4.1
This chapter explores the power imbalance between car manufacturers and car dealers, including the practices employed by manufacturers in their commercial relations with dealers, and considers issues raised by stakeholders as part of the extended terms of reference.
The power imbalance between manufacturers and dealers
4.2
As exemplified by the General Motors-Holden (GM Holden) withdrawal, the inherent power imbalance between manufacturers and local new car dealers was the dominant theme of the inquiry. The extent to which any power imbalance exists, and the need for additional legislative and regulatory intervention to address it, was disputed by submitters to the inquiry.
4.3
Manufacturers and their representatives considered that there was no power imbalance, arguing that car dealers are typically large and sophisticated businesses who often control access to prime real estate to showcase manufacturers' products. For example, submissions from the Federal Chamber of Automotive Industries (FCAI) rejected the notion that there is a significant power imbalance between car dealers and car manufacturers that requires further regulatory intervention. Indeed, the FCAI argued:
The often quoted but seriously misleading statements about significant power imbalances in the sector are simply not true. Most dealerships are very significant commercial enterprises, with significant financial, legal and business acumen to call upon in considering the acceptance of a new or renewed dealership agreement. FCAI would like to stress the positive aspects of the relationship between dealers and distributors. It is by far and away a more positive relationship than is portrayed by many. The relationship is symbiotic and supportive.
4.4
Similarly, Toyota Motor Corporation Australia (TMCA) submitted that:
Toyota is dedicated to ensuring best practice is exercised across our dealership network to deliver the best experience for our dealers and our customers. The National Toyota Dealer Association (NTDA) was established to ensure a collaborative relationship between the dealership network and Toyota while respecting the requirements of the Competition and Consumer Act 2010 (Cth).
4.5
Conversely, many car dealers considered that there was an imbalance in bargaining power significantly favouring manufacturers, given that dealers are presented with franchise agreements on a 'take or leave it basis', and manufacturers retained considerable discretion to impose obligations and to terminate or not renew such agreements.
4.6
For example, the committee heard evidence from Mr Richard Bennett, Managing Director, Magic Enterprises, who argued:
There is a definite power imbalance between the car manufacturer and the dealer. In a large amount of cases there is a professional relationship that works well and benefits the manufacturer, the dealer and the customer. When this is broken, or there is a different direction to be taken, the manufacturer holds all the cards and can have little regard for the dealer or its customers.
4.7
Tellingly, the large number of submissions and documents the committee received on a confidential basis appeared to be symptomatic of relationships where dealers were fearful of retribution for making public statements that were critical of manufacturers.
4.8
The Department of Industry, Science, Energy and Resources, and the Department of Education, Skills and Employment (the departments) acknowledged in their joint submission that dealership agreements between manufacturers and dealers shared 'features common within franchising, namely the power imbalance and information asymmetry which favours franchisors'. The departments observed that the power imbalance between franchisees and franchisors was 'also true for dealings between car dealers, as franchisees and car manufacturers, as franchisors, within new car retailing'.
4.9
Similarly, Mr Rami Greiss, Executive General Manager, Enforcement Division, Australian Competition and Consumer Commission (ACCC), commented that '[w]hile it's difficult to generalise across such a broad sector, I think experience suggests that there is often a power imbalance between franchisors and franchisees, in favour of franchisors'.
4.10
Indeed, the ACCC market study into the new car retailing industry in 2017 found that:
Certain issues raised by dealers in relation to the imbalance of power in their commercial arrangements with manufacturers may require further examination.
4.11
Many of the issues raised in the ACCC market study, such as minimum tenure and capital investment requirements, reasons for non-renewal, changes to commercial arrangements and reimbursement for remedies, were also raised by stakeholders to this inquiry.
Concerns regarding practices employed by manufacturers
4.12
This section addresses issues raised by stakeholders about the practices employed by manufacturers in their commercial relationships with dealer groups in Australia. This included specific concerns around the terms and conditions contained in dealership agreements, including:
investment required and tenure provided;
termination, non-renewal and change of distribution model;
performance requirements;
requirements around warranty claims;
unfair contract terms; and
goodwill and data ownership.
