare parts and further impedes competition in the market by from spare parts suppliers which are not authorized by manufacturers. Thus, the spare parts and services offered by the authorized dealers are generally more expensive than those offered by the independent repairers. After the warranty period expires, the higher pricing of the spares parts and services offered by authorized dealers restricts their ability to compete with independent channels for aftermarket services. On the other hand, since the manufacture-made spare parts are circulated within the authorized dealer system, the independent repairers have limited access to genuine parts and technical information needed for repair and maintenance and therefore cannot guarantee quality services. In the end, customers are the ones to suffer as they have to choose either the higher pricing quality services from the authorized dealers or the cheaper services offered by independent repairers without quality assurances.

Ever since the adoption of the PRC Anti-Monopoly Law in 2008, the 2005 Brand Distribution Measures have been criticized as granting powers to auto manufacturers to exercise vertical monopoly over auto distributors and aftermarket services. The amendment to the 2005 Brand Distribution Measures has been repeatedly mentioned in a number of policy statements. By way of illustration, in the Opinion on Promotion of Automobile Consumption jointly issued by MOFCOM, AIC, Ministry of Industry and Information Technology (“MIIT”) and other relevant government authorities in 2009, it explicitly stated that the revision to the 2005 Brand Distribution Measures should be initiated as soon as possible, and the automobile distribution models should be diversified in order to establish a more cost-effective automobile distribution network. The Guiding Opinions on the 12th Five Year Development of Automobile Distribution issued by MOFCOM in 2011 reiterates the same.

Although the SAIC Abolishment Notice, by itself, is insufficient to change the existing brand authorized automobile dealership, it is generally viewed as paving the way for the envisaged revamp of the existing automobile distribution regulatory framework. The Guiding Principles on the Auto Aftermarket issued by almost all regulators in the auto industry can be viewed as the first substantial step in the auto industry policy reform. The compulsory disclosure of the automobile repair technology information and the free flow of the manufactured spare parts enable the formation of an auto aftermarket independent from auto manufacturers possible.

It still remains unclear how the 2005 Brand Authorized Measures will be revised. There are debates over whether the authorized dealership should still remain as the core system with restrictions on the powers of auto manufacturers or whether a substantial change should be made to the authorized dealership. One point is certain, after the reform, the auto manufacturers’ control over the distributors and aftermarket service providers will be loosened, and a more transparent and fair competition market will be formed in the auto sales and service sectors. The market players in the automobile industry should prepare to respond to the drastic change in the market. Auto manufacturers, despite its strong position in the market, will need to start reconsider its distribution model, pricing strategy, spare parts supply strategy and regional planning. The auto dealers, to survive in this highly competitive market, will need to build up its strengths and improve its services. In the auto aftermarket, opportunities for emerging big names in auto repair and maintenance are on the horizon. We will keep track of any new change in the legal landscape of auto industry.