Turkish Competition Authority (TCA) has published a new Block Exemption Communiqué (Communiqué No. 2017/3) for the Vertical Agreements in the Motor Vehicle Sector ("New Communiqué) on 24 February 2017, updating terms of the block exemption on specified vertical arrangements. With this New Communiqué, the Competition Authority has instituted some changes in policy, in line with the 2011 sector study that they have conducted. This regulatory update follows a similar update by the European Commission, whose Regulation No. 461/2010 necessitated changes to some of the provisions of its Regulation No. 1400/2002.
The New Communiqué, replaces Communiqué No. 2005/4 which was in force since January 1, 2006. The Competition Authority has instituted a grace period of two years to achieve compliance with new provisions stipulated in the new communiqué.
In their study, TCA deemed that market concentrations in the sales market were in line with competitive markets and observed that prices have not increased in real terms since 2005, despite increased demand. TCA concluded that there was no evidence of a sufficient degree of market failure necessitating stricter measures on the sales market. On the other hand, in the after sales market, referring to spare parts and repair and maintenance services, the study has identified market distortions, including high profit margins and high market concentration of authorized dealers in the after sales market for more recent vehicles.
Conditions to Qualify for the Block Exemption Have Been Removed
In Communiqué No. 2005/4, block exemption was subject to meeting some restrictions on vertical arrangements which are no longer conditions in the New Communiqué.
Previously, vertical contracts could not restrict dealers or after-sales service providers from transferring their rights and obligations arising from the vertical arrangement to another dealer or service provider within the authorized network. Further, both parties to the vertical contract were obligated to specify their reasons to terminate a contract with proper notice. Since provisions of the Turkish Commercial Code (Law No. 6102) and the Turkish Code of Obligations (Law No. 6098) allow the intended results of these provisions, such provisions were deemed no longer necessary in the new communiqué. Likewise, the provision of the right to arbitration to settle disputes was removed due to conflict with Article 413 of Law No. 6100 on Civil Procedure.
Marketshare Thresholds Have Been Simplified
Companies will benefit from this block exemption as long as their market share remains below the threshold set at 30%. This threshold will apply equally to the sales and after-sales markets and to exclusive distribution and quantitative selective distribution systems alike. This implies a lowering of the threshold set at 40% for quantitative selective distribution networks under the guidelines of the previous communique, while maintaining the other thresholds. As before, no threshold has been set for qualitative selective distribution networks.
Sector studies conducted by TCA have indicated that differentiated thresholds have not contributed to efficiency, but market participants have found compliance challenging. Specifically, shares of participants in the sales market have remained below the threshold and therefore they have chosen to implement quantitative selective distribution systems, whereas participants in the after sales market have chosen quantitative or qualitative selective distribution systems based on whether their market shares have remained below or exceeded the threshold, according to their own estimation of market shares. However, such estimations of market share cannot be corroborated by the Competition Authority and create legal indeterminacy. Following these, the thresholds have been homogenized to create a simpler policy.
TCA has also argued that high profit margins incentivize market entry when qualitative-selective distribution systems are implemented, however the determination of whether qualitative conditions have been met by a service provider to become authorized should be left to the court system and regulation should not be introduced.
Single-Branding Obligations (Non-Compete Clauses)
Under the new regulation, any direct or indirect obligation by a supplier to limit the buyer's purchases from other (non-designated) suppliers to below 20% of the buyer's total purchases for some class of goods or services constitutes a single-branding obligation. In other terms, there is a single-branding obligation when a supplier obliges a buyer to make at least 80% of its purchases for a product or service from that supplier. Previous regulation had set the threshold at 70%, that is a supplier would have enforced single-branding obligation by requiring to provide at least 30% of a buyer's total purchases.
Previously, no single-branding obligation would benefit from the block exemption, but under the new regulation, single-branding obligations on dealers (sales market) will benefit from the block exemption, provided they have terms no longer than five years or they may only be extended by mutual consent after five years. No such exemption is provided for the after-sales market which was determined to be less competitive than the sales market in the 2011 study. Chains of independent spare parts providers will benefit from the block exemption for single-branding obligations of terms no longer than five years.
