INTRODUCTION TO API

  1.  The Association of Parallel Importers (API) was set up in 1997 to represent the interests of independent businesses in the UK who are involved in the import, retail, servicing and repair of motorcycles. There are currently 25 non-franchised motorcycle dealers who belong to the API with a collective annual turnover of £70 million and employing around 200 staff.

  2.  The API is a reputable trade organisation and members adhere to a strict code of conduct where customers' safety is paramount. Because members are not tied to a particular manufacturing franchise they can offer substantial discounts on the imported motorcycles.

  3.  API Code of Conduct:

—  Dealers must have Public Liability Insurance.

—  At least one year's warranty must be offered on all new bike sales.

—  Correct pre-delivery inspection procedures must be upheld.

—  Dealers must not sell machines directly from the crate (ie the motorcyles must be fully assembled and must be pre-delivery inspected).

—  All machines must meet EC Construction and Use Regulations.

—  Dealers must employ at least one fully trained mechanic.

—  Dealers must ensure members are kept informed of any Manufacturer's recall of safety notices and in the unlikely circumstances of a dealer going out of business the API will honour any outstanding warranty.

LEGAL ACTION

  4.  Three members of the API are currently facing legal action from Honda UK for alleged infringement of trademark rights and asking for compensation for damages and payment of its costs for taking the action.

  5.  Honda initiated the action in November when the defendants refused to give legally binding undertakings to cease trading in machines brought into the country through unofficial channels from outside of the European Economic Area.

  6.  The API are contesting the claims and have issued a counter-claim for damages to reputation, legal costs and loss of profit. The case is expected to be heard in October this year.

  7.  The overwhelming result of a poll on the issue run by Motorcycle News, the leading motorcycle weekly in the world (circulation 140,000), was in support of the API. The final telephone poll percentage was 96 per cent in favour of the parallel importers' position. The legal proceedings were considered to be a cynical action to protect profits and readers did not think that Honda's claim that safety was at stake was well-founded. The following editorial appeared in Motorcycle News on 9 December 1998.

NO SUPPORT FOR HONDA'S MOVE

  If your letters are anything to go by, Honda has got it all wrong.

  MCN wanted to print at least one letter supporting Honda's legal war on parallel dealers—but there weren't any!

Why does "grey" and parallel trading occur? What are the costs and benefits to producers and consumers? Where does the public interest lie in respect of such training?

GROWTH OF PARALLEL AND GREY MARKET

  8.  Parallel and grey trading is the importing of a branded good which does not come through official channels. Motorcycles are parallel imports if they are new and are also sold by franchised dealers. Grey motorcycles are second hand models which are not available through official dealers.

  9.  The prevalence of parallel importing is dependent on three main factors:

—  differentials between franchised and non-franchised prices;

—  availability of models; and

—  public confidence in parallel trade.

  10.  The number of parallel imported motorcycles has increased dramatically over recent years, from an estimated 15,000 in 1997 to around 25,000 in 1998, representing a retail value in excess of £150 million. This accounts for about 25 per cent of all new machines and about 5 per cent of all second hand motorcycles.

  11.  The table overleaf shows the prices at which members of the API have sold certain models of motorcycles in the past year and compares them with the then list price. These list prices have dropped very recently but API members are still able to better them.

*  D & K Motorcycles: API Member.

**  Manufactured within the EEA.

***  Manufactured in the UK.

****  Equivalent model.

  12.  The above table shows that parallel importers have been able to offer dramatic discounts on motorcycles. For example, D & K Motorcycles sold the Honda Fireblade last year at a discount of 36 per cent, and even after the drop in list price consumers could save 21 per cent on the official price.

  13.  In the motorcycle industry, it is common practice for manufacturers to restrict supply to their franchised dealers. Consequently, API members can offer popular models more quickly and at a cheaper price than official importers because they are not subject to these restrictions. These motorcycles, however, are still bought from the manufacturer with implicit consent and therefore the manufacturer is still receiving a profit on these machines.

SUPPLY OF PARALLEL AND GREY MARKET MOTORCYCLES

  14.  These motorcycles are mostly (80 per cent) sourced from outside the European Union, primarily from Japanese franchised distributors in Asia, and are imported, distributed and retailed in the UK at a competitive price.

  15.  The process of supply depends on whether the motorcycles required are in stock with one of the European suppliers, who are either franchised dealers or are Import/Export Agents. If they are in stock a parallel importer would telephone or fax them the requirements and would then receive, by return, an invoice and chassis numbers for the motorcycles, with an indication of when the machines will be available. The account is settled before delivery.

