Large research companies that cover the developed automobile markets in the world, usually publish long-term forecasts, sometimes even for a period of two or three years. Unfortunately, this is a privilege that is not available to us in the Israeli car market. The planning horizon in Israel’s economic-political reality is at best a quarter ahead, and any longer-term forecast is a gamble.
● The shekel is approaching a three-year low against the dollar
● A deposit in a bank, foreign exchange or a financial fund? Where should you invest while interest rates are rising?
● The section in the Arrangements Law that will allow the tax authority to get much more information about you
For example, the recent developments in the exchange rate of the shekel in relation to the dollar and the euro, which is the single most important factor that affects the prices of new vehicles in Israel. In January, we published in Globes the forecasts of ten of the leading investment houses in Israel, and their average estimate was that the shekel would gradually strengthen against the dollar this year to an average of NIS 3.37. The increase made a banking body that predicted an average exchange rate of NIS 3.18 per dollar. Many also expected stability or strengthening of the shekel in relation to the euro.
Quite a few entities in the automotive industry adopted similar working assumptions when formulating the 2023 price lists. But of course, no one predicted the economic uncertainty that accompanies the ongoing political upheaval and results in the public flocking to foreign exchange on the basis of a “refuge”. Now, the automotive industry is standing in front of its gates A currency that has risen significantly relative to the shekel since the beginning of the year.This situation pours fuel on the fire of rising car prices and serves as a force multiplier for inflationary pressures and price hikes by manufacturers.
The shekel no longer dampens price increases
The strong exchange rate of the shekel against the dollar and the euro has given a significant boost to the growth of the Israeli car market in recent years. He improved the purchasing power of the customers and, with the help of the minimal interest rate, brought into the circle of customers also less powerful layers of the population, who previously purchased used vehicles.
Although the strong shekel did not stop the creeping price increase in importers’ price lists, behind the scenes it contributed to a decrease, or at least to stability, in real prices. This, through “indirect discounts” such as sales promotions and through discounts to the leasing companies that were partially passed on to private consumers through the “zero kilometers” market. The exchange rate of the shekel also improved the ability of importers to neutralize extreme pressures to increase prices originating from external factors.
Today, production volumes and inventory availability are on the trend of improvement, but manufacturers continue to raise vehicle prices and not just the electric models. The current wave of price increases also affects (and perhaps mainly) gasoline and diesel vehicles (including hybrids) which still account for nine out of ten sales in Israel.
For example, last Thursday the news agency Reuters reported that starting next week, the Volkswagen Group, the second largest manufacturer in the world, will raise the prices of all its gasoline and diesel models in the world by 4.4%, due to a “spike in costs.” Other manufacturers such as Ford are looking into switching to a “fixed price” method in Europe, or in colloquial terms, “zero flexibility in discounts”. Even in Korea and Japan there are constant pressures to raise prices due to the costs of raw materials and production.
And when the increase in the prices of vehicles purchased in dollars and euros meets a weak shekel on the road, the result is pressure to raise prices and this is bad news for the market.
Already at the beginning of 2023, the price of many gasoline and hybrid models in Israel has increased by thousands of shekels. However, at that time the reasoning was the revision of the “green taxation” formula at the beginning of January, which resulted in a reduction of the tax benefits on gasoline vehicles, and of course an increase in the purchase tax on electric vehicles and plug-in vehicles. Now the devaluation of the shekel has been added to the pot, so the relevant questions at the moment are no longer “will there be another increase in price” but “when, with whom and to what extent”.
The increase in price is delayed (for now)
The timing of the price increase naturally depends on the trend of the exchange rates in the coming weeks. In the short term, most car importers operate exchange rate protections worth hundreds of millions of shekels, and these are currently dampening the shocks in the foreign exchange. However, all importers have red lines. “The dollar-shekel exchange rate is on the red line and the euro exchange rate crossed it a long time ago,” an importer told Globes this week big car
Another shock absorber that may delay the increase in prices is the large inventories, which the importers accumulated at the end of 2022 in preparation for the sales wave of 2023. The vehicles in the inventory were still purchased at a “reasonable” exchange rate, which may buy more time.
Therefore, the answer to the questions “where will the increase in price be felt and by how much” differs from importer to importer and model to model. A significant immediate increase in price that is also derived from the currencies can already be seen in practice in new models that have landed in Israel in the last few days and will land in the coming weeks. In new models, it is easier to pass on the shekel devaluation to consumers on the grounds that “it is an improved and newer model with more content”.
And these are still significant price jumps. Here are two examples from the past week: The new generation of the Kia Niro Plug-in, one of the best-selling models of its kind in Israel, was launched last week at a price of NIS 185,000. The outgoing generation of the vehicle entered Israel four years ago for NIS 155,000. Although it is indeed a new and improved vehicle, the meaning is that the vehicle has “moved” to a higher category.
Last week, the updated series of Nissan Qashqai was also launched at a base price of NIS 180,000 for the gasoline turbo model. When the vehicle was launched in Israel in August 2021 in Israel, its base model with the same specification cost NIS 160,000. We will probably see more such examples soon.
On the other hand, in the models there is a timing and the scope of the price increase depends on the sensitivity of the importer to the currency rate. The Korean brands, which account for about 30% of the annual car sales in Israel, are purchased in dollars, but they benefit from the 7% reduction in customs at the end of last year following the signing of the trade agreement with Korea. Hence, they can absorb the recent fluctuations in currency rates better than the competition.
The damage to the market is already felt
Finally, one more question remains and that is “how far the market will be able to absorb price increases without the demand being damaged”. The answer to this is retroactive, meaning that the damage to the market is already happening, although it is not yet reflected in the sales charts.
The industry says that most of the vehicles that were delivered in January and will be delivered in February are previous orders from customers who purchased the vehicles last year “at the old prices”. The industry reports a significant freeze in new orders, both from private customers and from fleets, and this as mentioned even before the changes in currency rates. Such a situation calls for discounts and cheap deals, but with a climb of 4.3% in the dollar exchange rate and 2.4% in the euro since the beginning of the month, it is doubtful whether such extensive discounts will be possible. And the bottom line – the next turn for the worse in the industry is just around the corner.