Investment required and tenure provided
4.13
The committee heard that most manufacturers require dealers to commit to significant capital expenditure as a condition of their dealer agreements.
The level of investment can vary depending on a range of factors, including the nature of existing dealer facilities and the requirements of the manufacturers.
4.14
Some manufacturers pointed out that they worked closely with their dealers to ensure the level of expenditure was appropriately linked to the length of an agreement. For example, TMCA noted:
In 2018 Toyota developed a 'Facilities Calculator' to assist dealers in calculating the pay-back term for the required capital investment in line with the term of the dealer agreement. Dealers are also provided with a facilities manual that outlines the minimum standards for a Toyota dealership, including details around layout and merchandising, down to the specific materials that will be required.
4.15
The National Toyota Dealer Association (NTDA) supported TMCA's claims that it had adopted a 'transparent process' in relation to its requirements for dealers to invest in upfront and/or continuing improvements to facilities and equipment. The NTDA also noted that TMCA 'sets out the expenses, expected outcomes, return on investment and payback period' and it also conducted a 'financial feasibility study for the benefit of the dealer before significant expenditure has commenced'.
4.16
Other manufacturers indicated that their process for requiring dealers to undertake capital investments was also transparent. Mercedes-Benz Australia/Pacific (MBAuP) submitted:
MBAuP has high-quality standards. Prior to joining the network, dealers are made aware of the requirements to represent our brand. Strategies are shared with dealers to ensure they are relevant and realistic, and MBAuP supports dealers to adapt their operations to create efficiencies and meet their objectives.
4.17
Ford Australia also highlighted that it worked closely with its dealers in relation to any planned expenditure under its dealer agreements:
We clearly outline, and discuss, any planned expenditure required with proposed dealers before an agreement is signed. The outcomes are then outlined in the dealer agreement. As a result, dealers have all the information they need to make an informed choice to enter an arrangement or not if they should choose.
4.18
Indeed, the FCAI argued that there was no evidence that dealers were being asked to make uneconomic capital investments and that dealerships were 'very stable across established brands and have been for many years'.
It also pointed out:
If the dealer does not think the tenure offered is enough to give the dealer the opportunity to make an adequate return, the dealer can seek to negotiate with the distributor. If an acceptable agreement cannot be reached, the dealer can simply not accept what is being offered. Unlike most other franchise systems, dealers control their sites and the locations of the sites are strategically significant. Therefore, the dealer has a real opportunity to enter into another dealer agreement with another distributor.
4.19
Nevertheless, other stakeholders raised concerns that the tenure terms offered by some vehicle manufacturers in dealership agreements may not allow sufficient time for dealers to secure a fair and reasonable return on these capital investments.
4.20
For example, the Australian Automotive Dealer Association (AADA) argued that one of the 'main factors that differentiates car dealers from other franchisees is the significant level of investment which is required to be undertaken'. The AADA noted:
The cost often does not end with the initial investment and manufacturers constantly ask their dealers to upgrade facilities or even move to new locations to build a new facility. The cost of building these facilities often runs into millions of dollars. Furthermore, significant costs are committed to prescribed equipment, special tools, training and various other costs. This is before all the other costs such as wages, stock, marketing etc.
4.21
The Motor Trades Association of Australia Limited (MTAA) observed that it was 'not unusual for the establishment costs of a franchise dealership to be in a range of $10 to $20 million'. In addition, it noted that costs of 'refurbishments can be between $500k to $3–5m depending on the requirements and the size and scope of alterations required'.
4.22
The AADA noted that certainty of tenure through dealer agreements in Australia were 'relatively short, averaging around 5 years, but we are now seeing examples of even shorter-term agreements'. It argued that:
The lack of tenure and the increasing use of agreements that span as little as one-year is the key underlying characteristic of the power imbalance. For a dealer that is constantly facing the fear of being 'non-renewed' it is impossible to push back against unreasonable demands of an offshore manufacturer.
