The proposed Motor Industry Code of Conduct

Will it make motoring more affordable, and will the industry benefit from its introduction?

 There's no doubt that South African motorists are under severe financial pressure. On top of car repayments and insurance, we have to cope with monthly fuel price increases, toll fees and maintenance costs as well. There's nothing we can do about the fuel price or toll fees of debatable merit, but as far as maintenance goes, there's always the possibility of cutting some costs, as explained in our earlier article on this subject. But, while your vehicle still has an active warranty, your hands are tied, leaving you at the mercy of the dealership, with their often-inflated parts prices and labour costs. This could be set to change soon, however, due to a proposed Code of Conduct (CoC) for the motoring industry as recently gazetted by the Competition Commission (part of the Department of Economic Development). Download the full proposed Code of Conduct here:

 What's interesting about this Code of Conduct?

The overriding theme of this document entails opening the aftermarket- and repair sector to participants who might previously have been excluded from this sector of the automotive industry. Great emphasis is placed on affording opportunities for smaller service providers and part suppliers, specifically those owned by historically disadvantaged individuals (HDIs), to enter the automotive repair industry. This includes calls for repair franchises and private workshops to grant these individuals and their companies preferential treatment, and attempts to open the doors for more previously-excluded companies to enter the marketplace. But that mostly boils down to rhetoric – the kind of obligatory hat-tip to government's current empowerment policies which apparently has to accompany every official document.

 The bigger impact lies in the details, specifically as they pertain to warranty-, servicing-, and repair policies (as prescribed by manufacturers and importers), as well as technical information, special tools and non-original spare parts. It also attempts to address some concerns regarding the retail pricing of new vehicles, by changing the current approach of including service- or maintenance plans in the purchase prices.

 Signatories to this CoC will have to apply radically different criteria to warranty conditions, there will be a significant shift in the way proprietary information will be shared among participants, and buyers will be offered the option of opting out of often-constricting service plans.

 But service- and maintenance plans are useful, so why change the way they work?

Let's get that point out of the way first. Many manufacturers sell their cars with a service- or maintenance plan included in the retail price. This holds some advantages for the buyers, because for the duration of these plans, servicing or maintenance needs are already taken care of: fixed-cost motoring is far more appealing than varying costs, and there's the bonus that the vehicle's service needs are essentially pre-paid and financed along with the vehicle.

 The downside is that service plans often add more to the list price of the vehicle than the actual services are actually worth, and become additional padding which adds to the profit margin inherent in the sale of the vehicle. The same applies to maintenance plans, where they make allowance for wear items (such as suspension components and friction materials) far beyond the actual value of those wear items. As far as other maintenance issues are concerned, many of those provisions are already taken care of by the warranty in any case, leaving the buyers to pay a premium for cover they perhaps don't really need.

 This proposed Code of Conduct aims to eliminate this loophole, by requiring full disclosure of the value of the plan to the buyers, and allowing them to select the duration of the service- or maintenance plan (or to opt out of the plan entirely). “Many first world markets have implemented these changes; so it’s less a case of if it will happen, but rather when” says George Mienie, AutoTrader CEO

What about the changes to warranty support?

Another part of the proposed Code of Conduct deals with warranties, both on new vehicles and pre-owned ones, as well as extended warranties. To condense a whole lot of legal-speak, the CoC wants to force manufacturers and dealerships to drop the requirement that vehicles need to be serviced at the agents to preserve their warranties.

 It aims to allow the buyer to service their vehicle at any accredited workshop (in other words, not at the agents), using either original equipment (OEM) items or “Identical Spare Parts” (non-original parts, but make to the same standards as OEM items), and still maintain the warranty. This is where it gets terribly complicated, and this is the first sticking point about which manufacturers will complain.

 What's the issue with non-dealership (private or franchised) workshops?

A warranty is basically a contract between the manufacturer (or dealership) and the buyer, whereby the owner of the car is protected against the eventuality of component failure due to defective workmanship or materials. Thus, it stands to reason that, for the warranty to remain a legally enforceable document, the underwriter (in this case, the manufacturer or dealership) needs to exercise some measure of control over the servicing-, maintenance- and repair operations performed on the vehicle in question, as well as the parts used in these operations.

 This is why current warranty conditions for new vehicles are very specific about having services and repairs performed only by the agents or through clearly stipulated outside contractors. The crux of the matter is that, if the manufacturers or dealers are expected to foot the bill for warranty claims, they are entitled to stipulate their own conditions for the warranty's application. This legal contradiction alone means that there's virtually no chance of local manufacturers or distributors to adopting this CoC in its current format.

