Sweeping new EU legislation meant to increase competition in sales of new cars and in markets for services and parts will probably be good news for consumers, independent service shops, spare-parts suppliers, and many dealers.¹ But as manufacturers lose some of their control over the way dealers market and sell their brands, they could face increasing price pressure on the 15 million cars they sell annually in Europe and in the highly profitable after-sales market. Nevertheless, they have a huge and long-neglected opportunity to compensate for falling revenues by improving the performance of their inefficient distribution networks. Europe’s car-retailing system was built decades ago, when dense and integrated sales and service networks were needed to satisfy demand in growing markets and to offer qualified repair service for cars whose quality and performance were generally worse and more varied than they are now.

To stimulate the large investments that were necessary, regulators allowed the automakers to grant their franchised dealers sales areas in which nobody else could sell their cars—an arrangement known as the exclusivity rule. Meanwhile, the selectivity rule allowed automakers to establish certain standards and performance criteria for their franchises in matters such as showroom design, the...