Hard times ahead for car sales in Israel

Dubi Ben-Gedalyahu

New car deliveries fell only slightly in the first half of 2019 but can be expected to plunge in the second half.

The monthly delivery figures in the Israel auto industry show us how risky it is to draw conclusions and make forecasts on the basis of dry figures, without looking at the broader picture. Officially, the Israeli auto industry ended the first half of 2019 with 158,000 deliveries of new vehicles, just 1.5% less than in the first half of 2018. At first glance, this seems like impressive stability. In actuality, the market this year is anything but stable. The truth is that the formal half-year stopping point shows nothing about what is in store in the second half of the year.

The Israeli auto market utilized its full momentum in January-June 2019. As usual, July and August feature an effort to maintain sales while masses of customers are on summer vacation. September will be affected by the political and economic uncertainty of another election campaign. There will be very few working days in October because of the holidays falling during the month, while sales usually plunge in November and December as the market waits for registration of the new vehicle early next year. This year, incidentally, the psychological trend of waiting for registration of the new vehicle at the beginning of the year will be especially strong because a new decade is starting, with new vehicle registration numbers bearing the year 2020.

The regulator's sticks of dynamite

What about "stability"? In January-June 2019, the Ministry of Finance dropped any pretense of conducting a level-head public policy in the auto sector, such as "reducing road density," "an environmental agenda," and the like. Instead, the ministry is using explosives to catch the tax fish - it is throwing dynamite sticks into the water to generate shock waves and collecting the masses of floating stunned fish.

The first dynamite stick was the well-timed announcement of an indirect across-the-board purchase tax hike in April via a substantial drop in environmental tax benefits. This especially affected the cheapest and most popular cars in the market, inspired importers to bring forward the release of vehicles from customs, and pushed masses of confused customers into buying new vehicles. This achieved its purpose of bolstering dwindling state tax revenues in the second quarter with an addition of nearly NIS 2 billion (including VAT, fees, etc.).

The Ministry of Finance was delighted with the results, and before the market had time to calm down and stabilize, tossed in a second dynamite stick - a tax hike for hybrid vehicles aimed at the hottest and fastest-growing segment in the auto market.

The shock waves from this measure will have an especially strong effect towards the end of the year, when state revenues are projected to soar because of early and exceptional release from customers of 15,000-20,000 hybrid vehicles. Sales in the sector by both private customers and leasing companies trying to preempt the tax will accelerate - new vehicles priced as used, or with no mileage, in the case of leasing companies - can be expected to skyrocket in 2020 when the tax benefit is cut.

It will come as no surprise if this trend increases the market share of hybrid vehicles by the end of 2019 - perhaps to as much as 30% or more of the market, a result that is the exact opposite of the Ministry of Finance's official goal.

Forecasting the broader picture in the market in the first half of 2020 is also not particularly difficult. Thousands of hybrid cars released ahead of time in late 2019 with increased tax benefits will leave Kia, Toyota, and Hyundai in a leading position in the first two quarters, but this time without generating "new" revenue for the state. The Ministry of Finance's well will dry up from over-pumping in the first half of 2020; it will have to find more creative ways of deriving 12-14% of state tax revenues from the auto sector.

All of these forecasts are valid, assuming that the macroeconomic conditions and the currency exchange rates remain stable. This by no means certain, given the ballooning budget deficit and the looming threat of a downgrade of Israel's credit rating.

European storm headed for Israel

In the medium and long term of 12-18 months ahead, the broad picture of the auto industry does not appear any more positive. This time, however, the reason is not regulatory distortion, but the tumult in the European auto industry.

Here is a summary of what is in store. In early 2021, all auto manufacturers selling a new vehicle in Europe will face a new mandatory limit on CO2 emissions - an average of 95 grams for their entire range of vehicles, 20% less than the current limit. Any manufacturer who fails to meet this test will be fined hundreds of millions or billions of euros, in direct proportion to the number of vehicles it sells in the European Union.

Meeting the requirements, mainly by launching "electrified" models in addition to gasoline and diesel engines that will continue to account for a majority of sales and profits, will be a very expensive task. A comprehensive study published in Europe this week estimates the development and production cost of "electrifying" a strategic vehicle platform at $2.3 billion a year for each manufacturer.

This process has several major consequences for the Israeli vehicle market. The first is that in the next 18 months, many vehicle manufacturers will have to mercilessly slash models, and even entire "families of models," whose profits do not justify the cost of adapting them to the new emissions limit.

First in line for the chopping block are the cheap mini-models that account for 25% of sales in Israel. Many models from the A segment of the European market will vanish or be converted to purely electric propulsion, which will wreak havoc with profits. Another possibility is giving up on automatic gears in order to get rid of every gram of CO2. If this change also reaches the South Korean Kia Picanto and Hyundai I10 mini-cars, the change is likely to substantially rejuvenate the competitive structure of the Israeli auto market, and reduce the most popular and accessible supply in it.

Another consequence of the new emissions limit, at least in the foreseeable future, is pushing the Israel auto market down several rungs on the business priority ladder of many auto manufacturers. Israel is already regarded as a problem market because of its inexhaustible appetite for discounts, but when the financial resources of many manufacturers are stretched to the limit, maximizing profit will be the top priority.

The Israeli market will continue granting full tax benefits for electric vehicles and considerable benefits for chargeable hybrid vehicles in 2020, but it can be assumed that the global manufacturers, other than the Chinese, will attempt to allocate every "electrified" vehicle coming off of their assembly lines to sales within the European Union in order to reduce their average emissions, which is weighted according to the volume of actual sales. Israel is not part of the European market.

The interim summary is less diversity, less supply (already being felt in key models), and potential market-wide price rises. So far, this is only potential, because importers in Israel still have fairly thick layers of fat isolating the real price from the official consumer price (price list). A reduction in discounts for leasing companies can be expected, however, with a considerable reduction in supply to the "zero mileage" vehicle market, which has been the concealed sales engine in the Israel auto market in recent years.

From safety to Brexit: Reason for changes

The CO2 storm is only part of the general picture. In March 2019, the European Union decided to require the installing of a long series of advanced safety devices on all vehicles sold in its territory as part of the European standards, starting in 2022.

These devices include a smart cruising control, diagnosis of the driver's alcohol level, an advanced warning system against driver fatigue, a "black box" for recording accidents, an identification system for driving in reverse, automatic brakes, staying in a traffic lane, etc. This is good insurance and consumer news (not to mention the Israeli auto-tech sector, but that is another story), and a large proportion of the models sold in Israel are in any case already equipped with these systems.

As of now, however, the Ministry of Finance grants a partial tax subsidy for most of these systems, which is due to be canceled in the coming months. This will increase the cost by several hundred euros, and even thousands of euros in some cases. In one way or another, this added cost will be rolled over on consumers in Israel, and that does not include the WLTP Part 2 real-time emissions tests; the Brexit effect, the effect of which on the industry is not yet fully clear; and US President Donald Trump, who is still disrupting world trade in general.

In short, stormy weather is ahead. The developed countries have mechanisms for cushioning shocks and preventing upheaval from affecting people's pockets. We have brutal auto taxes that turn every increase of €1 in overseas manufacturers' prices into a €2 price rise in Israel, plus regulation whose main purpose is to increase tax revenues. The cloudy vison of accessible public transport is becoming more distant as the budget deficit grows. What price stability?

Published by Globes, Israel business news - en.globes.co.il - on July 3, 2019

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

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