 It gets even more complex regarding spare parts

Manufacturers sell spare parts from their dealership parts counters. These parts are known as OEM parts, and are usually manufactured by outside suppliers, according to the specifications required by the manufacturer. However, these same outside suppliers also sell these parts, made to the same specifications, under their own brand names, for instance Bosch, ATE, Valeo and Brembo. These parts are known as “Identical Spare Parts” (ISP), and are every bit as good as the OEM items.

 The next parts tier is known as “Spare Parts of Matching Quality” (MQSP), and these are manufactured by unrelated suppliers, ostensibly match OEM parts in quality and functionality, and are certified by independent testing authorities such as the SABS. However, it's important to know that the last parts category usually doesn't incorporate small design changes as implemented by the OEM manufacturers, and as a result often don't perform up to exactly the same standard as the OEM or ISP items. The Code of Conduct aims to legitimise the use of both ISP and MQSP components for use in vehicles which are still subject to the manufacturer's warranty, without affecting said warranty.

 However, manufacturers are understandably resistant to allow this, as it means that they would have no control over the origin or performance of these parts, yet they will still be expected to honour their warranty obligations, should they sign up to this CoC. Add to that the uncertainty regarding the quality of workmanship at non-agent workshops, and it becomes clear that it's unreasonable to expect the manufacturers or dealerships to honour their warranty agreements under these conditions.

 To make matters worse, the CoC also proposes that warranty work may be performed by outside workshops, but that the manufacturer will still be liable for any expenses thus incurred. In short, they want the manufacturer to bear the brunt of a warranty without granting them any control over the process.

 What if the non-agent workshops have the same equipment and training as the agents?

Most modern vehicles require some manufacturer-specific equipment to either diagnose problems, or perform specific repair jobs. This has increasingly become a barrier for private or non-dealership workshops to perform certain repairs on many vehicles, as they simply do not have access to this equipment. As vehicles have become significantly more complex in recent years, this has been forcing owners to visit dealerships for these repairs, thus granting the dealerships a monopoly.

 The Code of Conduct aims to eliminate this barrier, by compelling manufacturers to make their diagnostic equipment and special tools available in the marketplace, and to train outside technicians to operate this equipment – and all this, at what the proposed CoC terms “reasonable cost”. Obviously, manufacturers and dealerships are reluctant to give up their monopolies in this regard, as they will in effect help to create competition for themselves.

 But it goes deeper than just the dealership monopolies, as the CoC will also require the manufacturers to release proprietary information, including software and coding protocols, wiring diagrams and technical manuals. Manufacturers obviously (and justifiably) object to such draconian infringements on their intellectual property rights, as they cannot reasonably be expected to essentially make all their expensive research and development available to all and sundry – let alone expose themselves to industrial espionage from their competitors.

What else does the Code of Conduct require?

Some of the CoC's other stipulations are far more palatable, such as limiting the restrictive requirements often imposed by manufacturers on their dealership's physical attributes. “The requirements for facilities of dealerships should be reasonable and have an economic rationale, particularly in relation to the size of land, showrooms, fittings and finished of dealerships”, states the one clause, followed by “OEMs shall not require dealers to make further investments within established facilities within 5 years of their commencement” in the next paragraph.

These are some of the more sensible proposals in the CoC, and must be applauded, as there has been an explosion of needlessly big and flashy showrooms and workshop facilities in recent years, particularly among the premium brands. This increases the overhead expenses of dealerships without really adding to the buying- or ownership experience, inflating the cost of servicing and vehicle prices even further. These onerous requirements also limit the possibilities of new dealerships opening up, and limits participation of smaller (or start-up) businesses in the industry.

In addition, the CoC encourages manufacturers, dealerships and private workshops to source more of their supplies from HDIs and their affiliated suppliers, which might result in a more equitable participation of the HDIs in the automotive industry. It might also encourage more HDIs to open their own franchises or dealerships, which could lead to improved employment figures in this economic sector

Will this Code of Conduct go into action?

While there are many admirable sentiments expressed in this draft CoC, it's highly unlikely that many manufacturers and OEM parts suppliers will sign up for it in its current form. There are simply too many infringements on the legal rights of warranty underwriters, as well as violations of Intellectual Property laws embedded in the current (draft) format, for it to be accepted.

Should legislation attempt to force manufacturers and OEMs into compliance, protracted court action will surely follow. In addition, many manufacturers are reluctant to relinquish their monopolies, so there's another barrier for the Competition Commission to overcome. It will however be very interesting to see this proposal evolving to suit our unique marketplace and requirements.