The Australian Competition and Consumer Commission is looking at the proposed combination of two car retailers: AP Eagers’ (ASX: APE) already owns shares in Automotive Holdings Group (AHG) (ASX: AHG) and proposes the acquisition of the remainder leading to a full takeover.

The ACCC is looking at "its impact on competition in new car retailing in the Newcastle/Hunter Valley region of New South Wales." The case is interesting because it is not national issues that are being raised and it is not an industry-wide issue. Indeed, in the big cities, ACCC says "The ACCC’s preliminary view is that the proposed acquisition is unlikely to substantially lessen competition for the supply of new cars in Melbourne, Sydney and Brisbane or nationally, the wholesaling and retailing of used cars, the acquisition of car dealerships or the supply and acquisition of finance and insurance products."

But the ACCC's reasons for digging into the effects in smaller markets bear thinking about: "A combined AP Eagers and AHG would operate 46 per cent of new car dealership sites in the Newcastle/Hunter Valley region, including those for the ten most popular brands, and runs 54 per cent of the dealership sites selling those brands. In metropolitan Newcastle alone, the combined company would operate 77 per cent of dealership sites selling the ten most popular brands, " said acting chairman Delia Rickard.

For some basis of comparison, consider the Western Australia towns of Busselton and Dunsborough which co-exist with a combined population of around 40,000. There are car dealerships for Holden, Toyota, Ford and one representing the combined marketing group of Mazda, Mitsubishi and Suzuki. There may be more because Korean brands KIA and Hyundai are, nationally, popular and so are Nissan, Mercedes and BMWNone are part of either Eagers or AHG. There are also several second hand car dealers and independent mechanics.

But let's be clear about this: the reason that Toyota, Holden and Ford have closed their Australian manufacturing plants is that the market is tiny: with a population of less than 30 million, many in cities where cars are a nuisance to own, no matter how hard they try, car dealers cannot sell many cars. For example, according to CarStar Blue the biggest selling car in Australia last year was the Toyota Hilux (suggesting rural or low density provincial purchases) and that sold only 4,206 units. By the time the survey gets down to number ten, the numbers are stark: "Holden Colorado – 1,719 sales"

This, then, is the challenge for the ACCC. They are considering whether, in the Newcastle/Hunter Valley region, "a divestiture would address potential competition issues."

It seems as if small, independent, dealers can survive even in very small and relatively remote communities. But is survival enough? Manufacturers constantly demand that dealers "upgrade" their premises to a corporate image: the garagistes of the past are no longer acceptable as the face of a brand, even for maintenance only. In the UK, for example, grand, out of town, centres are the only places to see showrooms - and the only official maintenance facility. That's no use at all when you live down 20 miles of tight winding road, far away from the nearest ring-road, brightly lit, 9-5 service centre. Independent, small town showrooms are uneconomical. If the ACCC does order that some showrooms are sold off, who will buy them? Their future may depend on their being cross-subsidised from a parent. Given that there are no manufacturers to subsidise dealerships with soft-loans, how long can small independents be expected to last? Is the ACCC, therefore, going to reduce choice by inadvertently leading to the closure of dealerships leaving brands unrepresented?

It's a complex question without an easy answer and at the heart of it is availability of service and service costs: buying a car is to buy a commodity item - it's keeping it going causes problems and that's even worse when sales includes e.g. long term servicing or warranty deals. What use is a ten year warranty on a car that you can only get repaired and serviced 200 km away and you have to get it there. The ACCC notice focuses on sales. That's the wrong point. It does mention parts and servicing but it doesn't ask the big question: should car companies be able to restrict servicing to "authorised agents." Now that's a huge can of worms but it's about competition, too.