5. Motor Vehicles
The motor vehicle industry is a very interesting case study for analysing the consequences of lifting the restriction on parallel importing because of the thriving market in second hand imports over the past 10 years.
Most of the major motor vehicle manufacturers have now taken action to prevent parallel importation of vehicles, and it appears that New Zealand courts now support the view that second hand goods are captured under the restriction in the Copyright Act. However, these actions are relatively recent, so there is a period of about ten years in which the market has operated as though there was no restriction. The beginning of the period is marked by the removal of import licensing restrictions on 1 January 1989. If we assume these import controls performed effectively the same task as parallel import restrictions in other markets, we have an experiment which can be used to gauge the impact of the removal of the restriction.
5.1 History of Reforms7
New Zealand's vehicle assembly industry began in 1926 when General Motors opened its assembly plant in Petone. Further plants followed after the imposition of a tariff regime which favoured local assembly and British sourced cars. In addition to the tariffs, there were also import licensing restrictions on both completely knocked down (CKD) kits that required local assembly and completely built up (CBU) cars that did not. The quantity that could be imported was determined by the government and generally favoured the importation of CKDs8. The total number of imports depended on a range of factors including the balance of payments. In years when the balance of payments deficit was predicted to be high, the value of licenses issued was reduced. Early in the 1970s, the improved balance of payments position allowed for much looser restrictions which effectively meant there were no limits on the volume of CKDs imported. Increased imports of CBUs were also permitted but these were still controlled. The impact of these changes was dramatic, with the total number of new registrations (both CKD and CBU) increasing by 50% between 1970 and the peak of 103,512 cars in 1974.
The local industry thrived under these restrictions, with the number of plants reaching a high of 16 in the 1970s. These favourable conditions ensured that the majority of new cars available in the market were assembled locally. Imports of CKDs dominated the imports of CBU vehicles by a ratio of about 9/1 over the 30 year period up to 1984 (Witt, 1985, p.12).
Prior to 1984, the only used vehicles that were imported were those accompanying citizens returning from overseas. This source of vehicles can be thought of as the equivalent of parallel imports for personal use.
During the early 1980s, the government examined the motor vehicle industry with a view to increasing the competitiveness and efficiency of the assemblers. This inquiry led eventually to the release of the Motor Vehicle Industry Plan in December 1984. The following changes resulted from the Plan:
- dismantling of the import licensing regime;
- reduction of tariffs;
- allowing for the import of components.
The licensing of CKD imports was abolished altogether, while a import licensing tendering scheme was set up for CBU imports. Both new and used cars could be imported with these licences. The quantity of cars to be imported was to be restricted to a given percentage of the domestic assembly market. The percentage increased from 5% in 1985 to 17.5 % in 1988.
Although the tendered import licences of CBUs did not distinguish between new and used vehicles, as margins are generally higher on new vehicles, most of the small quantity of licences were used for the importation of new cars. Vehicles previously registered overseas made up between 2% and 8% of the total number of vehicles registered in New Zealand during the period from 1965 to 1986. It wasn't until 1987 that significantly increased numbers of overseas used vehicles began to be registered: an increase of 200% in that year.
The Plan also revealed declining tariffs for CKDs. A reduction in the normal tariff from 45% in 1984 to 15% in 1988 was announced. The preferential tariff for kits sourced from Australia and Britain was reduced from 6.25% to 0% from 1985. Tariffs on CBUs remained unchanged at 55% for normal tariff and 20% for preferential (i.e. Australian and British sourced).
The sales tax that applied to motor vehicles was simplified to a two step regime by the Plan. For most vehicles this resulted in a significant reduction in the size of the tax. When GST was introduced in October 1986, the sales tax on motor vehicles was abolished and an excise tax of 25% was imposed. This was phased out between 1987 and September 1990.