Termination, non-renewal and change of distribution model
4.23
The termination or non-renewal of dealership agreements and the level of compensation offered to dealers were raised as significant issues by many submitters to the inquiry. For example, the MTAA noted that for dealers 'the termination, or cancellation, of their dealership agreement remains the most significant concern and has been amplified by the GM decision'.
The MTAA submitted:
Invariably, dealers have a personal investment in their operations that, on many levels, exceeds the core capital investments. Individual and family financial exposure is often inextricably linked to the finances and financial performance of the business.
4.24
The FCAI and manufacturers highlighted the relatively low number of dealer terminations (excluding the Holden withdrawal). However, information on the level of non-renewals was less forthcoming.
4.25
The AADA argued that there were 'various examples of manufacturers terminating or not renewing a Dealer Agreement and providing no or very little compensation'. The AADA argued that in many instances:
Dealers are unable to sell their business on the open market without interference, they immediately lose all the goodwill built up over a period of time. Manufacturers argue that goodwill belongs to the franchisor, but we have seen numerous examples where Manufacturer-owned dealerships have been sold with a large component of goodwill.
4.26
The MTAA highlighted that the parts and service components of dealer businesses were also impacted by dealer terminations:
…dealers invariably own their parts stock as part of capital investment and, therefore, the risk exposure. In termination events, franchisors can be under no obligation whatsoever to relieve the dealer of the remaining spare parts holdings. Parts stock can be as irrelevant to the details of the termination as the refrigerator in the dealership lunchroom.
Similarly, in the servicing area of the business, the dealer will have been compelled to have a range of specialist equipment, tools, software and other requirements as specified by the franchisor. In termination events, these items are rarely reflected appropriately or in sufficient detail in termination arrangements and not appropriately compensated if at all.
4.27
Indeed, the AADA argued that 'non-renewal has become the favoured approach for manufacturers which want to end their commercial relationships with dealers'. It argued:
This is why we are seeing more and more manufacturers make use of shorter-term agreements – because it allows manufacturers the flexibility to issue non-renewal notices at more regular intervals. For example, one Manufacturer which has publicly flagged that it will be changing its distribution model has put the entire network on a one-year agreement which it keeps rolling over until the manufacturer is ready to issue non-renewal notices to the entire network.
Changes to distribution models
4.28
Some stakeholders raised concerns, both publicly and confidentially, about the potential impact of changes to distribution models on individual dealerships. For example, the AADA submitted:
Under an agency arrangement a dealer ceases to be the owner of the vehicle stock and instead is given a fee for service. Vehicles are sold at a non-negotiable fixed price. This is a key change because it limits the dealers ability to use their entrepreneurial skills to compete and maximise profits.
It also means that dealers no longer hold the stock at traditional levels and as a result there is a strong risk that they will be stuck with large expensive facilities which are no longer fit for purpose. OEMs have the right to shift to new distribution models. However, when this shift occurs dealers should be adequately compensated to account for the reduced earning capacity and the significant investments they have made.
4.29
Consistent with this sentiment, Astoria Honda Brighton argued that it was significantly disadvantaged following Honda Australia's decision to move to an agency sales model for its Australian retail network.
Astoria Honda Brighton submitted that its dealer agreement with
Honda Australia was terminated with effect from 30 June 2021. It argued:
The financial compensation offered does not even cover our loss of profit had the dealer agreement been performed for the balance of its term. As a consequence we are forced to go to court against a multi-national organisation to receive just and fair compensation.
4.30
In response, the FCAI submitted that 'all businesses should be positioned to evolve and adapt to an ever-changing business environment and in response to shifting consumer preferences and advances in technologies'.
