The Israeli Ministry of Finance is currently considering legislative easing of parallel imports of vehicles, sources told “Globes”. The goal is to promote competition in the sector, which had record sales in 2021, and reduce consumer prices. The plan under preparation may take effect this year, but it is unclear whether prices will actually fall.
Israel’s car market was opened for parallel imports in 2016 when a law on the subject was passed. But the promises from then-Transport Minister Israel Katz that car prices would fall 20% never materialized.
There are currently 35 parallel car importers registered in Israel, with a negligible market share of 3% compared to only 14 official importers. One of the main reasons why parallel importers have not been able to pose a real competitive threat to official importers is the amount of bureaucracy they face. A relaxation of bureaucracy and the forms to be completed could revive the parallel import reform and ignite real competition in the car import market.
The main obstacle marked by the Ministry of Finance and the Ministry of Transport is the customs procedures for the parallel import sector. The bureaucratic maze often means that parallel importers have to pay thousands and even tens of thousands of shekels in excise duties on cars, while the official importers are exempt from excise duties on exactly the same cars.
For example, Israel has free trade agreements (FTAs) with the US, EU, Turkey and other countries where cars are manufactured, and imports from these countries are exempt from customs duties of 7% of the car’s price (including purchase tax and VAT), but to obtain exemption, the parallel importer must present a “certificate of preference”.
To obtain this “certificate of preference”, the vehicle supplier must present an original document from the manufacturer to prove that the car was manufactured in the country with which Israel has a free trade agreement. The official importer has no problem obtaining such a document, which is provided by the car manufacturer. The parallel importer, on the other hand, buys from dealers’ inventories abroad, and here there is a market failure.
When the dealer asks the car manufacturer for documents to the Israeli customs, the manufacturer has an interest in rejecting the request. In addition to the partnership with the official importer, the business model of the car manufacturers collides with the parallel importer. The manufacturer prices cars differently in different countries according to their business strategy based on the income of the target customers. In contrast, the parallel importer’s business model is to buy from countries with cheaper cost of living and sell at a profit in countries with more expensive cost of living. The parallel importer is thus virtually blocked from the duty exemption, which greatly reduces their chances of competing with the official importer.
Even without parallel imports, car buyers can choose from dozens of manufacturers and hundreds of car models. But they are controlled by about ten major importers. A customer who wants to buy a Hyundai should go to the official importer and the one who prefers a Mazda should go to its official importer. Free import of cars would create competition within the same car manufacturers.
In other countries, parallel importers have a market share of 10% -12% and expectations that the same market share can be separated from the market in Israel. That is 30,000-35,000 cars a year.
How will such a development affect the market? Today, a parallel importer who still obtains a “certificate of preference” sells the car at 3% below the official importer’s price. Nevertheless, such a price reduction is likely to be offset by tax increases on new cars that the Ministry of Finance is planning in the coming years.
Nevertheless, the significance for the car buyer is not only the price but also the delivery times. Currently, due to supply chain disruptions, buyers can wait many months until their car is delivered, especially with popular models. Parallel importers are already taking advantage of the situation to deliver cars at short notice. If they can increase their market share, it will also affect waiting times for delivery of new cars.
Published by Globes, Israel business news – en.globes.co.il – January 5, 2022.
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