Further changes were introduced in 1988. From 1 January 1989, it was no longer necessary to have a licence to import a CBU into New Zealand, though the tariffs remained. On the same day as the licensing regime was removed, the level of the normal tariff on CBUs was lowered to 45%. It continued its fall until it reached 35% on 1 January 1990. The tariff for CKDs was removed in January 1990. Further tariff reductions for CBUs started from 1 July 1993 and have continued since then. The current agreement will see the normal tariff fall to 15% in the year 2000. It has recently been announced that on 1 December 2000 all motor vehicle tariffs will be removed.
To counter the problem of under valuing by the importers of older motor vehicles, a specific duty was imposed in August 1991. For cars under 1000cc the specific duty was $1300, while for cars over 1000cc the specific duty was $1500. The importer thus paid the higher amount of either the specific duty or the ad valorem tariff. This effectively fixed a minimum level of tariff to be paid.
The changes in the industry as a result of this series of reforms have been dramatic. There are now only four firms assembling vehicles in New Zealand and this number is set to shrink further in the coming months and years. CKDs now make up less than half of the new vehicles available in the market and used vehicles make up over half of the total number of imports. Table 1 provides a comparison of the breakdown of vehicle types in 1984 and 1996.
Unfortunately, the removal of import licensing and the start of the tariff reductions coincide. This makes it considerably more difficult to isolate the effect of the removal of the import licensing restriction.
Table 1 Production/Imports of Passenger Cars |
| | 1984 | 1996 |
|---|
CKD Production | 92292 | 29727 |
New CBU Imports | 7364 | 42860 |
Used vehicles | 2019 | 117025 |
Total vehicles | 101675 | 189612 |
| Source: Motor Industry Association, Witt (1985), LTSA (1996) |
5.2 Impact on Market Participants
Prior to embarking on the formal welfare analysis, we briefly describe the main qualitative impacts on various market participants. The discussion mainly centres on the impacts for participants in the new car market, but where there are likely to be additional impacts for the used car market, these are mentioned.
5.2.1 Innovator
In the case of motor vehicles, the innovators are all overseas firms. For the purposes of the Copyright Act, the innovation in a motor vehicle is in the design of the parts, and it is the design that is protected by copyright. All of the design work for cars is undertaken overseas. Although there are some New Zealand based component manufacturers with their own copyright in their designs, we can assume that the innovator is a foreign firm.
The return to the innovator of a durable good such as a motor vehicle comes from only the first sale of the good. Once the good has been sold, the innovator's copyright is exhausted and it can not exert any control over the further use or sale of the good. Thus the producer of a durable good is creating its own future competition, because the purchaser can resell to consumers that may otherwise have purchased a new good. With motor vehicles, only used cars that are "nearly new" are likely to displace demand for new cars. If we assume that only 0-3 year old used vehicles are substitutes for new cars, as most commentators suggest, only a small proportion of the used imports have posed a threat to the new car market (Maddren, 1995, p.12). Figure 6 shows the number of new cars either produced or imported into New Zealand in each year compared to the number of used vehicles of less than 3 years imported in that year. Thus the majority of imported used vehicles are unlikely to have had an impact on the new car market and thus probably do not impact on the incentive to innovate.
The number of used imported vehicles in the 0 to 3 year old range as a proportion of the number of newly imported or produced peaked in 19959 at just less than 10%. Given the small size of the New Zealand market, it would stretch the imagination to argue that the removal of the parallel importing restriction has had an effect on the innovators' incentives to invest in motor vehicle design. In 1983, for example, we were the eighth smallest motor vehicle market in the world, if production were used as a measure (Witt, 1985, p.8).
Figure 6 Number of New Cars Registered and Number of Used Cars Aged Less Than 3 Years Imported1988-1995 |
1988-1995 | 
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| Source: | Motor Industry Association, Imported Motor Vehicle Dealers' Association |
| | (Ref Numbers.xls) |
5.2.2 Domestic Agents
The impact on domestic agents has been more dramatic. In 1984 before the plan was announced there were 10 motor vehicle assembly plants in New Zealand employing 6231 workers. The number has since dwindled to 4 plants operated by 4 firms. After the year 2000 it is unlikely that New Zealand will have an assembly industry. However, it is unlikely that the reduction in New Zealand assembly plants has been due to the parallel imports per se; it is more likely to be related to the reduction in tariffs that has occurred over the same period. This was confirmed by one of the interviewees.
