The car-maker provided GoAutoNews Premium with a copy of the letter sent to Ms Pratt in her role as chair of the inquiry.
As reported last month in GoAutoNews Premium (Click here for story), Senator Deborah O’Neill – as a member of the senate committee into the retail car industry that began in 2020 with inquiries into Holden – alleged that statements made by senior management of Mercedes-Benz Australia were “misleading”.
Under the protection of the senate, Ms O’Neill said that since giving evidence to the committee in November 2020, events had transpired that indicated seven claims made by Mercedes-Benz senior management to the Senate Education and Employment references committee were allegedly incorrect.
Mercedes-Benz states in the May 6 letter that evidence given before the Senate was ‘truthful’ and ‘provided to the Committee in good faith’.
Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP) writes “we stand by our evidence as given by our then CEO and Managing Director Horst von Sanden and Director of Network Development and Customer Management Jason Nomikos, as well as our written submissions to the Inquiry.
“Our evidence was truthful, based on the information available at the time to MBAuP and provided to the Committee in good faith with the intention of furthering understanding of the MBAuP business, the evolution of luxury car sales and good policy and regulatory outcomes for our sector.”
Read Mercedes-Benz’s reply to the senate:
6 May 2022
Senate Inquiry – Mercedes-Benz Australia/Pacific Pty Ltd
Thank you for your correspondence of 11 April 2022 requesting we review our evidence to the Senate Inquiry into Regulation of the Relationship between Car Manufacturers and Car Dealers in Australia (Inquiry).
Mercedes-Benz Australia/Pacific Pty Ltd (MBAuP) appreciates the opportunity to undertake this review and address claims made by Senator Deborah O’Neill, under the protection of parliamentary privilege, on 29 March 2022 that MBAuP representatives made inaccurate or misleading statements to the Inquiry.
From the outset, we stand by our evidence as given by our then CEO and Managing Director Horst von Sanden and Director of Network Development and Customer Management Jason Nomikos, as well as our written submissions to the Inquiry. Our evidence was truthful, based on the information available at the time to MBAuP and provided to the Committee in good faith with the intention of furthering understanding of the MBAuP business, the evolution of luxury car sales and good policy and regulatory outcomes for our sector.
As you are aware, we are currently the respondents in a matter brought by some of our dealers, as they were then MBAuP filed its defence with the Federal Court of Australia (Federal Court) on 20 April 2022, in response to the Statement of Claim. A redacted copy of the Defence is available by application to the Federal Court.
Given the publicity surrounding the statements made by Senator O’Neill and the disclosure of the Committee’s letter to the media (we refer to “Tech troubles fuel Mercedes-Benz sales model,” Australian Financial Review, 12 April 2022), we have been approached by a number of our stakeholders for our response. So we can address our stakeholders’ queries openly and efficiently, we intend to share this letter with them. We trust you understand our position on this matter.
Mercedes-Benz has a 136-year history of inventing, manufacturing and distributing premium motor vehicles worldwide. The Mercedes-Benz brand is synonymous with luxury, innovative design and technology, as well as a premium customer experience.
Mercedes-Benz Group AG (MBAG) (formerly known as Daimler AG), MBAuP’s ultimate parent company, based in Germany owns the Mercedes-Benz brand together with a number of other brands.
MBAuP was formed in 1958 and is the importer, retailer and wholesaler of new Mercedes-Benz passenger cars, vans, parts and associated goods and services in Australia.
Headquartered in Mulgrave, Victoria, MBAuP directly employs approximately 300 people.
Over the past 60 years, MBAuP, together with its network of authorised retailers, has achieved exceptional results. However, like many vehicle brands around the world, Mercedes-Benz is facing a mix of challenges, both domestically and globally, that have the potential to impact profitability, competition, retailer profits as well as customer retention and satisfaction. To respond to these changes and remain successful and sustainable into the future, MBAuP needs to evolve and adapt.
