Car sales grow despite (or because of?) pandemic

The figures for new car sales in Israel in October, released last week, represent a kind of marketing miracle. Some 14,500 new vehicles took to Israel's roads last month, 4.1% more than in October 2019. This was despite car showrooms being closed, the paralysis in the leasing market, and a double-digit unemployment rate.

The supply side of the miracle is easy to explain. Car importers had plenty of time in which to learn the lessons of the first lockdown in Israel earlier in the year, and to be ready with upgraded online sales systems, vehicle delivery logistics adapted to the situation, online sales promotions, and, mainly, a great deal of Israeli cunning exploiting every grey area in the coronavirus rules. Showrooms are shut, but cars are displayed to potential customers in the agencies' car parks, or in public underground car parks, at garages, or even at the customer's home, accompanied by a "field sales representative".

It's harder to explain the demand for new cars, which remained lively in October despite the atmosphere in the economy and the macro numbers indicating a storm on the horizon. It is therefore not surprising that everyone preparing plans in the car import industry is wondering whether the demand will continue into 2021, particularly the first quarter, which is critical for the industry, with nearly 40% of annual sales usually made in it. The key lies in the balance between the (relatively) positive forces that are currently keeping vehicle sales stable and the negative forces that threaten to send the economy over the cliff.

Being naturally optimistic, I'll start with the forecast for the positive background factors. First and foremost is the growing inelasticity of demand for cars.

Public transport in Israel, which has sucked, and continues to suck, billions from the emptying state budget, has for several months been only partially functional. Not only does the service not answer any criterion of efficiency , but it is seen as medically unsafe.

The alternative is a private car. Those who can't afford a new one buy a cheap used one and generate demand at the bottom of the value ladder. The sellers of the used car upgrade to a newer one, and so the market climbs the ladder till it reaches the top, where the new car buyers are.

Add to that the price of fuel, which is at an unprecedented low, making the marginal cost of each kilometer travelled negligible, and you get a serious engine driving demand for cars.

It should be pointed out that the inelasticity of demand for private cars in the coronavirus period is something seen in many places around the world, including places where public transport is far more sophisticated and efficient than it is in Israel.

The real prices of new cars (that is, after discounts) continue to be attractive, relative to the Israeli market of course, chiefly because of the extraordinary strength of the shekel against the US dollar and the euro. This gives the importers greater ability to deepen unofficial discounts and offer sales promotions.

Inflation in Israel is still around zero, and the Bank of Israel's consistent policy of supporting credit (until further notice), alongside the importers' independent sources, are for the time being tending to keep the availability of credit for new car purchase stable.

So private cars have become a more vital product than ever. On the other hand, when one reads the latest macro figures, it is not at all clear how long Israelis will be able to afford to buy cars, when the responsible adult will turn up who will take economic policy in hand, and how long the credit mountain will remain stable before lenders' nerves fray.