Notwithstanding the decline in the number of assembly plants in New Zealand, the diversity of new cars has come from the importation of CBU vehicles from a range of manufacturers. In 1991, for example, there were 65 separate brands of new cars registered. Most were not assembled in New Zealand, although, by number, the New Zealand assembled vehicles dominated the CBU imports until 1995. The removal of import licensing and the reduction of tariffs on CBUs allowed firms to choose to import a wider range of vehicles, and rely less on costly local production.
Since the opening up of the market there have also been a number of new entrants to the market. One interviewee mentioned Kia, Daewoo and Chrysler as examples. If the ability to set up exclusive dealing arrangements is a requirement for successful entry into the market, we would not have expected so many new entrants during the period when the parallel importing restriction on used cars was not enforced. On the other hand, new entry on such a scale could be interpreted as evidence that parallel importing of used cars impacts little on the new car market.
A possible explanation for the lack of parallel importing in new cars is the tight control the innovator has over the wholesalers of new vehicles. It would be possible to trace quickly the source of a new car parallel imported without the permission of the innovator. The punishment for undermining the innovator's distribution network is likely to be severe, so for a wholesaler the costs are likely to outweigh the benefits of supplying outside the authorised distribution network. Thus we would not expect a parallel importer to be able to purchase new cars at wholesale overseas. However, we cannot rule out the possibility that parallel importing in new cars did not occur because of the threat of action under the Copyright Act, even during the relatively liberal period with respect to used cars.
The registration process for motor vehicles also protects the domestic agent from parallel imports of "new" vehicles. Any vehicle purchased at retail must be registered before the sale can be completed. Thus it is not possible to purchase it at retail and export it before it is registered in its country of origin. As the definition of "new" is first registered in New Zealand, a parallel importer could not hold out that the car was new.
If we accept this, we would not expect to see major changes to the organisation of the domestic distribution system if parallel importing of new cars were permitted. If it is in the best interests of the innovator to maintain completely separate markets in different countries, they are able to achieve this contractually and punish any agent that sells the product wholesale.
In some, although we think in few, cases it would be worthwhile to parallel import at retail prices. If the retail price in the source country is low enough, it is possible to buy a vehicle at retail and sell it in the destination country at a price below the domestic agent's. Although such a transaction would officially be in the second hand market, it is likely to displace sales of new vehicles (see Appendix C for an example). The threat of such arbitrage would act as a check on domestic agents' margins.
Marketing and promotion of new cars is the major pre-sales service offered by the authorised distributors of new vehicles. One interviewee characterised this activity as battling for market share. Other information sources were seen to be available to assist consumers in making their purchasing decision. Thus a decrease in such activity as a result of increased intra brand competition may not necessarily be detrimental to consumers.
Used Car Market
In response to the widespread importation of used cars into New Zealand, many "authorised" domestic agents have also begun to import used vehicles for resale. Authorised agents appear able to use their brand image to appease public concerns about the quality and safety of used imported vehicles (see below). The vehicles offered by the domestic agents are backed by a guarantee that the odometer reading is genuine and that the vehicle is of an acceptable safety standard. In this respect they fill the gap between domestic second hand vehicles and parallel imports.
If the parallel importing restriction was enforced, the importation of used vehicles by the domestic agents would only continue if such cars attracted premium margins compared to new cars.
5.2.3 Retailer
Most of the large new car distributors have an authorised retail network with exclusive rights to sell their make of new car. The rights are generally allocated on a geographical basis, though some territories may overlap e.g. Honda Cars Wellington and Honda Cars Lower Hutt. Some of these new car retailers also operate in the used car market.