Thus, the new regulation is more permissive towards vertical agreements limiting multi-branding in the sales market. Similar regulatory changes were introduced by the European Commission, based on the observation that the previous regulation did not succeed in introducing in-store competition between brands providing little benefit from increased competition while introducing additional costs as manufacturers demanded greater levels of investment from their dealers to defend their brand identity against multi-branding.
This block exemption will not apply to obligations relating to the establishment of additional spare parts sales outlets or after-sales service facilities, however suppliers may prevent dealers in the sales market from establishing new outlets. Again, this differentiated approach mirrors the study findings of limited competition in the after-sales service and spare parts market.
Equivalent Spare Parts are Underutilized but Certification Has Been Introduced
The after sales market has been observed to be dependent on Original Equipment (OE) spare parts, supplied by the manufacturer of the vehicle. OE equivalent parts have low market share and are found only at independent service providers because certification of OE equivalence was not introduced until recently. In their study, the Competition Authority determined that certification of equivalent spare parts was necessary to improve market competition. Since then, Prime Ministry's Undersecretariat of Treasury has issued Circular No 2015/2 dated January 13, 2015, effective June 1, 2015 which tasked Turkish Standards Institute (TSE) with the certification of equivalent spare parts for a term of two years. After the expiration of that term, accredited bodies will be allowed to certify spare parts as equivalent to OE. As before, in their new communiqué, TCA has excluded from the block exemption any vertical restrictions on the procurement of OE or OE equivalent spare parts from third parties, other than for work carried under warranty cover.
Regulation of Access to Technical Information is Outside the Scope of the Communiqué
Independent after sales service providers should have access to the same technical information, training and equipment as service providers in the authorized network. However, TCA has removed relevant regulation from the new communiqué since such access is extensively regulated by European Community regulations No. 715/2007 and No. 595/2009 published in issues No. 27207 (dated April 21, 2009) and No. 28014 (dated August 3, 2011), respectively, of the Official Gazette of the Republic of Turkey. Regarding access to technical information on vehicles sold before 2008 or technical information not within the scope of the referred directives, TCA would evaluate the matter according to Article 6 of Act No. 4054. However, it could be argued that access to technical information is necessary primarily for new models of vehicles and therefore lack of regulation on this matter is not expected to limit market competition.
Out-of-Warranty Cover Repair or Maintenance Work During the Warranty Period is Not Addressed
TCA has argued before releasing this communiqué that existing regulations imply that authorized after-sales service providers should execute out-of-warranty work during the warranty period and no stipulations should be introduced with a communiqué even though independent service providers have been restricted from the after sales market for warranty-covered vehicles. Allowing authorized service providers to recoup their investment should ensure availability of after sales service and assure parts supply. TCA has cited Article 7 of the "Implementing Regulation on Introductory Guide and User's Manual" on the determination of the timing and provision of periodic maintenance, Article 11 of the "Implementing Regulation on Certificate of Guarantee" on the determination of whether any defects were caused by misuse and Article 14 of the "Regulation on After Sales Services" on the provision of after-sales service. These regulations were published in issue No. 29029 (dated June 13, 2014) of the Official Gazette of the Republic of Turkey. With these regulations, the manufacturer or importer, vendors and authorized service centers have been authorized to determine existence of misuse and obliged to determine details of periodic maintenance and to provide after-sales service. As stated above, TCA has argued that these regulations imply that out-of-warranty work should also be performed by authorized after-sales service providers on vehicles covered by warranty.
The new communiqué differentiates between the sales and after-sales markets following the findings of the sector inquiry of 2011. Since the sales market was deemed to be vibrant, some of the restrictions on vertical agreements have been removed, allowing single-brand obligations and allowing suppliers to deny dealers additional sales outlets. In contrast, the after-sales market has been found to have limited competition based on the dominance of authorized service providers for repair and maintenance work during the warranty period and limited availability of certified OE equivalent spare parts. Therefore, the Competition Authority has preserved restrictive provisions found in the previous regulation.
In other changes, general conditions and the obligations to provide access to technical information have been left out of the scope of this regulation, based on the argument that such provisions may be found in other regulations or laws.
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