Car importers profit from lack of competition

New cars Photo: Tamar Matsafi

Israel's car import sector features little competition and exceptional profit margins, the Ministry of Finance chief economist has found.

Israel's car import sector features relatively little competition and exceptional profit margins, the Ministry of Finance chief economist argues in his weekly review published today, based on an analysis of importers' profit margins over the past decade using figures from the Israel Tax Authority. Purchases of new vehicles have been climbing since 2007, and the 12 vehicle importers accumulated an aggregate NIS 14.1 billion profit in 2007-2014, a yearly average of NIS 1.6 billion. Average profit in this period was 72% higher in real terms than in 2003-2006.

The four largest importers accounted for two thirds of the profits in the sector. According to the figures cited by the Ministry of Finance, aggregate profit of the 12 vehicle importers was between NIS 1.9 billion and 2 billion in 2013-2014, double the figure for 2006 in real terms, before the steep rise in car imports began. At the same time, profit margins rose to 9.3%, an exception figure for the retail sector. The Ministry of Finance chief economist wrote, "Although there were two relatively weak years, 2009 and 2012, during the period, these were affected mainly by the steep shekel depreciation. In stark contrast was the fact that the rise in the importers profits took place in years in which the shekel appreciated. In other words, the vehicle importers do not roll the effect of shekel appreciation onto the consumer." He noted that the findings of an earlier study conducted for food importers were similar.

According to the analysis, the four largest companies accounted for 55% of the total turnover of vehicle importers. The chief economist wrote, "In monetary terms, the aggregate profit of the four largest vehicle importers in the past three years (2013-2015) totaled NIS 3.9 billion. In other words, on the average, each of these companies made an aggregate profit of NIS 1 billion." Three of these four companies are privately owned.

The report also revealed the employment and salary figures for the car importing industry. According to the figures, the 12 car importers had less than 6,000 employees in 2014. The average gross monthly salary was higher than the average business sector salary (a 50% gap), but according to the chief economist's figures, the proportion of remuneration for labor in this sector was only 28%, compared with a 58% average in the business sector as a whole. He wrote, "In assessing the development of employees' salaries in 2006-2014, when the car importers' profits doubled, it was found that the salary of employees in the sector grew only 8% in real terms.

According to the Ministry of Finance, the vehicle importers' high profit margins and the steep rise in purchases of new vehicles over the past decade reflect another aspect of the cost of living. The Ministry of Finance's analysis, based on Central Bureau of Statistics figures, shows that the most significant increase in the rate of vehicle ownership was in the fifth income decile – both the rate of ownership of one vehicle and the rate of ownership of two or more vehicles. The proportion of households in this decile with at least one car rose from 55% in 2006 to 71 in 2014. The gap between this decile and the two above it significantly narrowed.

In his conclusions, the chief economist wrote, "The findings support the need to implement in practice the Ministry of Transport's plan for bolstering competition in the auto sector, particularly with reference to the expanding the possibilities for importing new cars. As occurred in the other reform in the food market, this is likely to bring about a drop in consumer prices for new vehicles… other measures to ensure increased competition in this sector may also be worth considering."

In response to the chief economist's review, senior auto sector sources said that he "used historic figures designed to divert public attention from the dramatic increase in the government's tax revenues from the auto sector. This amounted to over NIS 40 billion in 2016, and is continually increasing. The government and the Ministry of Finance continue to ignore any request and public pressure to cut import taxes on vehicles and fuel, which could dramatically decrease the cost of living in this area. The report also ignores the critical effect of interest rate policy and absence of government supervision on consumer credit on the expansion of the vehicle market, reflected also on the rise in state tax revenues."

According to Ministry of Finance figures, household spending on cars rose 60% in real terms in 2006-2015.

Published by Globes [online], Israel Business News - www.globes-online.com - on March 19, 2017

© Copyright of Globes Publisher Itonut (1983) Ltd. 2017

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New cars Photo: Tamar Matsafi
New cars Photo: Tamar Matsafi
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