The FCAI also pointed out that:
It is the consumer that drives innovation in the new vehicle purchasing experience. It is quite likely that over the next twenty years there will be a mix of delivery and purchasing options available for the same vehicle, and consumers will be able to choose which pathway to take based on their own wishes. Whichever pathway is chosen, it is the view of the FCAI that dealerships will still play an important part in achieving the highest degree of customer satisfaction in an incredibly competitive market.
4.31
According to the ACCC, there was nothing in the Franchising Code or the Competition and Consumer Act 2010 (CCA) 'that prevents a manufacturer from changing its business model or commercial arrangements in this way'. However, the ACCC noted:
…the CCA, through the Franchising Code and the ACL [Australian Consumer Law], requires that a manufacturer acts in good faith, and does not engage in any unconscionable conduct, or make any false or misleading representations in its dealings with franchisee dealerships to implement such changes.
4.32
The ACCC submitted that it had 'not received any reports from individual dealers alleging any contraventions of the CCA by a manufacturer in relation to its conduct towards dealers in implementing a decision to move from a franchise model to an agency model'.
Performance requirements
4.33
Manufacturers indicated they used a range of mechanisms, including Key Performance Indicators (KPIs) to monitor the profitability and performance of dealers as part of their dealership agreements.
4.34
For example, Mitsubishi Motors Australia Limited (MMAL) argued that 'performance requirements for automotive dealers were usually well defined and reasonable':
Clearly, it is important that OEMs are able to establish and enforce KPIs to ensure that customer expectations are met and high standards of representation and performance within the dealer network are realised.
4.35
Mazda Australia also submitted that:
…the performance requirements for individual dealers are set having regard to both dealer specific criteria (including location and size of the dealership) as well as more general criteria applicable to the network as a whole such as post-sales service level requirements.
Dealers are kept informed regularly of their performance against these requirements and are provided with the necessary support, through Mazda's Dealer Support staff, to assist them to identify and address the issues which are impacting on performance.
4.36
In its submission, Ford Australia indicated that while its standard agreement term is five years, this could be of lesser duration 'where a dealer has not met the performance metrics during the prior term'. It also indicated that new Ford dealers were offered an initial two-year term 'which allows both parties to assess whether the relationship is a right fit'.
4.37
The FCAI highlighted that:
…distributors must act in accordance with existing laws in areas such as the obligation under the Franchising Code to act in 'good faith', and the obligation not to engage in 'unconscionable conduct' in accordance with the Australian Consumer Law. Importantly, these performance requirements and any incentives attached to them are clearly evident at the time of entering the dealer agreement or during the consideration of any renewal.
4.38
Concerns about the impact of KPIs on the financial viability of dealerships were raised by stakeholders. For example, the AADA noted in its submission that:
Manufacturers link incentive payments to these performance measures, the achievement of which is often the difference between profit and loss. Failure to meet performance requirements can result in performance management and eventually termination or non-renewal.
4.39
For example, Mr Richard Bennett, who owns a Renault dealership in
Western Australia, outlined how his dealership had been the subject of performance management from Renault:
Three months earlier I was runner-up national dealer of the year, so I must have been going okay, but then I received the letter. I was achieving my targets. The month after this letter, I'd achieved 130-odd per cent—I think it was 133 per cent—of my target. I got 130 per cent on my target for that quarter. The issue is someone just said, 'Let's write some letters.' This is where the bullying comes in. I spoke to one dealer, who didn't want to be named, who was on a second letter for non-performance, but the metrics were all wrong. It wasn't a fair letter.
4.40
The committee received many confidential submissions from dealers, who had experienced similar behaviour from some manufacturers. Many of these submitters argued that when unrealistic sales targets and KPIs were not met, dealers could be subject to performance management, loss of incentive payments and threats of termination or non-renewal of their franchise agreements.
Behaviour around warranty claims
4.41
Under the CCA, there is a requirement for manufacturers to indemnify suppliers for consumer guarantee claims made under the ACL.
