The Car Market in Israel Is a Cartel

On top of the high taxes the government levies on private cars, there’s a cartelized market. Four importers control 64 percent of the market for new cars and reap enormous gross margins of 8.1 percent – more than any other industry in Israel.

These disproportionate profit margins were revealed in a State Comptroller’s report published last week. There’s a warped confluence of interests at work here, in which the government and the importers both want consumers to pay more. The government earns around 10 billion shekels ($3.1 billion) a year from taxing cars, while the importers enjoy windfall profits in the hundreds of millions of shekels annually. Importers’ profits have grown because Israel is a closed market, with most makes of cars available only from a single importer. Competition among the importers is limited at best.

Moreover, even if the customer has a choice among different makes of car, when he goes to have it repaired and maintained, he is a captive customer, with no real ability to compare the prices of parts or determine the quality differences between them. The State Comptroller examined the prices of spare parts and discovered that 69 percent of original spare parts cost twice as much or even more than other, comparable parts. Car owners are thus forced to pay thousands of shekels just to keep driving the overly expensive car they bought.

Drivers also pay through the nose at the gas station because such a large share of the price of gas consists of taxes. Only the better off can afford to buy hybrid cars, thereby paying less for gas, or switch to a new electric car and dispense with gas entirely.

Although the government must encourage the public to use private cars less, we shouldn’t accept the distortions in the market as a decree of heaven. The problem of competition in car imports isn’t new; for 20 years, various government committees have proposed alternatives.

But the Israel Tax Authority – the regulator with the greatest influence over the car market – hasn’t done anything to increase competition, even though there’s a lot that could be done. First, taxes must be made transparent to the consumer. Second, the purchase tax – which not only inflates the price of the car, but also the prices of parts and insurance – should be replaced with a usage tax. That would make it cheaper to buy a car, but create an incentive to drive it less.

The importers’ cartel is a matter that requires thorough treatment by the Israel Competition Authority. Among other things, the authority should look into how importers help the manufacturers block parallel imports and the pressure they exert on garages to sell only original parts.

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The above article is Haaretz's lead editorial, as published in the Hebrew and English newspapers in Israel.