Japan FTA: No cheaper cars

A free-trade agreement (FTA) between Australia and Japan will not necessarily reduce the prices of imported Japanese cars.

As with similar FTAs already in place with the USA and Thailand – the second biggest vehicle exporter to Australia – the agreement eliminates the five per cent import tariff applied to new vehicles imported from Japan.

More new vehicles are imported to Australia from Japan than any other country. Last year more than 360,000 cars worth about $6 billion were shipped from Japan to Australia.

A seven-day Australian trade mission led by prime minister Tony Abbott is this week finalising the FTA with Japan after seven years of negotiations.

Industry groups including the Australian Automobile Association have lobbied the Australian government to axe the five per cent import duty on new vehicles (and the luxury car tax altogether), as part of its May budget.

Doing so would have saved Australian new-vehicle buyers $930 million and $400 million respectively in this financial year alone.

However, the Australia-Japan FTA is not expected to be formalised until July and may not come into effect until 2017 following the closure of Australia’s car manufacturing industry, which import tariffs were originally established to protect.

Similar arrangements are currently also being negotiated with South Korea, China and India, but as evidenced by the recent shift in sourcing from Japan to Thailand for Toyota’s latest Corolla sedan, FTAs do not guarantee price reductions.

Instead, local distributors could add more standard equipment, or simply withhold the savings to ‘hedge’ against for future currency fluctuations.

Mazda Australia spokesman Steve Maciver would not rule out price cuts or specification adjustments when the Australia-Japan FTA comes into play, but said media reports of savings as high as $2000 as a result of the Japanese FTA were wide of the mark.

He said that if the entire reduction was passed on to consumers without any specification change, buyers of the mid-range Mazda3 Touring or SP25 (two of the most popular versions of Australia’s top-selling new car) would save less than $800.

“The five per cent import duty is not based on the list price of the car,” he said.

“It’s based on the landed cost of the car – the price we pay Mazda Motor Corporation for a particular car, which is obviously less than the list price.

“So it’s not as simple as passing on a five per cent saving on the list price of the car. It would be [substantially] less than that.

“As an example with the mid-grade Mazda3, at around the $24,000 to 25,000 mark, roughly about $700 or $800 would be the component of that.

“If there were to be a saving to come through, roughly in the region of $700 to $800 is what the import duty is worth on a mid-range Mazda3.”

Hyundai, South Korea’s largest car-maker, has also cautioned consumers not to expect automatically lower prices following the FTA between Australia and Korea, which was signed this week in Seoul.

Like Hyundai, Mazda says exchange rate variations typically have a bigger impact on vehicle prices than the five per cent import duty.

“If and when the FTA goes through we need to be aware of the lay of the land in the market at that point,” said Maciver.

“What’s the market doing, what are our competitors doing, what’s the exchange rate at that point?

“The bigger picture here is that a five per cent duty difference will not have an impact as big as some currency fluctuations with the Yen over the course of some weeks.

“Currency fluctuations can make a bigger difference than to a car’s price than, for instance, changes in import duty.

“Apart from internal market forces, currency fluctuation is one of the biggest issues we have to deal with and try to manage as a business.”

Maciver said that, like all importers, Mazda locks in both its buying and selling prices for extended periods based on projected exchange rates, which can have both positive and negative effects on its profitability.

“I don’t know how far out we actually ‘hedge’ [purchase fixed exchange rates], but we do lock in certain ranges we work against and if it goes above that or below that obviously there are consequences either way.

“Sometimes we make a little bit more when the exchange rate works in our favour and sometimes we make a little bit less. But that’s what we have to accept as a business.

“What we’re not going to do is make pricing changes based on short-term fluctuations in currency. It’s one of the things we have to consider when we price our cars,” Maciver stated.