Benz queries budget estimates

The federal government's budget handed down last week introduces more questions for the future of the local automotive industry than it answers, says the Senior Manager for Public Relations, Product and Corporate Communications at Mercedes-Benz Australia, David McCarthy.

"Isn't it interesting that the budget figures for 2015 and 16 – not the MYEFO figures, the budget figures – have the government collecting more this financial year in luxury car tax than import duty on cars, which shows how unfairly the load is spread," he told motoring.com.au last week.

"Next year they think they'll get $20 million more in import duty than LCT [luxury car tax]."

That, suggests McCarthy, indicates a trend to imported vehicles as local manufacturing progressively shuts down. Ford plans to end production of its Falcon and Territory models in October, and Holden will drop the Cruze small car around the same time. Holden and Toyota will officially end all production in 2017, leaving Australia without an indigenous car manufacturing industry for the first time since the very early years of the 20th Century.

"Import duty is going to increase about 20 per cent," McCarthy observed. "Bear in mind import duty is only related to the European [brands] now."

The implications seem clear. Once Australians can no longer buy Commodores, Falcons, Territorys, Camrys, Aurions and Utes, the government predicts we'll be buying a lot more Mondeos and (Opel-built) Commodores. Or a lot more parallel imports...

Leaving aside any applicable inflationary effects, or changing value of the Australian dollar, $20,000,000 extra import duty represents five per cent (the tariff) of vehicles collectively worth $400,000,000. Based around a theoretical landed cost averaging $40,000, as an example, that would mean an extra 10,000 cars entering the country from Europe and other parts of the world where Australia doesn't currently have a free trade agreement (FTA) in force.

What the average landed cost for those extra cars will actually be is anybody's guess. McCarthy believes it's more likely to be $100,000, if the extra cars imported from Europe are mainly high-end parallel imports. He says that it doesn't make financial sense for private buyers to bring in a car that would retail for less than that figure. But if the local OEMs take advantage of the vacuum left by local manufacturing, the average could be as little as $20,000 per car – or even less.

Ford is already selling the Mondeo here and is unlikely to target fleet sales with that car as it has done in the past with Falcon. The same applies with Holden and the Opel Insignia-as-Commodore. Both companies will seek to maximise profit rather than sales volumes, in a new business environment without a local manufacturing operation to support. Ford will source the Edge from Canada to replace Territory – and Canada shares its North American Free Trade Agreement with the USA.

All that's not to say the government's figures are necessarily wrong, it's just that there's no transparency about the process. McCarthy believes that the increased numbers will come from parallel imports, but he can't be certain, because he is yet to see economic modelling from Treasury that would support the projected numbers.

"I think someone in Treasury has a ouija board, because these figures have lost their relativity..." he said. "What economic modelling did they use? We don't know, because they won't tell us."

Starting with the budget estimates for import duty over the next five years, McCarthy points out that the five per cent tariff is expected to bring in tax worth $570 million to the government for 2015/16, growing to $590 million the following financial year. Over the three subsequent years revenue from import duty will increase until it has reached $770 million in 2019/20.

Based on that theoretical $40,000 landed cost, we will be importing 20,000 more cars from Europe in 2017/18, the year after that 30,000 more again, and 35,000 on top in 2019/20. That's roughly 100,000 more cars than we currently source from countries or regions yet to enter into a free-trade agreement with Australia.

McCarthy asks the reasonable question, where will that money come from? Where, indeed, will the extra cars come from?

Of the nearly 373,000 vehicles sold here during the first four months of 2016, over 105,000 came from Japan, at least 49,000 came from South Korea, more than 87,000 were shipped here from Thailand, and the USA supplied nearly 18,000 more.

We have free trade agreements in force with all those countries. Collectively, according to VFACTS, those countries supplied nearly 70 per cent of all vehicles sold here for 2016 so far. Australian-based manufacturers sold less than 6.5 per cent of vehicles during the same period.

The government's forward estimates for revenue to be raised by the import duty increase by around 10 per cent each year from the next financial year. We are in a low inflationary period currently, and the Aussie dollar looks set to hold steady where it is for a while yet. And if an Australian government at some point in the future can swing a free trade agreement with Europe, which has been on the agenda for some time, that will put an end to tax revenue raised from importing roughly 20 per cent of cars sold here.

Again… where will all this revenue come from?

Even if that extra revenue is projected to come from parallel importation, parallel imports are more likely to come from countries that are either already partnered with Australia in an FTA, or soon to do so through the European Union.

If the government expects the end of local production to shift car buyers from their Aussie-built Fords, Holdens and Toyotas into imports to the extent that import duty revenue will increase (anticipated to grow 30 per cent between the next financial year and FY 2019/20), they're in for a nasty surprise, based on VFACTS figures.

And if the growing import duty reflects parallel imports gaining ground, when will that trend plateau?

The government expects no more than perhaps 30,000 cars a year being imported in parallel, but based on that $40,000 landed cost per unit, the import duty for 2019/20 would reflect around 100,000 cars per year – with no apparent end in sight to the trend.

If McCarthy's right, and the extra revenue is driven entirely – or at least mostly – by parallel imports averaging $100,000 each in landed cost, that means in 2020 there will be something like 100,000 more cars being brought in from Europe and other non-FTA countries than at present.

That would suggest parallel imports are not necessarily a major threat to existing OEM importers – other than perhaps the cherry-on-top models with huge substantial profit margins built into the price. The OEMs will likely grow sales of their imported products from Europe during the same timeframe, but no one can predict how many of those (theoretical) extra sales will be parallel imports.

All of this is based on supposition. Where is the modelling to support whatever the government expects to rake in?

Import duty budget estimates and projections
2015/16 – $570 million
2016/17 – $590 million (+$20 million)
2017/18 – $630 million (+$40 million)
2018/19 – $690 million (+$60 million)
2019/20 – $760 million (+$70 million)