OUR RETAIL NETWORK
Our passenger car network comprises 53 businesses across 64 locations in each state and territory, including a strong presence in regional Australia.
Our network is well-established, with more than half in operation for more than 10 years.
Our agents are sophisticated, well-resourced businesspeople with proven records of commercial acumen and success. Several are publicly listed companies or are backed by private equity firms or high net worth individuals. Many have extensive property holdings, owning the sites of their showrooms, and many operate multi-brand businesses, selling cars from a range of marques.
As sophisticated businesspeople, our agents have access to legal and commercial expertise, in some cases in-house, to advise them on their business operations and decisions, including the meaning and effect of legal documents and the commercial implications of arrangements with MBAuP, including the move to the agency model.
OUR CURRENT PERFORMANCE
While constraints on essential components and disruption to global supply chains have created challenges for all car makers the last few years, these challenges have not prevented Mercedes-Benz from selling cars in Australia. Since the transition to the agency model in January 2022, MBAuP has sold 8265 passenger vehicles and continues to lead its competitors in the luxury car market year-to-date.
RESPONSES TO STATEMENTS MADE IN THE SENATE 29 MARCH 2022
We do not intend to repeat our evidence to the Committee, made in person and by submission, except to the extent it assists us to address the statements made by Senator O’Neill in the Senate on 29 March 2022, under the protection of parliamentary privilege. However, MBAuP reiterates that it stands by our previous evidence and that it is truthful and accurate.
- The dealers were not happy with the proposed changes and in multiple meetings voted not to proceed with the agency model.
As Mr von Sanden told the Inquiry, the vote against the agency model as it was in November 2019 was not a vote against the introduction of an agency model; it was a response to the version of the model as presented at that point in time.
Our dealers voted on this version of the model and provided feedback to MBAuP on that that version of the model. This feedback, and other feedback over the course of time provided by the dealers, was given due consideration and significant changes were made to the model to achieve the most workable model for the Australian market, before the final version of the model was settled. In September 2021, the entire dealer network signed the new agency agreement, with the agency model being subsequently implemented in January 2022.
- Mercedes-Benz did not consult widely with dealers. In fact, when dealers tried to negotiate some of the terms of the model, Mercedes-Benz issued a Dispute Notice under the Franchising Code.
MBAuP refutes any claim that it did not consult widely with dealers on the development of the agency model ahead of its introduction in January 2022.
As the evidence of Mr von Sanden makes clear, the agency model was introduced in part after dealers first made requests in 2016 (and beyond) for support from MBAuP to manage market change and disruption. These challenges were evidenced, at the time, by the decline in profitability being experienced in Australia not only by Mercedes-Benz dealers, but across the entire sector.
Over the course of 2017-2021, MBAuP facilitated extensive formal and informal consultation and dealt with individual dealer inquiries and concerns:
- Between November 2017 and September 2021, there were at least 15 meetings involving the National Dealer Council (NDC), as representatives of the Mercedes-Benz dealer network, and the Dealer Advisory Council (DAC);
- In addition, there were seven `Retail Future Group’ sessions in October 2018, November 2018, February 2019, March 2019, September 2019, October 2019 and November 2019;
- During this period, there were also numerous meetings, phone calls and correspondence with individual dealers and dealership groups held Australia wide, both in person and virtually.
We further note the development of the agency model for the Australian market was a collaborative process, and many features in the final iteration of the model were incorporated as a result of specific feedback from dealers, including significant items, such as the term of the agency agreement and the remuneration structure.
Dispute notices under the Franchising Code of Conduct
Issuing a Dispute Notice under the Franchising Code of Conduct (Code) is the appropriate means of facilitating the resolution of disputes in this context. Given this, issuing a Notice pursuant to the Code cannot reasonably be held to be evidence of a party’s failure to consult, of bringing unreasonable pressure to bear on the other party to force a resolution, or of otherwise acting in bad faith. Such a Notice only indicates the absence of agreement between parties at a point in time.
