Driving competition in auto imports

A quick glance at any busy street or parking lot will reveal the tiny number of car manufacturers dominating the Israeli market. You'll easily spot different Mazda, Hyundai and Toyota models, while other manufacturers are far less prevalent.

	Jacob Shachar
	Photo by: Nir Keidar

In the '80s Japanauto, the Subaro importer, controlled 40% of the Israeli automobile market. Today Delek Automotive, which imports Ford and Mazda vehicles, controls 25% of the market. On the face of it, the auto market here is still centralized, with very little evidence of competition, but a closer look reveals a more complex picture.

Competition does exist - but between the fleets of rental cars, rather than the private buyer. Most sales in Israel are made to the car leasing firms, which operate as an oligopsony - that is, a group of large clients which governs the price of new and used cars - rendering the private buyer irrelevant.

So why is Israel's automobile market so centralized?

At first glance, the competition between car importers seems fierce: Fifteen importers are competing in the local car market, representing no less than 36 makes of car; the number of ads also indicates marketing turf wars. But a look at the sales figures tells a different tale.

	Tzvi Neta
	Photo by: Guy Raivitz

Four importers have the market sewn up

In 2009, the four leading importers - Delek Automotive, Union Motors, UMI and Calmobile-Calmotor - had a joint market share of 58%. In the first half of 2010, these importers collectively had 55.3% of the market.

The profit margins enjoyed by these importers, however, show a less even picture. Delek Automotive made an average profit per car of NIS 7,274, and NIS 316 million in total profit in 2009 (the year of the economic crisis ). By contrast, UMI, the smallest importer of the four, only made a profit of approximately 10 shekels per car in 2009. As most of the importers are not listed on the stock exchange, no financial reports on them exist.

"You go into the capital market when you need to raise money, but it doesn't happen often in the car industry," says Tzvi Neta, proprietor and CEO of the vehicle import company Machshirei Tnua. "It's easy for importers to get bank credit because the field is considered a cash cow."

Neta recently considered a flotation of Machshirei Tnua, but finally decided against it.

Importing cars is an apparently profitable and stable long term business which also enables importers to branch out into other fields. The Manor family for instance, who import Peugeot and Citroen cars, own a substantial chunk of IDB Holdings; George Horesh, a Toyota and Lexus importer, acquired the H&M franchise; and Jacob Shachar, one of the owners of car importer Mayer, bought the Phoenix Insurance Company.

"All this was the case in the '80s," says a senior figure in the industry. "There were not very many importers and everyone made money. Today profitability has been eroded and it's harder to make a fortune."

The great importer profit margins, says the source, result from the fact that the Israeli market is closed and you cannot import from neighboring countries. Ministry of Transportation policy, he notes, has contributed to this as well.

"The [Year Model] policy let an importer sell a car even if a few years had gone by since it was manufactured, and to run up a stock of older cars," the source explains.

According to Yaki Anoch, chairman of the Israeli Car Importers Association, importers are not as powerful as they appear.

"It's a manufacturer's market - importers have very little influence over the price and therefore over the profit margin," he says. "Israel is an isolated market, so it's easier for manufacturers to sell cars here at a low price without affecting other markets. But the importers are just a marketing arm."

The Ministry of Transportation issued the following response to claims of centralization in the car import industry: "Transportation Minister Yisrael Katz recently took one of the most significant steps of the past decade in this sector: opening the parallel imports market to free competition. Parallel imports make it possible for the first time in Israeli history for cars made by the same manufacturer to be imported by more than one firm. This is a major change in regulations, which will create new sales channels and fundamentally alter the state of supply and competition in different market segments.

	Yaki Anoch
	Photo by: Ofer Vaknin

"We believe the significant adjustments, led by Minister Katz, are breaking down the monopoly and centralization which have prevailed in this industry in recent decades, and results will start to be seen even in the next few months. We are convinced that in a few years, when the Israeli consumer purchases cars at lower rates and more attractive terms, everyone will wonder why there had not been any competition until now."

Perhaps the parallel import reform will finally break down centralization, but senior figures in the industry claim the problem is no longer the importers but rather the market structure itself, which is biased in favor of the rental car dealers. In their view there is ferocious competition, but the private individual simply does not register it.

