At the beginning of May, a column was published in Globes under the headline “The perfect storm is coming to the car market” against the background of the weakening of the shekel and the rise in interest rates on car and financing prices. Now, a month later, the fear of those predictions seems to have only increased. The dollar against the shekel has continued to climb in recent weeks, completing an increase of about 11.5% since the beginning of the year. The euro exchange rate has climbed by almost 4% since the beginning of the current month, and the interest rate has also risen by 0.4% in the last month to 0.75% (although this is a relatively moderate increase compared to the jump in interest rates in the United States).
Meanwhile, the thunder and lightning do not leave a significant mark on the local car market. Demand for a new car is still high and exceeds what manufacturers can supply, importers have orders until the next three quarters and used cars are still being purchased at an accelerated pace. However, in the industry one can already feel the signs of change. More and more customers are beginning to express hesitation when it comes to financing a car with interest – which continues to climb, and fewer customers are willing to pay any price to get their hands on a new or used car. At this point, the changes are still very moderate, but if the difficult situation in markets around the world continues, it is likely to be felt in the automotive industry as well.
Leasing market: the fear of the high-tech crisis
The first half of 2022 was one of the best in the history of the Israeli leasing industry, and included a jump in profitability thanks to a celebration of the sale of used cars. In fact, the industry’s biggest “problem” in the past year has been the difficulty in providing leasing customers with the growing demand for employee vehicles. The so-called troubles of the rich.
But the music is starting to change and the first indications of this come from the high-tech industry, which is the traditional locomotive of the Israeli economy and certainly of the leasing industry. High-tech companies, which depend on exports and capital markets, feel more quickly the impact of what is happening in the world. Quite a few raisings and issues have been postponed or frozen, and in the field there are also reports of a slowdown and even a halt in the massive recruitment of manpower in the industry, which characterized the recent period against the backdrop of capital markets, including in old companies. There are even hints of manpower cuts in young companies, whose raisings and capital markets have been the source of their growth.
If this situation continues, it could lead to a decline in demand for leased vehicles and to increasing pressure on those companies to lower prices, which leasing players will find it difficult to roll over to importers against the background of the strengthening dollar and euro, when the shekel is weak. In the first stage, this situation may only reduce the excess orders that currently exist in the leasing market, so that a balance will be maintained. But later the entire leasing market may shrink.
It should be noted that many leasing companies also have a substantial dependence on capital markets as a source of fundraising through bonds, and some are also significant players in the car financing market.
Car importers: Stock prices falling
Most car importers are entering the current crisis from a position of power. All this, after a celebration of profitability that stemmed from demand that exceeded supply in the past year and the strong shekel exchange rate, which pushed up gross profit. However, importers have significant exposure to foreign exchange rates and the weakening of the shekel comes at a very problematic time for them, when inflation is rising. The situation is that importers may increase prices for customers as long as demand is high, but if demand for vehicles slows down, importers will find themselves trapped.
In this context it should be noted that the aggravation of macro conditions may also have an increased negative impact on the young industry of indirect imports. Most often, indirect importers do not have unlimited resources like those of large car importers, and are therefore much more exposed to outside financing and rising interest rates to finance the purchase of their vehicle inventory.
Meanwhile, the external negative effects on the local capital market also seem to have an impact on the share prices of public car importers. The stock of Delek Car, importer Mazda, Ford and BMW has been cut by 23.8% since the beginning of May, mimicking all the gains in the past year. Similarly, the share of Carasso Motors, an importer of Renault and Nissan, lost 21.3% within a month and a half, despite a significant announcement issued on the receipt of the import concession of a new Chinese brand. Automax Motors, one of the major players in the parallel import market, has also lost close to 11% of the share price in the past month and a half.
Private customers: Purchasing power eroded
Private car buyers in Israel have had to swallow a lot of frogs in the last two years. The lack of supply allowed all players in the new car market to reduce discounts, which raised prices in real terms. In addition, the demand for a used car soared prices without any real justification, and the government also contributed its share when it raised the purchase tax on hybrid and plug-in models.
Now customers also have to deal with further erosion in the purchasing power of the vehicle due to the weakening of the shekel and the decline in the value of public holdings and options of high-tech workers, due to the declines in the capital market. The latest nail may be reflected in further increases in Israeli interest rates in the coming months following the United States, which will lead to an increase in annual interest rates on new car financing for the territory of 5% -6% and north, and the interest rate on used car financing for 10% territory.
As mentioned, in the first phase it can be expected that the main effect will be the creation of a new balance point between demand and supply, and reduce the sales volume of the car market over time compared to last year’s peak. However, if the negative trend in macro data is prolonged, it may also be reflected in an increase in the volume of insolvency of customers who have purchased a vehicle through financing.
A first hint of a change in mood was provided last week by the CFO of Ford’s finance division in the United States, who said at a Deutsche Bank conference that there was a significant increase in insolvency on car loans, but so far it still does not exceed the multi-year average.
Macro developments in the coming quarter will determine whether the car market is currently passing a slight bump or is approaching a roadblock. Although in the meantime the market enjoys record employment and impressive amounts of available capital, the Monetary Committee of the Bank of Israel continues to be optimistic as if Israel is a lonely and prosperous island, detached from what is happening in the world economy. But if there is one thing we have learned in the last two years it is, that there are no more isolated islands left.