Long-term planning is a luxury at a time when our economic and political reality changes almost weekly, but Israeli car importers are already looking towards January 2022, which is when the purchase tax benefit on hybrid (electric and gasoline powered) cars will expire.
The change is a material one. It will affect a market segment that in the past decade has seen dizzying growth, taking almost 16% of new car sales last year. The consequence of gradually equalizing purchase tax on hybrid cars to that on regular gasoline-powered cars is a jump from a tax rate of 30% two years ago to 50% now, and an effective rate of 65% at the beginning of 2022.
The planned abolition of the tax break on hybrid cars is the third stage in the "green taxation" plan published by the Ministry of Finance in December 2019, with the undeclared aim of halting the shift to less heavily taxed hybrid vehicles, which has reduced state revenues from car sales.
In accordance with that plan, at the beginning of 2020 purchase tax on hybrid cars rose from 30% to 45%, and in January 2021 it rose to 50%. In ten months' time, as mentioned, it will be back to where it started ten years ago, that is, 83% tax, less a NIS 15,000 "green" benefit, the maximum benefit allowed for conventional vehicles. This means an effective rate of purchase tax of about 65%, which is the rate that applies to gasoline-powered cars in pollution level group 2. The outcome is likely to be a price rise of NIS 10,000-12,000 for family cars and the popular SUVs.
The question preoccupying the industry is, what will happen to the market "the day after"? It this just a glancing blow to this growing segment, or perhaps the end of the story, and which segments and vehicle models, if any, will benefit from the considerable vacuum that will be created?
Will the market absorb the blow?
Opinion in the industry veers between two extreme scenarios. Devotees of the "steady state scenario" argue that the Israeli vehicle market has already absorbed the first two rises in purchase tax on hybrids with impressive indifference. Fact: last year, sales of the popular models, priced at up to NIS 145,000, maintained a 16% market share, just 1% less than in 2019, before the tax change took effect. At the same time, sales fell in the market as a whole.
The Ministry of Finance can see this as an achievement, and as proof that it can have its cake and eat it too. Despite the fact that purchase tax on hybrid cars rose substantially, leading to a substantial rise in state revenue, consumer prices of hybrid cars rose only slightly, and the impressive statistic of growth in sales of green cars, which the state proudly presents in the international arena, was hardly dented.
The reality is more complicated. The inelasticity of demand for hybrid cars stems from a combination of several ad hoc and temporary factors. For example, the prior publication of the plan to raise purchase tax enabled car importers to prepare towards the end of 2019 with the import of large stocks of hybrid cars that were delivered with just 30% purchase tax, and these represented a substantial proportion of last year's sales.
The same exercise was repeated in December 2020, when tens of thousands of new hybrid cars landed in Israel, and were sold at the reduced rate of tax. These stocks will moderate the price rise in the segment at least until the end of the second quarter, and perhaps beyond then.
The relevant importers are already trying to reserve a large production allocation for themselves at the manufacturers, for supply in the fourth quarter of this year, in advance of the third stage of the tax rate increase in January 2022. These cars should cover demand for at least the first half of next year.
Another reason that prices and demand have been stable so far is the appreciation of the shekel against the currencies of the car producing countries, which absorbed some 5-8% of the price rise which should have occurred after the rise in purchase tax. This too is not a fixed factor, and clearly, if the exchange rate trend changes, a latent rise in the price of hybrid cars could materialize.
The third moderating factor is the serious profit margins of the importers in this segment. The size of these margins can be understood from the huge discounts, of up to 15% on the list price, at which some of the popular hybrid models are offered on the "zero kilometers" track by the leasing companies, i.e., the sale of surplus vehicles that are technically second-hand but which have recorded no mileage.
Even now, leasing companies are advertising popular hybrid family cars at discounts of 8-14% on the official list prices. It can therefore be assumed that at least part of the price rise expected in this segment in 2022 will be absorbed through narrower importer margins.
Finally, hybrid cars still enjoy a monthly usage value NIS 500 below that of regular gasoline-powered cars, which represents an incentive for those who receive company cars to prefer them. This, however, is a temporary benefit, and its abolition is being examined as part of the general abolition of the special taxation status of hybrid cars in Israel.
Dependence on the manufacturers
The other scenario is that abolition of the tax benefit on hybrid cars will take us back to where we started, that is, to the volume of sales seen at the beginning of the previous decade, before tax benefits were introduced, when they accounted for less than 5% of the total market. This scenario is based on the fact that genuine hybrid cars are still dearer to produce and sell than their gasoline-powered equivalents. If they rise in price to become 10-15% dearer than those equivalents, demand for them will drop substantially, as will the ability of the importers to give effective discounts on them to the leasing companies, which are still the largest customers for hybrid cars in Israel.
At the moment, it looks as though the market's reaction will vary between the different importers and brands. The Korean brands Hyundai and Kia, for example, which in December led sales in the hybrid segment with models such as the Ioniq and the Niro, could find at least partial salvation in the imminent signing of the free trade agreement between Israel and South Korea, which will lead to the abolition of duty of 7% imposed on these models, offsetting a considerable part of the purchase tax rise.
Toyota, on the other hand, which is the pioneer and a strategic player in the popular hybrid market in Israel (Corolla, Prius, CH-R, Yaris), is apparently counting on support from the manufacturer. Internationally, Toyota has set penetration of its hybrids into Europe as a strategic goal, and is reducing the supply of gasoline-powered models meeting European standards, so that hybrids will be the company's default product. The same applies to Honda, which has already officially announced that it will cease to sell non-hybrid models in Europe. That being the case, these manufacturers will have to help the importers remain competitive, because if they do not do so, their presence in Israel will be substantially harmed.
Filling the vacuum
There are those in the car importing industry in Israel that are already gearing up to fill the vacuum that could be created if hybrid sales fade. One segment that is a candidate to fill the vacuum is plug-ins, which will retain the purchase tax benefit for at least the next three years. The problem is that, apart from two models - the Niro plug-in, and the new MG HS, which started to be sold in Israel recently - most plug-in models are at the high end of the market. Supply can be expected to expand over the next two years, but it's hard to see prices being in the popular category.
We will therefore probably see a comeback by the gasoline and diesel versions of the popular models, most of which are now equipped with micro-hybrid systems. These are not really hybrids, but rather cars with a miniature auxiliary motor and a small battery that are insufficient to allow the car to be driven on electric power only. They will, however, probably be marketed as hybrids.
Pure electric cars could also take part of the market share that is vacated, although here the main constraint is the price/range ratio. And perhaps at the last minute a political decision will be made to extend the period of the tax benefit on hybrids. In our current reality, anything is possible.