MBAuP issued the Dispute Notice in response to allegations made by the dealers that it was acting unconscionably and in bad faith as the parties sought to finalise the new agency agreement. We note these allegations were raised for the first time shortly before the deadline for the execution of the agreements. Because MBAuP disagreed with these allegations, we issued the Notice in order to seek a mediation at which we could resolve the agency agreement and address the dealers’ allegations with a co-appointed independent mediator.
- The agency model is not a win for dealers. If instituted, the agency model would cut the profitability of some dealerships by over 50 per cent. The experience now that the model has been introduced has sadly lived up to these dire predictions.
We respectfully disagree with any characterisation that the agency model will “cut” the profitability of dealerships “by over 50 per cent.” We also do not agree with the claim the experience of the model has been “dire” for our retail network.
While it has only been four months since the model was introduced, MBAuP has sold 8265 passenger vehicles and continues to lead competitors in the luxury car market year-to-date. This is despite challenging global and local conditions causing delays and disruption in the global car manufacturing and supply chains.
As the evidence of Mr von Sanden and Mr Nomikos indicated, the agency model only affects new car sales and parts and accessories sold as part of that transaction, which historically make up around 30 per cent of dealer profitability. The remaining 70 per cent, is made up of used vehicle sales, spare parts sales, servicing and financing (among other things) and is largely not affected by the agency model.
Furthermore, the agency model shifts significant costs from agents to MBAuP. The most significant of these is the cost of buying and holding inventory. Under the agency model, dealers no longer have to purchase/finance passenger cars. All passenger cars are owned by MBAuP and are maintained in a central pool and available to all agents to sell to all customers, regardless of location. In addition, MBAuP also provides agents with showroom vehicles, stock vehicles and demonstrator vehicles.
It is also important to appreciate that not all of our agents are litigants, and in terms of scale and sales volumes, “non-litigating” agents account for almost half of passenger car sales for the period from 1 January 2022 (when the agency model was introduced) to 30 April 2022.
- The agency model is not about consumer benefits. It is merely about ensuring greater profits in Stuttgart, instead of the main streets of suburban Australia.
MBAuP introduced the new model in response to evolving customer expectations, new technologies disrupting conventional sales channels and in response to feedback from many of our dealers who expressed concerns to us about declining profitability.
We stand by our evidence on the benefits of the new model to Australian car buyers:
- Transparent pricing: Customers no longer have to haggle over price as the cost of a new Mercedes-Benz passenger car, inclusive of selected options, is clear and upfront from the outset of the transaction;
- More choice, regardless of postcode: Our customers now have access to the full range of stock available in Australia and are no longer constrained by the stock available at their local dealership. This is a particular benefit for rural and regional customers who don’t have a lot of dealerships in close proximity and will now no longer be constrained by the stock available locally; and
- More convenience: Our online showroom makes configuring and pricing a new vehicle much easier for our customers by allowing them access to actual stock in country or soon to arrive.
While we understand that some consumers enjoy haggling as part of the experience of purchasing a new car, consumer research commissioned by MBAuP in October 2019 found that:
- 60 per cent of customers wanted a “haggle free” experience
- 74 per cent saw the price negotiation process as a “necessary evil” and wish there was an easier way to buy a car
- 65 per cent found the process mistrustful and lacking transparency.
Furthermore, we do not agree that set pricing for our passenger vehicles reduces competition. As stated earlier in our evidence to the Inquiry, most competition in our segment of the luxury car market is inter-brand. Aggressive competition from other marques is not affected by the agency model. We believe the agency model will be a competitive advantage, as the superior customer experience it delivers will encourage more people to purchase a Mercedes-Benz, rather than a vehicle from one of our competitors.
- Dealer profits will be impacted. Deloitte analysis said that profitability under the new model could decline by more than 50 per cent.
