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2.1 Factors Affecting the Existence of a Spare Parts Market

Because production of compatible component parts can provide a steady source of revenue, it constitutes an attractive business model for manufacturers of both original products and of spare parts. For original product manufacturers, revenue from spare parts represents, in a favorable scenario, a source of profit and in a less favorable one, a hedging mechanism which allows them to subsidize the cost of the original manufacture in the event of economic downturns. For new entrants, the spare parts market is attractive because of relatively low development costs and prospects of a high profit margin.

In some industries, such as the automotive industry, robust spare part markets have developed, but that is not necessarily true for all industries. Whether a market exists is largely a function of demand, which, in turn, depends on a number of dynamics. Specifically, in a spare part market, demand is stimulated by repeat purchases of replacements for broken parts, which tend to continue throughout a product’s entire lifecycle.Footnote 1 Demand persists even when the need for the original products decreases, be it for reasons of market saturation, or economic downturn. In a down economy, consumers tend to rely on repairing and replacing parts on existing goods, rather than on more costly new acquisitions. Finally, demand is a function of the number of products in circulation. A high level of consumption of goods increases the total number of goods sold, and with it the need for replacement parts.Footnote 2

Other dynamics however, operate to counteract demand for spare parts. The acceleration of product lifecycles diminishes the demand for spare parts. Its two primary causes are technological and aesthetic obsolescence. The speed of technological development results in products becoming rapidly obsolete, due, for instance, to incompatibility with the latest state of technology. Consider the massive amounts of electronic equipment, which in theory is still functional, but in practice has become unusable. Aesthetic obsolescence occurs due to an accelerated succession in product styles, often as the result of innovative marketing strategies, which accelerate the consumption cycle.Footnote 3 Therefore, many modern products, primarily consumer products in a lower cost range, such as, for instance, coffee makers, mostly need no replacement parts and a market for such parts is unlikely to develop.

In higher cost products, additional factors may diminish demand. For instance, compliance with safety regulations, particularly in potentially hazardous products may raise production costs to a point where producing spare parts is unattractive. A computed tomography (CT) scanning device, for example, is potentially dangerous to both patients and third parties. The applicable safety regulations for, say the machine’s outer hull, increase production costs to a point that the aftermarket for this product becomes unattractive. The risk of liability for defective products may have a similar effect, particularly in jurisdictions with consumer-friendly product liability laws, such as the U.S., where damage awards can be substantial. Technological complexity may also make the replacement part business unattractive. Consider a wind turbine, whose design protectable parts are its outer shell and parts of its tower. Production of such parts would require a high degree of specialization and make an aftermarket unprofitable. Finally, a spare parts market may not develop where policies of certain purchasers, such as government entities’ procurement departments, require spare that parts be supplied by original manufacturers only, for instance, in products of critical importance, where product failure can simply not be allowed.

Combined, these circumstances have apparently favored the emergence of a competitive spare parts market primarily in the automotive industry and made it the target of regulation. Whether other industries should be similarly regulated will be considered in the next section.

2.2 Spare Parts Markets—Industries Other Than Automotive?

Because the spare parts market in the automotive industry is by far the most developed, if not the only competitive aftermarket, the debate surrounding design protection for must match spare parts is based almost exclusively on the technical and economic realities of that industry.Footnote 4 In theory, however, demand for such parts could exist in other industries as well.Footnote 5 This prompts the question why in other industries this issue arises, if at all, only sporadically.Footnote 6

This question was raised in the course of discussions preceding the adoption of the EU Design Directive, the automotive industry had suggested that other industries should be considered as well for purposes of regulating the spare parts issue. In response, the European Commission commissioned a report,Footnote 7 which in 2003 expressly concluded that only automotive spare parts are impacted by the repair clause: “Whilst the provisions of the Design Directive are generic in their application, they have elicited particular interest in the automotive sector, and cars especially, where the market for replacement parts is substantial. According to this study, no other sectors are specifically concerned”.Footnote 8

