Europe's biggest car maker, Volkswagen, has sent a letter to its UK dealers warning them they could lose their franchises if they try to sell cars over the Internet.

The company is reacting to an explosion in the number of UK Websites selling new cars. Autobytel UK, New Vehicles Direct and Motorbase are mentioned by name in the letter which says "there are now so many it would be difficult to produce a full list."

Autobytel UK's Chief Executive Kevin Turnbull told BBC News Online: "Our worry about this is that they don't really understand the Net consumer and Autobytel services. There is a hint in all this of some kind of restrictive sales practices."

VW denies preventing cheaper cars

VW was fined $110m in January 1998 by the European Commission for preventing its Italian dealers from selling VW and Audi cars to customers in other European Union countries. The Commission said Volkswagen contravened EU competition law by denying customers the benefits of cross-border price differentials.

But the company denied on Wednesday that the letter to its VW and Audi dealers had anything to do with cars being sold at discount prices over the Net:

"Retailers are able to promote and advertise anywhere they wish. They cannot, however, appoint agents to sell for them, who have made no investment in servicing and back-up facilities for customers in their locality," it said in a statement.

"Effectively, commissioned selling agents using the Internet or any other media are placing themselves between the customers and retailers and are charging a fee for their service. Ultimately, this must lead to increases in price for the consumer and lower levels of service."

Car e-tailing unstoppable

A Volkswagen dealer, who did not wish to be named, told BBC News Online that VW was putting its finger in the dyke.

"Retailing over the Net is coming. car companies can try to dissuade dealers, but ultimately the whole dealer network is going to come under strain and the days of the exclusive franchised dealer are numbered," he said.

"This is all about losing control. Every other industry would love to control distribution the way the car manufacturers do."

Car makers in Europe benefit from a "block exemption" scheme which allows them to run exclusive dealer networks and protect themselves from open competition. But the EU may abolish this in 2002.

Web provides complete package

In the meantime, they face Internet companies imposing their own networks on top of Volkswagen's. Autobytel UK was set up a month ago on the same lines as the successful American service of the same name. Autoweb and Microsoft's CarPoint are also seeing booming car sales through the Net.

Consumers can compare car prices and features and find dealers in their area through the Autobytel Website. They can be guided right through the car buying process including finance packages and insurance.

Dealers pay Autobytel a fee for advertising their cars, but can save money on their own sales and marketing. Six hundred cars have so far been sold.

"The costs compared to traditional retailing are significantly lower. It brings extra customers to the dealerships and consumers are benefiting from more competitive prices," said Kevin Turnbull.