  16.  A parallel importer would purchase directly from the Far East if the models are not in stock with one of the European suppliers. An indication of requirements and a request for the motorcycles to be available at the earliest possible production month is faxed to the Import/Export Agent who places the order with the manufacturer. Confirmation from the factory via the Agent is then received with an approximate delivery date at which point the member would have to pay a 10 per cent deposit to secure the "slot". These motorcycles are then shipped through to a local official dealership and the full balance is due. The chassis numbers, shipping details and documents are passed to the parallel importer's Forwarding Agent. VAT and duty are paid on the motorcycles before delivery to the member's premises.

  17.  By comparison, an official dealer orders directly from the manufacturer on a quaterly basis. A list of requirements to include the quantity and colour breakdown for all models for that forthcoming quarter must be completed one month before the quarter. The manufacturer will then respond with an actual list of what has been allocated. The vast majority of the time the requested quantity and colour are not supplied so that most dealers will over-order.

  18.  So long as safety and environmental standards are not compromised, the public can only benefit from the increase in competition that parallel trading brings. Recent "Ride Magazine" investigations found that there is no marked difference between the official and the unofficial dealerships in terms of safety and reliability, and consumers can be assured that API dealers will match or better offical warranties and after-service care.

Should more or less protection be given to brands and are trademarks insufficiently or excessively protected?

TRADEMARK EXHAUSTION

  19.  The API does not believe that trademarks and trademark rights were established to protect supply and thus profits, but to assure consumers of the origin of the goods that they are buying. The current situation is anti-competitive and anti-consumer. DGXV of the European Commission asked the National Economic Research Associates (NERA) to investigate the "economic consequences of the choice of a regime of exhaustion in the area of trademarks". The NERA report, published on 25 February 1999, suggests that prices would come down in all but two sectors of the economy that was investigated, including the motor industry.

  20.  The current legal position is Community trademark exhaustion meaning that a brand owner has no power to prevent the import of their goods already placed on the market anywhere within the European Union. The brand owner does, however, have the right to prevent the import to the EU of their goods already put on the market with their consent from outside the EU.

  21.  This means that parallel traders are effectively stymied by the legal restrictions imposed on the importation of goods. International trademark exhaustion would permit the free movement of goods once the item has been put on the market anywhere in the world.

  22.  The consequences of moving towards a global exhaustion of trademarks are:

—  Lower prices for consumers.

—  A greater range of models available to the public.

—  A greater supply of goods available.

IMPACT OF PARALLEL MOTORCYCLE MARKET

  23.  The above three consequences can already be seen in the motorcycle sector where parallel and grey trading is a significant part of the market. Prices have fallen dramatically as manufacturers have been forced to respond to the competition; there are more models for the consumer to choose from; and parallel traders have been able to meet demand more quickly than the franchised dealers. The following article appeared in the Financial Times on 2 February 1999.

"GREY" IMPORTS DRIVE UP MOTORCYCLE SALES

  Market growth—although not profitability for franchised motorcycle dealers—has been given substantial impetus by the activities of the "grey" or unofficial importers that buy machines cheaply in the Asia-Pacific region and other emerging markets. They have forced leading manufacturers such as Honda and Kawasaki to cut prices on some models by up to 30 per cent.

  24.  Table 1 (page 34) shows how manufacturers have been forced to drop list prices in response to the significant increase in parallel imports.

What are the main problems with existing measures to detect and prevent counterfeiting and piracy? How can such measure be made more effective? Are there problems with definitions?

How can Intellectual Property Rights be more effectively agreed and enforced internationally?

INTELLECTUAL PROPERTY RIGHTS AND COUNTERFEITING

  25.  Counterfeiting is obviously not an issue in the motorcycle industry, although the API recognises that it does affect other sectors. There is a strong argument for certain exemptions to full international trademark exhaustion due to the impact of counterfeiting and other issues of non-franchised sales. The pharmaceutical industry for example will have heavy investment in research and development and there are also ethical implications of restricting medical markets according to profits.

  26.  The API would like to reiterate that the confusion of the parallel trade with counterfeiting is not justified and the API condemns piracy in all its forms.

CONCLUSIONS AND RECOMMENDATIONS

  27.  The key recommendation to the Select Committee would be to move towards a global exhaustion of trademarks, with exemptions for certain sectors, in order to allow a more competitive environment with an accompanying lowering of price for motorcycles.

10 March 1999