Oops. Car Importers Forgot to Cut the Price

In the last few weeks, car importers have stepped up their advertising, in anticipation of the 2008 models. The glitzy ads urge buyers to rush and buy the last 2007 models, proffering trade-ins and financing, all at comfortable prices.

These alluring ads have it all, except for one little suggestion: that they lower the price of the cars.

The last time car prices in Israel dropped, was in January 2007, by 4.4% to 6.4%. The most popular models, family cars with 1,600cc engines, sank from about NIS 119,000 to NIS 114,000, and five thousand shekels is nothing to sneeze at.

The drop in price wasn't because of competition or anything like that. No, the importers were forced to it, by the Finance Ministry and the Knesset, in their periodic update of "price groups".

Price groups were designed to serve a purely technical purpose: to set the appropriate tax level on company cars.

When your employer allocates you a leased car for your own personal use, then your salary for tax purposes is raised, though of course your net is not. The increase is based on the estimated value of using a company car.

But this issue of price groups has long since become a benchmark for setting car prices too.

Anyway, the treasury updated the price groups in January 2007, based on changes in the exchange rate curing 2006. And mainly, because it lowered the tax on buying a car.

Five months hence, sales tax has not dropped again, this is true. It may. But the exchange rate has changed.

From the start of the year, the dollar has dropped by 6.3% against the shekel, the euro has lost 3.6% against the shekel, and the yen has receded by 7.4%. The dollar, euro and yen are the currencies that importers use to buy the cars they sell. In short, they're paying a lot less per car in shekel terms.

If the price of the sedan were updated base on the exchange rate, it would drop from NIS 114,000 by eight thousand to about NIS 106,000, according to one test we used.

It is true that they are offering some breaks: trade-ins, financing on great terms, cheap accessorization, etc. That's all worth money and can reach thousands. But these indirect bargains aren't the same as cutting the price of the car by several thousand shekels.

Competition between the importers can't exactly be cut-throat if none of them can be bothered to lower the price, even though their sources cost them much less.

The importers argue that the consumers don't want the cars to cost less, because it will lower the resell price of their second-hand cars. That sounds silly: surely the customers would have preferred to pay less, if they could, even if it means they get less for their old car.

Presumably the only client that feels that way is the leasing companies; they have huge fleets and a drop in price of their second-hand cars would hurt, a lot.

The importers argue that the main component of a new car's price is tax (true). They argue that they are the captives of the leasing companies, and that any discounts available must go to the leasing companies (also true). But that does not excuse them: that's no way to behave in a competitive environment, and if there is no competition among them, then it's time to introduce it.