In contrast, a 2015 European study on the economic effects of design protection (EPEC Report) expressly includes other industries.Footnote 9 A detailed section on the repair clauseFootnote 10 also discusses the watches and clocks industry, considered by the EPEC Report to be a highly design intensive industry.Footnote 11 From an economic standpoint, the Swiss watchmaking industry ranks highest, followed by Germany, Italy and France, all of which also feature relevant watch and clock manufacturers.Footnote 12 Control over replacement parts seems to be a concern also for this industry, albeit less acutely than in the automotive industry,Footnote 13 since the EPEC Report concludes: “Similarly to the automotive industry, the watch aftermarket consists of authorised and independent watch repairers. Since precise data on market concentration are not available, we are not able to discuss this issue in detail. However, what might be noted is that in a formal complaint to the European Commission, European confederation for watch repairer associations (CEAHR) claimed that authorised repairers act as monopolists in the respective aftermarkets for luxury watches as manufacturers refuse to supply parts to independents. Manufacturers, on the other hand, argued that their reasons relate to keeping high quality of services—as noted by the Commission, according to some of them ‘up to 30% of repair work done in their after-sale services centres concern the damage caused by the inappropriate and wrongful repair executed by the watch repairers who do not possess proper knowledge and skills’.Footnote 14 While the issue of abuse of dominant position is still under investigation, the Report seems to indicate at least that authorised repair shops play an important role in that industry.”Footnote 15

However, beyond this conclusion, no reliable data are available and efforts to contact representatives of the watchmaking industry for further information, have remained unsuccessful.Footnote 16 This leaves the automotive industry as the sector with the most developed spare parts market, and accordingly the most significant interest in debates about legislation impacting it.Footnote 17 Several reasons might explain the prominence of the automotive aftermarket. In part, it is, of course, attributable to the considerable number of vehicles in circulation and the relatively high cost of acquisition of a vehicle compared to the cost of repair, which prompts repair over replacement. Even if measured by normal wear and tear, a fairly sizeable market would exist. With respect to visible spare parts, further factors stimulate the demand: first, the exposed position of must match parts in the context of their use (mobility) enhances normal wear and tear, and second, the frequency of non-probability events, such as traffic accidents. These factors account for the significant volume of the automotive spare parts market, as well as the fact that the data available derive almost exclusively from the automotive industry.Footnote 18 For this reason, the discussion in this book will center on spare part issues arising in that industry.

2.3 Spare Parts in the Automotive Industry

The automotive spare parts industry constitutes a significant market segment. In the EU alone, the spare parts business projected for 2020 is 230 billion Euro. Of this, visible parts hold a 25% share.Footnote 19 Regulation of spare parts will affect not only the aftermarket itself, but will be felt throughout the vast supply chain underlying it.Footnote 20 These facts account for the intensive lobbying efforts by all stakeholders when it comes to spare parts regulation.

As a background for understanding the economic tensions arising in the automotive aftermarket, it is helpful to take a look at this market segment. Manufacture and distribution in the automotive spare parts business form a complex web of relationships. In order to achieve cost savings, timeliness of supply and ultimately, economies of scale, original equipment manufacturers (OEMs) outsource production, distribution and customer relations to spare part contract manufacturers. This has led to a division of the market of authorized spare parts into those which derive directly from the producer of the original vehicleFootnote 21 and those manufactured under contract by the so-called original equipment suppliers (OES). Spare parts made by OES are, while not manufactured by OEMs, authorized by them and presumptively subject to their quality control.Footnote 22 Elaborate contractual provisions are in place between OEMs and contract manufacturers, distributors and repair shops operating with the OEM’s authorization. Spare parts which do not derive from OEM/OES sources are manufactured and distributed through networks of independent distributors and repair shops, also referred to as Independent Aftermarket (IAM).Footnote 23

