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Israel: Automotive forecast(IndustryWire Via Thomson Dialog NewsEdge) FROM THE ECONOMIST INTELLIGENCE UNIT 200620072008200920102011New passenger car registrations ('000)131157169180193205Stock of passenger cars (per 1,000 population)244250257264272280New commercial vehicle registrations (000)353738404242Retail sales of petrol (000 tonnes)2,0202,0442,0682,0942,1242,135Source: Economist Intelligence Unit.A gradual reduction in taxes, coupled with rising disposable incomes and falling unemployment, will help to support strong growth in demand for cars in Israel's relatively underdeveloped automotive market over the outlook period. As a result of very high taxes, car ownership, at an estimated 244 vehicles per 1,000 people in 2006, is substantially lower than in most developed countries, although higher than in many other Middle Eastern states. Although total vehicle deliveries fell in 2006, they are expected to recover in 2007. The 2006 figures in part reflected the one-off impact of the July-August war between Israel and Hizbullah, a Shia group, in Lebanon. However, a more significant factor was the announcement of a further cut in the purchase tax on new cars from 2007, which caused many buyers to postpone their vehicle purchases until the new year. As a result, December vehicle deliveries were down by 47% year on year, whereas from January to November, total car sales had risen by 6%. All told, total vehicle deliveries in 2006 dropped for the first time since 2003, according to data from the Israel Motor Vehicles Importers Association (IMVIA), based on reports from importers. The IMVIA found that total deliveries declined by 2.7% to 149,505, compared with a rise of 2% year on year in 2005. Continued reductions in car purchase taxes will support rising demand for new passenger vehicles over the forecast period. Demand will grow more rapidly than in the historical period (2002-06), when taxes were higher. Nonetheless, car sales in Israel will remain sensitive to developments in the security and political situation, which have the potential to undermine consumer confidence. For instance, the 2006 war with Hizbullah also contributed to lower demand for cars. In the event, the overall economic damage resulting from the war was less than had been feared, with GDP growth coming in at 5.1%, only 0.5 percentage points lower than it had been in 2005, but initial uncertainty over the extent of the economic impact encouraged consumers and businesses to postpone car purchases. As a result, vehicle deliveries were down by 18% year on year in July 2006, a far greater decline than was seen for the year as a whole. Recovery is expected as purchase taxes are gradually cut Vehicle sales will grow much more strongly in 2007, boosted by a reduction in purchase tax and by higher economic growth and a still strong currency. Vehicle purchases were up by 25% in January 2007, according to preliminary IMVIA dataa clear reflection of the tax cut. Moreover, the Israel Tax Authority has reported that imports of new private cars were up by 38% in the first six months of 2007, to 96,989. However, imports of commercial vehicles (which were not included in the tax cut as they face lower purchase taxes than private cars) fell by 9.6%, to 5,717, over the same period. The Economist Intelligence Unit forecasts that new passenger car registrations will surge by 20% in 2007 as a result of this year's tax cut. Registrations are then forecast to grow by a robust average of 7% between 2008 and 2011, supported by rising income per capita, strong economic growth and the continued gradual reduction of the car purchase tax. The government has announced plans to cut the purchase tax on new private cars to 72% by 2010. Purchase taxes have traditionally been very high in Israel, at an upper limit of 95% in 2005. However, under current plans, the rate of tax will continue to decline, to 78% in 2008, 75% in 2009 and 72% by January 2010, at which point the tax will have been equalised with that for commercial vehicles. This should lower the cost of new cars to consumers by around 10%. In addition, the Israel Tax Authority is now considering plans to continue cutting taxes to 60% by 2013, according to a report in the local Haaretz daily in August 2007. One reason for this is to increase the use of new cars that are more fuel-efficient and less polluting (although if car usage increases dramatically as a result of the lower purchase price, cars' contribution to pollution levels could potentially still increase). Together with the lack of good public transport infrastructure in many parts of the country (although this is improving), this should lead to a recovery in the automotive sector (unless the shekel depreciates sharply again). The scrapping rate should eventually return to close to its long-term average, having declined slightly in 2005. The government is reportedly considering a bill to reduce carbon