4.42
The FCAI informed the committee that dealers were 'an integral part of distributers' warranty and ACL claims handling processes. Dealers essentially act as the distributor's agent for the purposes of manufacturer's warranty claims'. The FCAI explained how the process worked in practice:
It is impractical for distributors to assess every single warranty claim at the time the claim is made, as to do so would cause delays, and thereby lower customer satisfaction and engagement. Distributors authorise dealers to assess warranty claims on their behalf, with certain limits and authority. Dealers then submit an expense claim to the distributor.
4.43
Various manufacturers indicated that they readily complied with their obligations under the ACL and worked cooperatively with their dealer networks to facilitate this outcome (see Box 4.1).
Box 4.1: Manufacturers views on compliance with ACL
TMCA noted in its submission that it provided its dealers with a 'statutory indemnity from Toyota for cost incurred by them as a result of manufacturing defect claims under the ACL'. TMCA submitted:
Toyota assists dealers with manufacturer's warranty repairs. Toyota works together with our dealers in respect of warranty claims. Dealers can contact the Toyota warranty and technical help desks if they have any warranty or technical concerns.
Dealers are required to diagnose vehicles and lodge warranty claims. Most claims (more than 90%) are approved automatically. Toyota only reviews warranty claims for significant amounts or when specific requirements are not met. Toyota also allows dealers to claim any reasonable time incurred in respect of inspecting/diagnosing vehicles as part of a warranty claim. Toyota does not deny warranty claims that are legitimate.
In its submission, MMAL noted that:
MMAL is highly conscious of its obligations under the ACL, and is committed to fostering a culture of compliance within its organisation. MMAL regularly engages external specialists to deliver ACL training to all levels of MMAL's organisation (from front-line staff to senior executives). MMAL also provides ACL training to its dealer network.
Mazda Australia noted in its submission that:
…Mazda supports dealers in the management of many claims made by customers against the dealer, whether it fall under Warranty or the consumer guarantees. Mazda approaches such issues with a view to providing the customer with assistance (as a matter of customer service and to ensure a good customer experience) and will frequently offer a remedy even though it is not legally bound to do so and where it would otherwise be the dealer's responsibility.
4.44
Notwithstanding these statements by manufacturers, a number of stakeholders expressed reservations about the conduct of some manufacturers. For example, the Motor Trade Association SA/NT noted that its members had also raised concerns in relation to 'the practice of franchisors shifting the costs of legislative compliance to the franchisee when they are dealing with warranties'.
4.45
Similarly, the MTAA claimed there had been an increase in the incidence of manufacturers 'further tightening the area of warranty definitions and process to reduce manufacturer costs'. Examples cited by the MTAA of costs not included in warranty reimbursement include:
initial and potential ongoing diagnostic work (when often a problem is presented when previously unknown);
unrealistic times set by the manufacturer for repair;
administration costs, including time taken to assist customers;
costs associated with loan vehicles supplied to customers during warranty work.
4.46
The MTAA also submitted that:
Too often delays in parts supply, lack of information, lack of support, unrealistic work process expectations and procedures in undertaking warranty work, disputes over whether the required repair is a warranty problem or not, are forced on the dealer as the only intermediary with the consumer.
MTAA and Members over recent years have been fielding increasing verbal reports regarding manufacturers/distributors and distributors further tightening the area of warranty definitions and processes to reduce manufacturer costs. Of course, like many elements in a relationship that has soured, there is an evident reluctance to provide written evidential material because of fear of retribution and the absence of a 'good enough' safe harbour.
4.47
Reflecting on the experience in the United States of America,
Mrs Lauren Bailey, Director, Franchising and State Law, National Automobile Dealers Association, highlighted that:
Nearly every state has passed a law guaranteeing that dealers are compensated for both parts and labour on warranty repairs at their customer pay rates. Manufacturers mandate facilities, special tools, equipment and training to carry out warranty repairs for the manufacturers, and all of this costs dealers a lot of money. But that investment benefits consumers, as dealers are the ones who fill the warranty made by the manufacturers.