Structurally, the market can be divided into four levels: manufacturers, distributors, repair service and consumers. At the manufacturing level, spare parts may be produced by either OEMs, i.e. the developers and producers of the original vehicle, or by spare parts manufacturers, who may or may not be authorized by an OEM.Footnote 24 Non-authorized spare parts manufacturers, or independents are not contractually bound to the original manufacturer or its distribution network.Footnote 25 At the distribution level, distributors may be under contract to distribute spare parts from OEMs, from manufacturers authorized by OEMs, or alternatively from independent manufacturers. It is estimated that independent distributors make up about a 52%, and auto manufacturers a 48% market share. Spare parts manufacturers supply both distributors and auto manufacturers for purposes of distribution. According to surveys, the type of parts supplied by each segment is generally determined by vehicle age. OEMs supply primarily newer vehicles, 0–4 years old. The market for 4–8 year old vehicles is strongly disputed between the two, whereas the IAM tends to supply more parts for vehicles older than 8 years.Footnote 26 Finally, retailers may be under contract with original manufacturers or authorized distributors, or alternatively they might operate as IAM distributors and repair shops. The IAM segment is supplied by both authorized and independent suppliers, each holding an about 50% share of the market.Footnote 27 Finally, at the consumer level,Footnote 28 spare parts reach the final user by way of two channels: on the one side via the vehicle manufacturers, through the network of authorized dealers and repair shops (OEM/OES) and on the other, through the independent aftermarket. As a rule, production of parts by OEMs ceases after about 7 years, even though some auto manufacturers give 10-year warranties.Footnote 29 Longer term demand is driven by consumers who have an interest in having spare parts available for as many years as possible after purchase of the vehicle.Footnote 30 In the event original parts become unavailable through the OEM/OES channel, they are frequently procured from independent manufacturers.

Despite the complexity of these arrangements, the interests of the individual stakeholders are clearly delineated between OEMs and independent manufacturers. Their respective positions vis-à-vis regulation of this market segment can be outlined in general terms as follows.

2.4 Stakeholder Dynamics in the Spare Parts Business

2.4.1 Challenges to New Market Entrants

Independent spare parts manufacturers perceive themselves to be at a disadvantage in their ability to enter into and compete in the spare parts market. Because they normally lack access to the original design and associated know-how, they must reverse engineer parts. Often this involves extensive research and extraction of information on the precise structure of the original part and its properties, in order to ensure compatibility with the original product.Footnote 31 Production facilities must be established and distribution networks must be developed.Footnote 32 The increasing technical complexity of automobiles adds to the disadvantage of independent suppliers, as software diagnostic tools are costly to acquire and often proprietary to OEMs. Consequently substantial up-front investments are required in order to enter the market.Footnote 33 Independent suppliers are concerned that the OEMs’ ability to secure IP protection on the design of spare parts would effectively exclude independents from the market.Footnote 34 Consequently, their position is to advocate liberalization of the spare parts markets, inter alia by eliminating design protection for the spare parts.

2.4.2 Challenges to the OEM Industry

OEMs have the advantage of already being “in” the spare parts market, having the benefit of production lines and distribution networks that were established in conjunction with the original product (the vehicle). However, it seems that the investment is rarely amortized through sales of those products. OEMs therefore must often rely on revenue from the spare parts market to recover their original investment, support future development and stay afloat in times of economic downturn. Competition from independent suppliers undermines this business model, largely because independent suppliers tend to concentrate spare parts for which production costs are low, and which are most profitable.Footnote 35 This not only reduces the OEMs’ market share but burdens them with manufacturing and stocking, often for years, parts that are less or not profitable. All of this diminishes the resources available to OEMs for future development.Footnote 36 Of further concern are low quality counterfeits and the associated safety risks, which tend to have an adverse impact on OEM reputation. Consequently, OEMs advocate strong IP protection of spare parts.

2.4.3 Public Policy Concerns

Finally, from a public policy perspective, IP regulation of the spare parts market raises additional complex questions. On the one hand, eliminating IP protection in order to increase competition would lead to more favorable pricing of spare parts and benefit consumers. Such measures are supported by spare parts alliances and the insurance industry. On the other hand, national legislators, especially of countries with strong automotive industries are under pressure to support national industries, given the considerable ramifications in terms of job creation, balance of trade and GDP. Public safety resulting from possibly sub-standard quality of independent spare parts is a further concern and measures addressing these issues are strongly supported by OEMs.

Overall, achieving a balanced solution that meets the needs of the triangulated interests of OEMs, spare parts manufacturers/insurance industry and consumers presents policymakers with a difficult challenge. Legislatures and courts in most countries are still in the process of seeking solutions.

The following chapters will focus on developments in this area, primarily in the EU and the U.S., but with occasional reference to approaches adopted by other jurisdictions, such as Australia, South Africa, Brazil and Japan.