Saturday, 21 October 2017

BMW Under Investigation for Collusion: An Unfortunate Reality of the Auto-Manufacturing Industry

Today’s post reacts to the news that BMW, the famous German auto-manufacturer, has been raided by the European Commission’s (EC) antitrust division as part of an investigation into collusion between the largest German auto-manufacturers. In this post, the focus will be on the details of the investigation, as far as we can know at this very early stage, and then on contextualising that against the larger picture for auto-manufacturers. Ultimately, although operating in opposition to the supposed ideals of the marketplace i.e. private and independent business, the reality of the situation is that in this particular industry collusion is rife, and arguably necessary – depending upon one’s position.

The EC raided BMW’s Munich offices last week in the latest development of an investigation into collusion between the largest German auto-manufacturers. The investigation, which began earlier this year, is based upon the allegations that ‘Volkswagen, Audi, BMW, and Daimler has for years run secret technology working groups’, with the legal element being that the cooperation between the companies effectively represents a cartel, if collusion is indeed proven. Specifically, the investigation is concerned with whether the manufacturers colluded on setting the price paid for technical components (thus impacting upon the supply lines) that were involved with the neutralisation of exhaust emissions, although BMW were quick to declare that this current investigation is not related to the emissions scandal which has heavily impacted upon its ‘rival’ Volkswagen (VW). Interestingly, the issue of cartelisation is key here, and the EC’s structure to encourage whistle-blowing regarding the revealing of Cartels has arguably worked well, with Daimler – the parent company to the famous Mercedes-Benz brand – being the company to break ranks and inform the EC of the presence of this Cartel in exchange for leniency. Whether or not Daimler gets the full immunity it is hoping for is another matter as the EC has a number of options available to it (like reduced fines rather than complete immunity), but it is likely that Daimler will receive full immunity because the regulator is particularly keen to foster an environment where whistle-blowing is a real option. This is because cartelisation is a particularly prevalent problem within the industry.

The German magazine Spiegel suggested earlier this year that this current investigation will not stop at a cartel based on technological price-fixing and is inherently connected to the emissions scandal currently enveloping VW. In Germany, the issue of cartelisation has been a factor for generations, and only recently this issue was revealed within the Truck industry. Last year six Truck manufacturers were found to be guilty of forming a cartel in the very same area as the car manufacturers mentioned above – emissions-related technology – with Iveco, DAF, Volvo/Renault, Daimler, and MAN being fined an E.U.-record of €2.93 billion between them. Scania, the sixth company, refused to settle with the EC and last month were fined €880 million for their part in the cartel. For revealing the cartel, MAN had their fine cancelled, with Margrethe Vestager, the E.U.’s Competition Commissioner, confirming that ‘it pays to denounce a cartel’; it is safe to say then that Daimler, for revealing this latest cartel, will likely receive the immunity they have requested, or something very close to it. However, before we conclude, is it simply just greed that encourages these companies to cartelise and affect suppliers and customers alike, or may there be any other relevant factors?

 The most important aspect in this regard is to acknowledge that not everything is black-and-white in this particular industry (like many others, admittedly). There have been a number of instances whereby groups of companies have teamed up to purchase technology, with a recent example being the leading German manufacturers working together with Nokia for use of its mapping services. Fiat boss Sergio Marchionne has been quoted as requesting that car manufacturing firms stop wasting money on duplicative efforts with regards to technological components that offer little competitive advantage, and commentators have noted that the particularly low profitability within an industry this large may suggest that the efforts to cartelise have not been due to absolute greed. So, if the issue is not greed, as is being suggested, we may find part of the reason in the recent news that Holden, the last remaining car manufacturer in Australia (itself a subsidiary of General Motors) has closed its doors. This remarkable situation whereby a nation particularly proud of its love for automobiles does not host a manufacturer, is the demonstration of the fear felt in every manufacturer’s boardroom – the industry is fraught with dangers such as competition, exposure to larger economic trends, and the effects of changing manufacturing processes i.e. the move to developing nations like Mexico which is altering the landscape in the industry. The attractiveness of countries like Mexico, India, and China, when viewed in relation to the ever-changing and increasingly isolationist politics in the modern age, mean that the relatively high costs of manufacturing in places like Japan, Germany, and Australia are forcing manufacturers to make serious decisions about their future.

Ultimately, it is important to view the cartelisation occurring within Germany in a certain context. Whilst it is illegal and will be punished, the rationale for doing so is arguably evident when we look at the broader picture. However, more than this, the notion of deterrent raises it head once more because, if we think of the advantage that these firms can accrue in terms of survival via cartelisation, then the ‘record’ fines of no more than €1 billion each (using the Truck Cartel case as the example) will not be enough. One of the main issues facing Holden (and Ford and Toyota, Australia’s other most-loved brands that left recently) is the issue of punitive tariffs being applied to their products when being exported – we know, from the recent post on the trade battle between Boeing and Bombardier, that the current political trend is heading towards more division and tariff-imbalances, not less; for this reason, the prospect of cartelisation being prevented within the auto-manufacturing industry is a long way off, despite the European Commission’s best efforts.

Keywords – Cars, Trade, Collusion, Cartels, Germany, BMW, Volkswagen, Daimler, Audi, Politics, Australia, Holden, Competition, European Commission, @finregmatters

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