emissions that would include a requirement to scrap all cars over 20 years old, which if implemented would cause a temporary spike in the scrapping rate and a corresponding boost to replacement demand. Another factor underpinning healthy demand is that the number of licensed drivers has been rising almost twice as fast as the general population in recent years. In addition, although the high sales-tax regime may limit demand growth for multiple car ownership in the country, the number of households with at least one vehicle will rise steadily from around 57% in 2003. However, the growth in the number of households with two or more vehicles (currently around 15%) will accelerate only towards the end of the forecast period, as income levels approach those of western European economies and tax changes lower the cost of cars. Japan will remain the top source market Japan and South Korea are expected to remain among the leading sources for passenger car imports. Although Israelis pay duties on Japanese and South Korean cars that are not paid on cars manufactured in the EU and the US (with which Israel has free-trade agreements), passenger vehicles from these two Asian countries tend to be cheaper even after all the taxes have been applied. They are therefore still attractive to buyers. Although Japan, which accounted for over 40% of the market in 2005, will continue to be the single biggest source of cars for Israel, demand for South Korean cars will expand. Mazda (Japan) remains the strongest-selling make in Israel, followed closely by Hyundai Motor (South Korea), Toyota (Japan), Ford Motors (US), Chevrolet (produced by the US-based General Motors), Subaru (made by Fuji Heavy Industries of Japan) and Mitsubishi (Japan), based on 2006 import figures from the IMVIA. Smaller European models from US manufacturers (such as the Ford Focus) and from Asia will be more popular than cars produced for the US market by US firms, because of considerations of fuel consumption and constraints on space. While the New Israeli shekel is expected to remain largely stable against the US dollar during the forecast period, exchange-rate movements will continue to affect the composition of car imports. We expect the shekel to weaken against the yen throughout the forecast period, while remaining broadly stable against a relatively weak dollar, which may well hit sales of cars from Japan, to the possible benefit of US manufacturers. In addition, we expect the shekel to weaken slightly against the euro in 2008. However, from 2009, an expected strengthening of the shekel against the euro, together with growing disposable incomes and lower car prices, is likely to see Israelis return to some of the more prestigious European marques. Nonetheless European manufacturers are unlikely to return to their earlier dominance, as Israeli consumers' taste in vehicles has become more diversified. (Exchange-rate trends have in the past supported the growing dominance of Asian manufacturers, helping their share of the market increase to over 50% and overtake that of European brands, which as recently as 2000 held around 60% of the market.) Imports of low-cost cars from China could also potentially rise as Chinese car companies market themselves overseas and seek to improve their quality, particularly as Israeli firms begin to invest in China's car-manufacturing sector. In June 2007 the Chery Automobile Company signed a deal with a US-based, Israeli-owned investment company, Quantum LLC (a unit of the Tel Aviv-based Israel Corporation), to establish a joint venture to manufacture Chery cars for export overseas. The Chinese firm already has a dealership in Israel. Company car tax breaks may be removed The Ministry of Finance plans to reduce the tax breaks currently available for employees who use leased company cars. Taxes on the use of these cars are expected to rise gradually from 2008. (This is something that the finance ministry had hoped to do for some time, but which faced significant opposition from businesses. The tax breaks issue is seen as a key achievement for the new finance minister, Roni Bar-On, who was appointed in July.) The removal of the tax breaks is expected to reduce demand for leased company cars, as they will become less cost-effective. However, demand for car purchases could well increase as fewer employees are given access to company cars. Demand will be especially strong among those who succeed in negotiating higher salaries to compensate for the removal of company cars (a number that is likely to be significant, since the continued fall in unemployment will also strengthen employees' bargaining power). As a result of these trends, car-leasing companies are expected to account for a declining proportion of market demand, whereas individual consumers will play more of a role. According to Haaretz, a local newspaper, over 70% of new cars in Israel are currently sold to leasing companies. Limits to growth of public transport usage