Car prices head for the crusher

Cheaper Japanese imports will join a market depressed by over- supply and threatened by the internet, writes David Brierley

The news last week that Britain may soon be awash with cheap cars from Japan signals that the long-predicted car price war may finally be here. The deregulation of "grey imports" announced by Stephen Byers, Secretary of State for Trade and Industry, comes on top of a glut that has already forced down prices. There will be more pressure on car prices from internet retailers.

Mr Byers' deregulation will allow British consumers to import more right- hand drive cars from one of the world's cheapest car markets. While the move has been criticised as being too slow, all restrictions will be swept away in January 2001. Meanwhile, the informal agreement between Japan and the European Commission on car-import quotas lapses next January. This will allow successful marques such as Honda and Subaru to bring more vehicles into this country.

"Consumers will see more Japanese cars and a wider range of vehicles," said Professor Garrel Rhys of Cardiff University. This will increase further the pressure on prices in an industry confronted with overcapacity, saturated markets and the desire from consumers and politicians for a better deal.

Hefty discounts on new models are already widespread. Ford last month cleared out 10,000 unsold Mondeos by offering a pounds 3,000 discount. Vauxhall and Peugeot are offering pounds 1,000 off leading models. At the same time, there is a glut in the second-hand market. Dealers are registering new vehicles and then selling them, at a significant discount, as used. Around 15 per cent of last year's 2.2 million new car sales may have taken place this way.

Professor Rhys said: "We are in the world of a price war. The industry is trying to stop it spreading. It is selling cheaply through discounts and pre-registrations rather than by cutting the list price."

The car industry is consolidating through deals such as Ford's acquisition of Volvo and Kwik-Fit. Profits growth can only come from increased efficiency. Ian McAllister, chairman of Ford of Britain, said: "Prices are already lower than they were in real terms. And I can see no increase in car prices for the foreseeable future."

Meanwhile, list prices for cars will have to fall, particularly in Britain. Protectionism has kept prices high in Britain and across Europe, benefiting manufacturers at the expense of the consumer. For decades, car prices have been significantly lower in North America and Japan than in Europe.

High prices do not help the reputation of the industry. Because of high list prices, consumers must haggle for a fair deal with salesmen paid on commission. Car-buying resembles bartering for a camel. Even the industry admits this will have to change.

Kevin Turnbull, chief executive of autobytel.co.uk, the car internet retailer, said: "We think the consumer has had a raw deal. There is a big fear of being ripped off."

Politicians are starting to act. In December, the Trade and Industry Committee issued an attack on prices charged to British customers. It remarked that 60 out of the 74 most popular models in Britain were more expensive here than on the Continent. A Ford Mondeo costs 58 per cent more here than it does in Spain.

In March, the Office of Fair Trading announced that car prices at many dealers were dictated by manufacturers. Christopher MacGowan of the Retail Motor Industry Federation said: "Prices that are set by manufacturers do have undue influence over dealers."

John Bridgeman, director general of the OFT, said: "It is clear that the market isn't working properly." The matter is now being investigated by the Monopolies Commission.

The industry is not only under attack in Britain. German consumers, who enjoy lower prices than the British, have also discovered that cars are cheaper elsewhere in Europe and started buying cars when on holiday in Portugal and Italy. Manufacturers have tried to stop such behaviour.

In January, the European Commission fined Volkswagen a record pounds 69m because its Italian dealers were not being allowed to sell Golfs and Passats to Germans. Now the Commissioners are investigating DaimlerChrysler, whose dealers in Germany, Belgium, the Netherlands and Spain have reportedly been unable to sell for export. Renault also faces an investigation after its Irish dealers refused to sell cars to British customers.

The European Commission has set out to eliminate price differentials on cars across Europe. To some extent, it has been frustrated by very high national taxes on new cars registered in the Netherlands and Denmark. Nevertheless, the so-called "block exemption" for car dealers remains clearly in the commission's sights. This exem- ption frees authorised dealers from competition law and in effect protects the geographic monopoly of a dealership. This enables the manufacturer to sustain list pricing.

The Trade and Industry Committee has called for the exemption to be revoked. The Commission is not likely to disagree. Professor Rhys thinks this would rapidly create a free car market on the Continent. He said: "The block exemption stops arbitrage between markets. Eliminating it would allow movement between markets across the continent. With the euro allowing clear signals, price harmonisation would happen in the very short term."

All volume car producers would lose out. But those who exploit strong positions in national markets such as Volkswagen, Ford and Fiat, would be especially sensitive to harmonised prices. General Motors has a long- standing belief in the inevitability of a European market in cars, so that its price differentials are not as great as those of its rivals.

Some price harmonisation has taken place since 1992 when the commission first started producing detailed information on car prices across Europe. Professor Rhys commented: "Forty per cent of the price harmonisation has taken place. Sixty per cent is to come."

Specialist manufacturers such as BMW do not have wide price variations across European markets. But they face the problem of sustaining the all- important price premium to the mass-market producers whose prices are declining. The premium is hard to justify when mass-market cars are becoming more luxurious but not more expensive. New models such as the Volkswagen Golf, Vauxhall Astra or Ford Focus have been launched with higher specifications than predecessor models, but not at a higher price.

Air bags, anti-lock brakes, power steering and air conditioning are becoming the norm. This is one way that manufacturers have chosen to pass on improved efficiency to the consumer. The next step is to reduce list prices.