4.48
The ACCC observed the impact of this behaviour on customers and noted that they 'face significant difficulties in enforcing their rights under the ACL consumer guarantees when problems occur with new cars' and indicated that 'a significant body of evidence suggests this is systemic across the new car retailing industry'. The key issues identified by the ACCC as contributing to these customer difficulties included:
manufacturers' focus on warranty obligations to the exclusion of their consumer guarantee obligations under the ACL;
manufacturers' responses to 'major failures' defaulting to repairs;
the widespread use of non-disclosure agreements by manufacturers when resolving complaints;
the lack of effective independent dispute resolution options for consumers; and
particular features of the commercial arrangements between manufacturers and dealers that can constrain and influence the behaviour of dealers in responding to complaints.
4.49
The ACCC also submitted that it was 'concerned by what appears to be a dominant "culture of repair" underpinning manufacturers' systems and policies for dealing with car defects and failures, even where cars have known and systemic mechanical failures which would entitle a consumer to a replacement or refund under the ACL consumer guarantees'.
The ACCC noted that it had pursued 'successful enforcement actions in relation to the manner in which various car manufacturers have approached consumer guarantee claims'.
4.50
However, in relation to the verification of warranty claims, the FCAI argued:
Distributors should be entitled to verify that these warranty claims and statutory indemnity claims dealers submit to them are bone fide and accurate. To achieve this aim, most distributors have in place some form of periodical claims audit process. In operating these claims audit processes, distributors must also act in accordance with existing laws in areas such as the obligation under the Franchising Code to act in 'good faith', and the obligation not to engage in 'unconscionable conduct' in accordance with the Australian Consumer Law.
4.51
That said, the AADA argued that some manufacturers used a potentially unlawful audit process known as 'extrapolation' where:
…manufacturer warranty auditors, often from the head office or a contracted third party who has no regard for the ACL, will select a small representative batch of warranty claims and determine an error rate which they will then apply to claims across a nominated time period, which could be 24 months or longer. This normally results in clawbacks by the manufacturer of tens or hundreds of thousands of dollars even though the errors identified might be for small administrative oversights or process conformance mistakes.
4.52
The AADA submitted that despite the requirements under the ACL 'some manufacturers, normally operating under the instruction of their overseas head offices, enforce their own warranty policies and procedures in this country'. As a result, it argued that in some cases:
…the failure to adhere to complex warranty administration procedures can result in a 'clawback' by the Manufacturer, who upon finding examples of non-compliance with their rules will, at their sole discretion, reverse legitimate payments made to a dealer through warranty and consumer guarantee claims.
4.53
The ACCC stated that the issues of 'clawback' and 'extrapolation' had previously been raised by the ACCC and that these practices had 'the potential to result in dealers being inadequately indemnified for remedies that have been provided in compliance with the ACL'. It indicated that it was:
…highly supportive of a stronger consumer guarantee regime, which protects suppliers and introduces a prohibition for non-compliance by both manufacturers and suppliers that will remove impediments to consumers seeking to enforce their consumer guarantee rights under the ACL.
4.54
The ACCC noted that 'Consumer Affairs Ministers have previously agreed that further work should be undertaken to ensure suppliers are appropriately supported by manufacturers in carrying out their consumer guarantees obligations'.
Unfair terms in contracts
4.55
The AADA argued that unfair contract terms are commonly included in dealer agreements, which are presented on a 'take it or leave it basis'. It argued:
Dealers have typically invested heavily in the brands they represent and therefore feel obliged to sign such agreements, despite the unfairness of the clauses in them, which further entrenches the power imbalance between franchisee and franchisor.
4.56
Similarly, the MTAA submitted that there were 'examples where terms of a dealer agreement could be considered unfair'. This included:
agreement terms that were too short to secure an adequate return on investment; and
unilateral variation of terms during the operation of a dealer agreement, including further unspecified and un-notified investment changes to performance processes, warranty provision and reimbursement, and marketing plans.
