Insider's Guide to the Australian Car Market - July 2015
Get wise on what's impacting the Australian car market. Our quick wrap of recent developments and forecast trends for the second half of 2015 uncovers the value created by the latest policies, free trade agreements and global market trends.
New Car Sales
On the surface, things look rosy for car dealers. For the 2015 calendar year-to-date, demand for new vehicles is up 3.3% on the same period last year with 578,427 vehicles sold.
But this isn't the full story. Not all dealers will be pleased with what the year has brought so far. Notable gains have been confined to just two sectors; SUVs and light commercial vehicles.
It's clear from these numbers that Australia's ongoing mass migration from traditional sedans to SUVs continues. So too, the contagious urge to move several notches further up the rugged scale and get a ute.
With the rise and rise of the SUV, more manufacturers are scrambling to grab SUV market share. Year-to-date growth of the SUV sector is up 13.8% on the previous year and is being driven primarily by strong sales of compact SUVs, so the flood of new compact SUV releases is hardly surprising.
Notable compact SUV releases so far include Honda's new SUVified Jazz, the HR-V, the stylishly zippy Renault Captur and the equally trendy Renault 3008. Coming later in the year, we have a revamp of Australia's favourite compact SUV, the Hyundai ix35 and a pair of radically different looking twins, the Fiat 500X and Jeep Renegade, which share many of the same parts. All of these releases have something new and exciting to offer buyers who like the sporty utility factor, but want something small, affordable and fuel efficient.
The long-time American love affair with the rugged pickup truck, or ute as we call it down under, is now a confirmed worldwide phenomenon. With all its added creature comforts, the modern ute continues to encroach on traditional passenger car territory. This fact is clear from Ford and Mitsubishi's aggressive ute advertising on prime time TV of late, where once we might have seen passenger car ads. No doubt it's also what moved Volkswagen to introduce its fabulous, upmarket Amarok a few years back. The Amarok was voted 2014 'Tradie Vehicle of the Year' by carsales.com.au. Ute sales this year have been helped in no small measure by the long awaited release of the next generation Toyota HiLux.
Australia is currently experiencing its lowest interest rates on record. The Reserve Bank has been pursuing its policy of low rates in an effort to stimulate the economy as demand from China for our natural resources dries up.
Low interest rates are encouraging borrowing and are great news when you're looking to finance a car purchase.
But lower interest rates are a two-edged sword. Cheaper borrowing costs can make the Australian dollar less attractive to depositors and may lead to a generally weaker Australian dollar. In turn, a lower Australian dollar is bad news for buyers of imported goods, such as cars, because it makes them more expensive to buy with Australian dollars.
Many economists agree with the RBA's stance on keeping interest rates low for as long as possible, but warn that they cannot remain low indefinitely. While helping Australian exporters sell their goods overseas, steep, protracted declines in the Australian dollar will eventually lead to price inflation at home. Therefore, it would be a mistake to assume we'll always have access to low rates.
So far the Australian dollar has only weakened against certain currencies. Weakness has been pronounced against the US Dollar, the Chinese Yuan, South Korean Won and Thai Bhat over the last 12 months, whereas exchange rates against the Japanese Yen and Euro have remained stable. As far as manufacturer currencies go, the Euro is perhaps one to watch as turmoil develops over Greece's potential bankruptcy and exit from the Euro.
Auto manufacturers try to hedge against adverse currency movements, but hedging is expensive and is only a temporary, partial fix. It can't cancel out or reverse long term currency swings. If the Euro does weaken substantially from current levels, European cars will start to look a lot more attractive than their Korean, American, Thai and Chinese manufactured counterparts.
Free Trade Agreements
Australia's free trade agreement with Japan came into force in January of this year. The effect is a reduction of import tariffs on Japanese cars.
According to Trade Minister Andrew Robb, three Japanese manufacturers have already reduced the cost of family-sized cars by up to $2,600 as a result of the FTA, with savings of up to $7,600 for higher-end models.
The agreement reduces the import tariff on Japanese cars by 5%. But 5% sounds like a much bigger reduction than it really is. The 5% tariff was levied on the "landed value" of the vehicle, i.e. the value when it arrives in Australia, before applying dealership mark-ups, transport, marketing and other costs. To put these in perspective, the landed value of a passenger vehicle that retails for $20,000 would be approximately $10,000. Removing 5% from the landed value would amount to a reduction of just $500.
A similar free trade agreement with South Korea came into force in December 2014, but its strengthening currency has meant greatly reduced profit margins for South Korean manufacturers. As such, they've taken the opportunity to claw back some lost profit rather than pass on the tariff reduction to consumers.
Luxury Car Tax
In the run up to the 2015 budget, the auto industry was abuzz with anticipation. Large sections of the industry were hoping, and confidently predicting, that Australia's Luxury Car Tax (LCT) would be abolished.
The LCT is a 33% tax typically levied on new cars priced above certain thresholds. The price threshold is $63,184 for cars consuming more than 7L per 100km and $75,375 for those that consume less.
A much hated aspect of the LCT is that it's levied on the GST inclusive price, making it a tax on a tax.
Since introduction in its current form back in 2001, the government has used LCT proceeds to support Australian auto manufacturers. With the imminent closure of all Australian car manufacturing operations, it seemed logical to conclude that there was no further need for the tax.
The problem our government faces is one of dwindling revenues. This makes it hard to cut taxes. As Chinese demand for our mineral exports cools, gross tax income has fallen sharply. And it's expected to fall much further still over the next few years.
The LCT raises approximately $400 million per annum. Despite what some auto industry leaders may say, $400 million is hardly a trifling amount for a government of any persuasion to let go of in difficult times. So for now the LCT stays.
Recent movements in the currency markets will surely filter through to impact showroom prices as stocks are replaced. The US Dollar, South Korean Won, Chinese Yuan and Thai Bhat have all strengthened substantially against the Aussie dollar, which makes it much harder for manufacturers with these currency bases to compete with their Japanese and European counterparts.
Then there are the declining fortunes of larger traditional passenger vehicles, which dealers will be finding harder to sell – interesting!
If you've been weighing up Korean cars with a view to getting quality at a good price, you might be surprised to now find comparatively softer prices from Japanese and European dealers. It's certainly worth digging to see how low Japanese or European dealers will go, given their greater current profit margins, especially if you're looking at a larger sedan.
Do you need help finding a Japanese or European bargain and a great finance package to lock you into our record low interest rates? Contact stratton's car finance team today on 1300 STRATTON (787 288) or start with a no-obligation online quote.
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