Car importers pocket the profits from strong shekel

Ashdod Port photo: Tamar Matsafi

Auto leasing companies are making big profits by buying cars at discounts and selling them to private customers.

The shekel-dollar exchange rate has fallen 5.6% this year, while the shekel has gained only 3% against the yen. However, the main player in auto imports to Israel this year is the euro. In addition to the many European carmakers, many of the Korean and Japanese vehicle manufacturers export to Israel from their factories in Europe, where costs are directly linked to the euro. As of now, the shekel has strengthened 9.6% against the euro since the beginning of the year. This means that in shekel terms, a car arriving at Israeli ports that cost €10,000, is €1,000 cheaper for the importer than in January.

Those €1,000 can theoretically be translated into a €1,500-2,000 price cut, including purchase tax and VAT. The big question posed by such extreme exchange rate changes is why this movement has had no concrete effect to date on the official auto consumer price list. The price lists published in January are almost identical to the current price lists. There has even been a slight upward movement in prices this year.

Distortions: The foreign currency exchange rates expose the tricks

The auto sector has offered quite a few explanations for this pattern. The leading and most common one is "The positive effect of the exchange rates was offset by internal and external changes." For example, the industry says that had the shekel not appreciated against the auto import currencies, prices would have risen in April as a result of the far more significant cut in environmental tax benefits.

The auto sector asserts that most of the importers prepared for this tax measure by accumulating substantial inventory, which was released from customs in the first quarter, when the big drop in the exchange rates of the shekel against the import currencies had not yet occurred. In other words, a large proportion of the cars still being sold in the market at present were purchased with stronger currency.

It is very difficult to discern whether this argument is correct, and to what extent. In any case, the effect of the environmental tax was not across-the-board; it focused mainly on specific models, most of them small and environmentally friendly models. The effect on many other models, some of them very popular, was negligible, and importing them was not brought forward.

Another common explanation in the sector for the failure of prices to fall is that the Israeli consumer is benefiting from the bonuses of the stronger shekel against the import currencies, but indirectly, through the cut-rate zero-kilometer track of the leasing companies, and through bargains and sales days - in other words, a track in which new vehicles are purchased by leasing companies at large discounts and marketed onwards at small discounts to private customers.

This explanation exposes two basic market distortions. The first is the zero-kilometer market, which is unique to Israel, in which a large mediation commission is deducted from the importers' discounts, instead of the private consumer benefiting from them. How dependent the leasing companies are on these commissions can be seen in the reports by the public leasing companies, some of which show that the profits from the sale of vehicles are greater than the profit originating in core leasing business.

On the other hand, the discounts and bargains of the auto importers expose the bluff in the Israeli market involving the scrap value of used cars. Everyone in the market knows that there is a substantial difference between the list prices and the actual prices, but the official list prices are nevertheless used as a basis for calculating the balance sheet value of the large vehicle fleets, and as a basis for calculating the value of the vehicle as collateral to secure private credit for its purchase. This amounts to NIS 15-20 billion in credit that rests on unrealistic values.

The most common and effective explanation of all is that manufacturers increase the basic car price in order to compensate themselves for the exchange rate. At least on the face of it, it does not appear that in the current crisis market conditions, global manufacturers are capable of or motivated to substantially raise car prices for the importers.

Who will pay the price: The manufacturers will raise the price

Utilizing exchange rate differences to make profits is not confined to the auto industry; it is a well-known situation in a free market economy. When the changes are extreme, however, there is a significant side effect. As a beginning, importers must take into account that this tactic is liable exact a price from them in dealing with the manufacturer in the long term.

The manufacturers are not naïve. Although most of them right now have an interest in getting rid of merchandise they have been stuck with, without raising the prices, it cannot be ruled out that for the models in short supply for which demand is strong, they will prefer allocating supply to more profitable markets, while leading the Israeli market high and dry.

This is already happening in the field, with a shortage of key models, especially hybrids, and long delivery times for customers. We are likely to see it much more conspicuously in the future, as demand for hybrid and environmentally-friendly vehicles increases in Europe before the more stringent emissions regulations take effect in 2021.

Another byproduct of the situation is increasing dependence of the leasing companies on benefits resulting from exchange rate differences. The forex market is a kind of casino, especially during periods of global instability. If the exchange rate situation reverses and the situation quickly reverts to the way it was the zero-kilometer market will shrink, and the leasing companies are likely to find themselves without a key revenue anchor.

Finally, the sector should keep in mind that the phenomenon of indirect and micro-importing in Israel is rapidly assuming major proportions. Opportunistic merchants can take advantage of the exchange rate differences and the availability of inventory in market hit by the overseas crisis to cut prices and compete aggressively for private customers. This pattern can only expand.

Private customers have already gotten used to meekly accepting the fact that a new car is a luxury and a tax revenue cow for the state. Someone who thinks that the official price lists are dictated by heavenly decree, that 5% discounts and reverse sensors at house expense are like winning a lottery, and that taking a loan according to the full list price plus is a worthwhile deal probably deserves whatever he or she gets.

Published by Globes, Israel business news - en.globes.co.il - on September 4, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Ashdod Port photo: Tamar Matsafi
Ashdod Port photo: Tamar Matsafi
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