4.57
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) observed that 'unfair contract terms (UCTs) are still present in almost all standard form contracts'. It argued that this was due to the current rules applying to UCTs, which it argued:
applied only to a subset of standard form contracts;
made UCTs only voidable (not illegal and automatically void);
required a court ruling to declare a particular term to be a UCT (rather than the ACCC and ASIC being empowered to determine this); and
allowed for no other penalties and compensation.
4.58
At the hearing on 24 November 2020, Ms Alexandra Hordern, Director of Advocacy, ASBFEO, noted that it was 'uncommon for us to see a contract that doesn't have an unfair contract term of some sort, whether that's a unilateral variation clause or something else'. Ms Hordern explained:
The contracts are usually created from precedence. So, often these contract terms that had previously been acceptable practice sneak in and continue to be used in contracts as they get rolled out. They get changed as people complain about them. One of the issues we've raised about the current unfair contract terms regime is that in order to get one of those terms overturned the small business—usually it's a small business—would need to take the other party to court to have that contract term overturned.
4.59
The ACCC acknowledged that UCTs were a problem, not just in the automotive industry, and that it had 'advocated for reforms to the unfair contract term provisions for some time, including introducing a prohibition and penalties for the inclusion of unfair contract terms in both consumer and small business standard form contracts'.
Goodwill and data ownership
4.60
An ongoing issue of concern for car dealers was the methodology for recognition of 'goodwill' and customer data in compensation arrangements in the event that a dealership agreement was terminated or not renewed.
4.61
At the committee's hearing on 5 February 2021, Dr Nicholas Gangemi, who prepared a study on the legal concept of goodwill, noted that with franchises 'there are a lot of difficulties when dealing with custom and with goodwill and with ownership'. Dr Gangemi observed:
…in Australia it's the franchisees that are the customers of the franchisor, and then the ultimate customers are the customers of the franchisees.
One of the major sources of custom of the franchisee is that relationship, but it is not the only source of custom. The personal skills of the franchisee is a major source of custom and any information that they gain could easily be a major source of that custom.
4.62
The FCAI identified two aspects to 'goodwill' in relation to automotive dealerships—the goodwill attached to a brand and that attached to a location/site. In its submission to the inquiry, the FCAI argued:
Unlike all other franchise systems dealers do not pay any 'franchise fee', or even trade mark licence fee to distributors when they enter a dealer agreement. Rather, dealers are essentially granted a right to buy products from the distributor and sell them at a retail level to consumers/end users, utilising the well known vehicle brand that the overseas manufacturer has spent years and enormous sums building.
The other component of goodwill is that which attaches to a location.
The importance of this aspect of goodwill is recognised in many other franchises where the franchisor holds a head-lease for the franchise location, so that if the franchisee ceases to operate, the franchisor still controls the location.
4.63
Further, TMCA identified another type of goodwill associated with the business itself:
…there is also goodwill that attaches to the dealer's business.
That goodwill arises for accounting purposes when a sale of a business takes place at a price which exceeds the value of its net assets. That excess is called 'goodwill' and it is commonly understood and recognised as belonging to the dealer.
4.64
The AADA argued that the termination or non-renewal of a dealership agreement can lead to millions of dollars of goodwill being lost by dealers.
The AADA has argued for fair and reasonable compensation to be paid to franchised new car dealers in the event of a non-renewal process or a termination. It submitted:
The goodwill in a dealership can be immediately diminished to nil in the event of a non-renewal process or a termination. While non-renewals and terminations are inevitable, AADA would contend that a dealer should, where appropriate, be compensated for all of the goodwill built up in the business.
4.65
The MTAA indicated that it had received evidence that some dealers had been subject to sudden cessation of dealership agreements without regard for goodwill. The MTAA also argued for the inclusion of goodwill as a value component of termination arrangements, including compensation in the event of termination, cancellation or non-renewal.
