The Council welcomes the proposal of a new set of Type Approval Regulations that aim to enhance vehicle standards on safety, environmental protection, and energy efficiency and anti-theft performance. However, the Council is concerned that your department has not indicated in the consultation paper its view on the effect the revised approval procedures might have in the relevant motor vehicle market or markets. From the Council's limited inquiries in the industry, there appears to be grounds for concern that as the revised approval procedures are fully implemented, they may create a regulatory barrier to entry for parallel importation of motor vehicles; thus effecting competition for the sale of motor vehicles in Hong Kong.
Regulatory Barrier to Entry
Paragraph 18 of the Consultation Paper notes that there is no intention for Hong Kong to set up unique type approval requirements and standards. The Government proposes that the certificates issued under Economic Commission for Europe Regulations and European Community Council Directives will be considered as equivalent certification to meet the Type Approval Regulations. In addition, paragraph 19 notes that alternative standards, as long as they provide comparable levels of safety and environmental protection as the above European standards will be accepted. In these circumstances, applicants for vehicle approval can present the complete national vehicle type approval certificate as proof of compliance for vehicle type approval purposes.
The Government would be aware that the new motor vehicle retail sector is characterised by essentially two different groups of retail market participants. On the one hand there are retailers who have exclusive franchises for the distribution of certain brands of motor vehicle. On the other, there are retailers, commonly referred to as 'parallel importers', who compete with the exclusive franchisees for sales of the same brands of motor vehicles. The Council's understanding is that parallel importers have introduced a high degree of competition for motor vehicles in Hong Kong, through their ability to source vehicles from distributors within foreign domestic markets, rather than from the manufacturers themselves.
Information provided to the Council indicates that manufacturers' wholesale prices to distributors in foreign domestic markets, for vehicles that are sold in those markets, is lower than for the same vehicle if it is sold for export. The Council has been further informed that distributors in those foreign domestic markets will not disclose to manufacturers that they are involved in the export of vehicles that the manufacturer has supplied for domestic consumption. Accordingly, those distributors will not be in a position where they can request the manufacturer to issue a certificate on the conformity of a vehicle with approval procedures in another jurisdiction. Likewise, manufacturers, to support the integrity of their exclusive dealing arrangements with distributors in export markets, would not issue certificates to parallel importers of their vehicles.
At present, parallel importers are able to satisfy Hong Kong vehicle approval procedures without having to rely on third parties. Under current requirements, importers need only satisfy examinations by relevant government departments such as the Environment Protection Department, and the Electrical and Mechanical Services Department. Once an importer has satisfied the requirements of these agencies, the vehicle is certified to be of road-worthiness.
Accordingly, because of the likelihood that parallel importers will be unable to obtain the necessary approval certification for vehicles that they import, there is a corresponding likelihood that the proposed new approval procedures will have the effect of blocking the parallel importation of motor vehicles.
The issue that next arises is the extent to which the removal of a group of motor vehicle distributors from the relevant market or markets in Hong Kong will have on price, product choice and service quality.
Competition
With regard to price, the price differential between obtaining a vehicle from a parallel importer compared to an exclusive franchised distributor can be considerable. For example, with reference to a recent advertisement for a Mercedes-Benz S320L, a consumer could expect to pay a price of HK$838K if purchased from a parallel importer; or HK$1080K, from the exclusive distributor -- a price difference of HK$242K or 28% of selling price[1] .
The Council is aware that the Government is currently examining the means to eliminate loopholes in the 'First Registration Tax' for vehicles that are allegedly used by parallel importers to cut prices far below prices that 'mainstream' motor vehicle traders can offer. The Council would as a matter of principle approve the closing of such loopholes and making tax collection uniform across industry; so as to create a level playing field. However, the existence of tax loopholes might not necessarily be the sole reason for price differentials between franchised and non franchised distributors.
With regard to choice, the Council has observed through trade advertisements that some car models of the same brand imported by parallel importers are not exactly the same as those sold by exclusive franchised distributors. A removal of parallel importers from the sector could therefore also be expected to result in a lessening of choices to consumers.
Government Competition Policy
In May 1998 the Hong Kong Government issued a Statement on Competition Policy, which set out its objectives and offered some specific pointers to facilitate compliance with the policy. The stated objective of the policy is to enhance economic efficiency and free flow of trade, thereby benefiting consumer welfare. The means by which that objective is to be achieved is through using competition. Accordingly, the policy, at paragraph 11, invited all government entities to, amongst other things, "examine the impact of all new proposals on competition".
However, the Department of Transport Consultation Paper has not indicated in its proposals for changing vehicle approval procedures, what impact the proposals will have on competition in the relevant market or markets. From the Council's limited inquiries, as noted above, it is apparent that at the very least some important questions arise as to the impact the Department's proposals will have on competition in the industry. It would be expected, having regard to the Government's Statement on Competition Policy, that the Department would have undertaken, or indicated in its Paper that it will undertake the following.
- An analysis of competition in the industry, beginning with an assessment of the relevant market or markets. For example, whether separate markets exist for certain vehicles (i.e. segmentation between prestige and non prestige vehicles, or other classes of vehicles).
- An assessment of the effect that the proposals may have on competition. For example, if the effect of the proposals is to reduce the number of market participants, does this raise a concern that the contraction in the number of competitors will result in a lessening of competition.
- If there is a likelihood that competition will be lessened, what safeguards are proposed, so as to preserve the Government's objective of using competition as the means for achieving economic efficiency in the Hong Kong economy.
The Council suggests that the Department should at some stage prior to continuing with full implementation of the revised procedures, undertake the above work to gauge what if any safeguards are required to preserve existing levels of competition in the relevant market or markets. In undertaking this work, the views of parallel importers should be sought and tested against the Department's analysis of the relevant market and the existing state of competition. Reference could also be made to a recent UK Competition Commission Inquiry into the supply of new motor cars within the UK. The Inquiry examined the issue of complex monopolies, and made appropriate recommendations to address competition concerns. A complex monopoly arises where a small group of market participants jointly accounting for a large part of the relevant market conduct their affairs, whether voluntarily or not, and whether by agreement or not, so as in any way to prevent, restrict or distort competition. The Inquiry findings can be located at http://www.Competition-Commission.org.uk.
Notes:
1. Prices quoted from Auto Magazine of May 2001 issue and Auto Express of July 2001 issue.