Although the security situation has improved significantly in recent years, the ongoing Israeli-Palestinian violence and tensions with neighbouring states will continue to restrict the expansion in road travel. This will limit the overall growth of the automotive sector. However, security concerns are a particular constraint on demand for public transport and will continue to underpin a preference for private cars. (A number of local buses have been targeted by Palestinian suicide bombers since the beginning of the second intifada (uprising) in September 2000, although the incidence of attacks has declined significantly since 2005.) In addition, restrictions on public transport on the Jewish Sabbath will remain. Although successive governments have repeatedly pledged to improve the public transport network, encouraging Israelis to switch to other means of transport will be difficult, even if the peace process progresses. Nevertheless, the development of commuter rail lines serving Tel Aviv has been populargiven the congestion problems for commuters travelling to the city by road during peak hoursand usage should rise at a healthy pace, in line with the expansion in the network, as long as steady economic growth is maintained. A light rail system is also under construction in Jerusalem, designed to serve around 100,000 passengers a day. In comparison, a long-mooted metro system for Tel Aviv is making slower progress, and is unlikely to be ready until after 2011. Nevertheless, public transport for longer, intercity journeys will remain confined to buses, and usage of intra-city bus services will continue to be constrained by security fears. Average petrol consumption is higher in Israel than in Europe and most of the Middle East. However, it will grow relatively slowly over the forecast period. Although the growth in population and in disposable incomes will feed into higher demand for new cars, there is limited scope for long-distance travel as the country is relatively small and has closed or problematic borders on all sides. Petrol retailers in the country have, therefore, sought to expand other revenue streams by improving their retail offerings at petrol station convenience stores, as well as by purchasing fuel retailers abroad. This trend is likely to continue, given the limited scope for growth in the domestic market. Even if political relations between Israel and its neighbours begin to improve, it will be many years before Israeli citizens will feel secure driving Israeli cars in neighbouring Arab states and vice versa. Moreover, although the road network has expanded at a steady pace in the 1990s, it has not kept up with the number of new vehicles on the road and road congestion in Israel is among the worst in the world. Government seeks to encourage fuel-efficiency The government would like to encourage the market for more fuel-efficient vehicles and particularly for hybrid-fuel models. The finance ministry has announced plans to lower taxes on the purchase of electric and hybrid vehicles, but, given that the current models are expensive, most consumers will continue to favour small and modest cars, with relatively low engine capacityvehicles of 1,600 cc and below accounted for almost 83% of registered vehicles in 2005. With the economy expanding at a healthy pace, fuel consumption will grow, but much of the growth will be in diesel, with petrol consumption rising by only around 1% a year. The relatively large natural gas finds off Israel's coast may lead to the use of natural gas and other alternative energy sources. Nonetheless, this is likely to start to emerge only towards the end of the forecast period. Israel has potential to develop more "telematic" exports On the supply side, Israel is too wealthy to serve as a low-cost base for foreign manufacturers and its domestic market is too small to make the setting up of a car plant economically viable. However, the country will remain an important supplier of automotive electronics and other subsectors, particularly navigation software, tracking and anti-theft systems. These are fields where Israel's high-tech sector and experience in developing electronic systems for the military could give it a competitive edge, and it is already a market leader in some technologies. In recognition of this, in August 2006, General Motors agreed to extend for a further seven years its industrial co-operation programme with the Ministry of Industry, Trade and Labour. Under the first agreement, signed in 2001, General Motors bought US$334m of equipment from Israeli suppliers. Estimates of the potential global revenue that could be generated from developing "telematic" products vary widely, but it is generally assumed that demand for them will grow at a more rapid pace than sales of new vehicles in developed countries, given their relatively recent introduction into vehicles in the mid- to late 1990s in the US, Europe and Japan. Copyright 2007 Economist Intelligence Unit |