4.66
Astoria Honda Brighton told the committee that it was significantly disadvantaged in relation to the goodwill that it had built up following
Honda Australia's decision to move to an agency sales model for its Australian retail network. It noted:
The compensation methodology used (as calculated by Deloitte) grossly undervalues the actual loss we will suffer let alone the value of the goodwill we have established in our business.
4.67
The AADA also noted its concerns in relation to the treatment of customer data. It argued that:
…there is a growing trend of manufacturers encroaching on the dealer's customer data. While some information is shared for very specific reasons, such as safety recalls, it seems as there is a growing desire for OEMs to own this data which is very valuable.
4.68
Indeed, it seems that manufacturers did not consider the customer data associated with a car dealership to be part of the goodwill associated with the business and took different approaches to sharing and managing that data.
4.69
Honda Australia's position was that customer data was 'jointly owned between us and the dealer' despite not having a formal data-sharing agreement with its dealers.
4.70
However, Mr Stephen Collins, Director of Honda Australia, acknowledged that while customer data is valuable, it did not form part of the compensation package:
Senator O'NEILL: Does Honda Australia believe that customer data is worthless? Of no value?
Mr Collins: I would say that data clearly has some value.
…
Senator O'NEILL: If I believe that my neighbour's car should be mine, I don't have a right to take it. It's theirs, they own it, they have value, they use it. If a car dealership has data and it's of so little value that you are not willing to pay for it, why are you taking their data, Mr Collins?
Mr Collins: If this is in reference particularly to the compensation package, the principle of our compensation package is to put the dealer in the same position they would have been in had the period of the contract been continued until the end. Our view is that that's a component of loss of profit, as well as rent, capex and exit cost, not customer data.
4.71
By contrast, Mr Brett Mills, Chairman of the NTDA, indicated that TMCA and the NTDA had entered into a data-sharing agreement:
The process to get that data-sharing agreement to the point of being signed went on for years between the dealer council and Toyota—again, it's a great example of the way that we work together with Toyota—to come up with what data that we believed as dealers we were happy not only to move to the manufacturer but to share between dealers in order to give customers a better experience. It actually puts in place a set of rules and guidelines around what needs to happen should further data be requested to be shared with the manufacturer.
4.72
Volvo Car Australia commented on the 'importance of the vehicle manufacturer owning (at least jointly with the dealer) and being responsible for the management of customer data'. It argued in its submission:
Manufacturers are best placed to hold and manage this customer data given their experience at meeting very stringent data protection regimes, particularly the GDPR in Europe and China's Cyber Security Law. Manufacturers make very significant investments in customer insights, technology systems and compliance and can only do this effectively if they are able to hold and manage customer data. Further as consumers seldom draw a distinction between an independent dealer and the supplying manufacturer any data breach by a dealer is likely to be perceived by the customer as a manufacturer breach, at the same time the risk of a breach is taken by the brand.
Committee view
4.73
While the committee notes that there are some examples of relationships between car manufacturers and dealers which do not seem to exploit the potential power imbalance, it appears that this is not the case across the majority of the industry.
4.74
The committee is very concerned by the experiences presented by car dealers, both large and small, the majority of which have had their evidence considered confidentially to protect them from retribution, both overtly and tacitly, by manufacturers for voicing their concerns.
4.75
In particular, it is manifestly apparent to the committee that there is a widespread failure of manufacturers to work with dealers to ensure that capital investments can be recouped, unfair contract terms are eliminated from dealership agreements, and dubious practices to not fully reimburse dealers for warranty and recall work (including auditing of claims) is addressed. Given these issues, it is unsurprising that manufacturers are unwilling to entertain fair and reasonable compensation when dealership agreements are terminated or not renewed, even when it is the manufacturer themselves seeking to change their distribution model.
4.76
The committee believes the evidence presented by stakeholders in this chapter highlights the trying experiences of many other dealers when attempting to exercise their rights in their relationships with manufacturers and brings further credence to the difficulties outlined by Holden dealers during GM Holden's withdrawal. These experiences underscore the failure of the current regulatory regime and demonstrate the urgent need for further reform.