Israel's Ministry of Finance is currently considering regulatory relaxations on parallel imports of vehicles, sources inform "Globes." The aim is to encourage competition in the sector, which saw record sales in 2021, and reduce prices for the consumer. The plan being drawn up could enter into effect this year but it is unclear whether prices will actually fall.
Israel's vehicle market was opened up to parallel imports in 2016 when a law on the subject was enacted. But the promises by the then Minister of Transport Israel Katz that car prices would fall 20%, never materialized.
There are currently 35 parallel car importers registered in Israel, with a negligible 3% market share, compared with just 14 official importers. One of the main reasons that the parallel importers have been unable to pose a genuine competitive threat to the official importers is the amount of bureaucracy that they face. Relaxation of the bureaucracy and the forms that must be filled in could revive the parallel import reform and ignite real competition in the car import market.
The main obstacle marked out by the Ministry of Finance and Ministry of Transport are the customs procedures for the parallel import sector. The bureaucratic maze often means that parallel importers are required to pay thousands and even tens of thousands of shekels in excise for cars while the official importers are exempt from excise on exactly the same cars.
For example, Israel has free trade agreements (FTAs) with the US, EU, Turkey and other countries in which cars are manufactured and imports from these countries are exempt from custom duties of 7% of the price of the car (including purchase tax and VAT) but to gain the exemption, the parallel importer must present a "certificate of preference."
To obtain this "certificate of preference," the vehicle supplier must produce an original document from the manufacturer to prove that the car was produced in the country with which Israel has an FTA. The official importer has no problem obtaining such a document, which is provided by the car manufacturer. The parallel importer, in contrast, buys from the inventory of dealers abroad and here is where there is a market failure.
When the dealer asks the car manufacturer for documents for Israeli customs, the manufacturer has an interest in refusing the request. In addition to the partnership with the official importer, the business model of car manufacturers clashes with the parallel importer. The manufacturer prices cars differently in different countries according to their business strategy based on the income of the target customers. In contrast the business model of the parallel importer is to buy from countries with a cheaper cost of living and sell at a profit in countries with a more expensive cost of living. Thus the parallel importer is virtually blocked from the customs exemption, greatly reducing their chances of competing with the official importer.
Even without parallel importing, car buyers can choose between dozens of manufacturers and hundreds of car models. But they are controlled by about ten large importers. A customer wanting to buy a Hyundai must go to the official importer and whoever prefers a Mazda must go to its official importer. Free import of cars would create competition within the same car manufacturers.
In other countries, parallel importers have a 10%-12% market share and expectations that the same market share could be carved out of the market in Israel. In other words 30,000-35,000 cars per year.
How would such a development effect the market? Today a parallel importer who does manage to obtain a "certificate of preference" sells the car at 3% below the price of the official importer. Even so such a price reduction is likely to be offset by tax rises on new cars that the Ministry of Finance is planning in the coming years.
Nevertheless, the significance for the car buyer is not only the price but also supply times. Currently due to supply chain disruptions, buyers can wait many months until their car is delivered, especially with popular models. Parallel importers are already taking advantage of the situation to supply cars at shorter notice. If they can increase their market share, this would also impact waiting times for the delivery of new cars.
Published by Globes, Israel business news - en.globes.co.il - on January 5, 2022.
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