Five leasing companies control the price on the street

The state of the Israeli auto industry calls for the definition of a term that hasn't been pulled out of the economics textbooks for some time: oligopsony, in which a number of major customers (the leasing companies ) dictate the rules of the game to the sellers (the importers ) and to the smaller customers (the private consumer ).

The senior industry source recalls the Mitsubishi and Daihatsu wars of the early '90s, and the advertisements which directly attacked rival importers, "but that all disappeared the minute leasing came into the picture." According to him, leasing is "the bane of our existence."

The car leasing companies buy about 60% of all the cars in Israel; and a focus on the main categories of family cars, small cars or executive cars, reveals that their share of buying in these categories actually hits 80%, proving the extent of customer centralization. So leasing companies shape the price of new cars: The price of sales to private individuals starts at a higher rate so that used-car depreciation will start from a higher point, thus creating a discount margin to offer leasing companies. Leasing companies also sell most of the used cars in the recent annual price guides and therefore have a decisive influence on that market as well.

Figures compiled by the Israel Tax Authority indicate that in 2008 leasing companies bought 96% of the Ford Focus models in group 2 (the most popular licensing group at that time ) and 97% of the Mitsubishi Lancer models. These cars now only enter the market second hand.

"The leasing company is a dealer [or sub-agent]," says the senior industry figure. "Dealers manage the market. The importer may make more than a manufacturer in Europe, but he is a middleman selling to dealers. They bypassed the monopolies and became multi-brand dealers. What happened was that the government tilted the scales toward me, the consumer - for me, as a private consumer it makes sense to buy from dealers [leasing companies]."

The competition between importers today is no longer over the private consumer, but over the discounts and finance options offered to leasing companies. According to market insiders, even parallel imports will not change the state of play, as most of the popular cars that get to Israel through that route will wind up in the rental car fleets and not help competition. Incidentally, the first company to receive authorization for parallel imports is the leasing company Shlomo Sixt.

The Ministry of Transportation replied, "the ministry does not believe that the price of new and used cars is fixed by leasing companies. These are unsubstantiated allegations."

	George Horesh
	Photo by: Limor Edrey

The Israel Tax Authority thinks otherwise. Past reports by the authority have defined the auto market as "distorted" and the scale of purchasing by leasing companies as obstructing competition. The Israel Tax Authority declined to comment, but noted that their position had not changed.

Moni Bar, CEO of Budget Israel, responded to claims of centralization: "You're talking about a total of 10 leading companies. You should see the savage competition between us. We're tearing each other to pieces. Every company will want to get the biggest discount and the best terms for its customers."

"There are editions meant specifically for leasing," Bar continues. "Manufacturers give leasing companies discounts of around 10%, which is not an unreasonable margin over the private market. This doesn't even cover the price guide depreciation of a leased car. A customer club member, for instance, gets a 6% discount on cars meant for the private market. The bottom line proves the vicious competition the exists, and the balance sheets show that we're not raking it in. There is a reasonable influence over supply and demand, just like in any other industry."

Private imports lower price of luxury cars

Prices in the luxury car market are higher, and it would seem profits are astronomical. The boom in private imports a couple of years ago proved that it was possible to buy such cars at much lower prices by importing them privately. But after importers lost a third of the prestige car market to private imports, it looks as if the situation has changed.

Machshirei Tnua, for instance, lowered its price for the Jeep Grand Cherokee (the most popular privately imported vehicle ) by NIS 90,000, while Calmobile dropped its Mercedes prices relative to the decreased value of the Euro. Correspondingly, the end of the economic crisis in the United States and Europe has shrunk the stock of vehicles that could be purchased cheaply thanks to lack of demand in the local market.

Based on our recent calculations, TheMarker has found that the prices on private imports are in most cases similar to the prices being charged for those same models in Israel. Factoring in the greater devaluation of privately imported cars, and the generous discounts available in the luxury car market, it just doesn't make sense to import a new car privately anymore. In the case of used cars, however, the story may be different. Although competition in this sector is higher than it used to be, there is still no reason to shed any tears for the luxury cars importers.