MBAuP does not agree that dealer profits will be impacted by the agency model in the way contended. To clarify the issue of the “Deloitte analysis”: in March 2019, Deloitte Touche Tohmatsu (Deloitte) prepared a spreadsheet called the “Dealer Assessment Tool” (Tool). The Tool simulated the potential effect on the profitability of particular dealerships under a new business model. To simulate this effect, it applied certain variable assumptions about the income and costs incurred by that dealership known at that point in time.
At that time, this Tool assumed little to no change in the costs incurred by a dealership under the agency model. Contrary to that assumption, the agency model enables dealers to reduce their costs of operation, including floorplan financing costs, insurance and rent.
It’s important to appreciate that this Tool was deployed in early 2019 to dealers comprising the Retail of the Future Working Group (11 dealers across 13 dealerships), while the agency model was still in development. The current agency model is different to the model represented in the Tool, as MBAuP made substantial changes after the date that the Tool was created based on dealer feedback. In any case, the Tool was provided to dealers to allow them to assess the changes that the agency model would introduce to their business (as understood at that time) and simulate related changes that they could make to their operations in a way that would allow them to reduce costs and address any potential changes to profit. Consequently, it does not simulate or reflect the actual effect of the agency model on our agents.
It is important to understand the final version of the agency model confers additional benefits to agents, including: harmonised commission, demonstrator vehicle ownership and a higher pre-delivery inspection payment. None of these significant benefits were built into the Tool in 2019 and were concessions provided by MBAuP to dealers before they signed agency agreements.
- Mercedes-Benz wasn’t committed to dealers long-term. Dealers were issued non-renewal notices as a means of terminating their agreements.
As the evidence of Mr von Sanden made clear, Australia is an important market for Mercedes-Benz. The introduction of the agency model was intended to help grow our share of the local passenger car market by providing an exceptional sales experience to our customers and making it easier for our agents to sell passenger vehicles.
All dealer agreements were due to expire and did expire at the end of 2021. MBAuP was required by both the terms of the agreements and the Code to issue 12 months’ prior to the date of expiration, a notice to each dealer advising that it did not intend to renew or extend the existing agreements. It is unfair to criticise MBAuP for complying with its legal obligations. When MBAuP issued the notices advising that the dealer agreements would not be extended or renewed beyond their expiry date, MBAuP advised all dealers that they would be provided with a new agreement for an agency model.
We note that every single dealer in our passenger car sales network was offered the opportunity to migrate to the agency model. Subsequently, the entire network signed agency agreements and notwithstanding legal proceedings against MBAuP, are now selling new Mercedes-Benz passenger cars under the agency model.
- Mercedes-Benz will profit from the shift to the agency model. It will take profits out of dealerships and straight into the pockets of Mercedes-Benz.
MBAuP had a legitimate commercial interest in making changes to its business model in an endeavour to improve customer experience, reduce operating costs, to protect dealer and MBAuP profitability, to protect the brand against disruptors and to position MBAuP and its dealers for future sustained success against physical and digital competitors.
Thank you again for the opportunity to review the evidence we provided to the Inquiry and to address the claims made under parliamentary privilege on 29 March 2022 about the agency model. We trust we have clarified any remaining concerns the Committee may have about the model, how it works and its many benefits for both consumers and our agents.
While the agency model has only been operative since January this year, and despite challenging global economic conditions, MBAuP is proud to be the leading luxury brand in the local market. We firmly believe the choice, convenience and enhanced sales experience delivered by the agency model will deliver us the competitive edge needed to remain Australia’s leading luxury car marque.
Despite current global uncertainty, our outlook in Australia is very positive. We will continue to innovate and excite our customers by offering services and products they want and expect from Mercedes-Benz.
Should you have any further questions, please don’t hesitate to contact Sasha Trakilovic, General Counsel and Company Secretary, by email.
Managing Director Mercedes-Benz Cars & Chief Executive Officer
Director of Customer Management & Network Development
By Neil Dowling