In some cases a single retailer will stock a number of different makes of car. This is generally for low volume makes that don't have sufficient quantity to take advantage of economies of scale but can offer economies of scope.
The impact on retailers will depend, at least to some extent, on the relationship they have with the New Zealand distributor. If they are set up as franchises, there are likely to be contractual requirements to source their vehicles from the New Zealand distributor. However, even without this requirement it would be difficult to source "new" cars from an alternative distributor, as discussed above.
One interviewee suggested that the imminent demise of the assembly industry in New Zealand could result in a retrenchment of the associated retail networks. This could see the emergence of non-brand retailers selling different makes "off-the-shelf". However such a development, were it to happen, would due to tariff changes rather than the import restrictions.
It is possible that without the parallel importing restriction, the contractual requirements set by the New Zealand distributor could be too onerous for many retailers. We could see some retailers switch from being authorised agents to being independent importers.
Used Car Market
An interesting characteristic of used motor vehicle retailing is that it is not segmented by manufacturer unlike the new car market. Many of the new car retailers also sell used vehicles and in addition there are used car retailers that are not affiliated with a new car distributor. Both sets of retailers sell a range of makes and models of cars, though affiliated retailers generally tend to stock predominantly their own make of used cars.
5.2.4 Consumer
At first glance it appears that the consumer has been the big winner in the last 10 years. Real prices of new and used cars in New Zealand have fallen dramatically over the past 10 years and the range of vehicles available has increased. However, it is hard to isolate the effects of parallel importing from all the other dramatic changes in the market. Since 1984, factors that have had an impact on the market for new and used motor vehicles include:
- tariff changes;
- tax changes;
- exchange rate movements;
- direct competition from additional manufacturers selling their new cars in New Zealand; and
- price competition generated by parallel imported used vehicles.
Prices
The popular perception is that the prices of new and used cars have fallen since the lifting of the import licensing restrictions. This is certainly what we would expect given the reduction in tariffs and taxes that have occurred over the same period. All of these other factors must be controlled to be able to identify the effect on the price of used cars of parallel importing. The welfare analysis presented in section 5.3 discusses these issues in more detail.
Availability
The range of both new and used motor vehicles has increased in the years since the import licensing restrictions were lifted. New Zealanders now have access to models released overseas as well as those assembled or imported for use in New Zealand.
This was confirmed by interviewees who said that parallel importers can access models overseas which will not be released into New Zealand through the "authorised" channel for up to 2 years. In the interviewees' opinions, parallel importing has allowed New Zealand consumers to access a wider range of cars, more quickly than would otherwise have been the case. The range available to New Zealand consumers is considered to be much wider than in most other developed nations.
Safety and Quality Issues10
One of the defences of the current parallel importing restriction with respect to motor vehicles is the issue of safety. This is a variation of the general "quality" argument. Innovators or their domestic agents argue that the safety of parallel imports is inferior to that of the product sold through the authorised distribution channel. In part, consumers may be willing to trade off a degree of safety against price. However, it is more likely that consumers do not perceive any reduction in safety. All vehicles imported into New Zealand since 1991 are checked to ensure that the vehicle was manufactured to one of the four standards that New Zealand accepts and that they are roadworthy. This currently involves a three step process:
- an inspection in Japan by the JAAI - which ensures the vehicle was manufactured to the Japanese standard;
- a declaration by the importer that the vehicle meets the appropriate standard;
- an audit by a certifying engineer.
Thus parallel imported products must meet the minimum safety standard required of the equivalent used vehicles that were first registered in New Zealand. To suggest that such cars are not safe is to suggest that either the minimum standard is not sufficient or that the standard test does not pick up all aspects of a car's characteristics that input into its "safety". The LTSA is currently reviewing the checking procedure for imported vehicles in an attempt to further improve the service it provides for New Zealand consumers.
Another aspect of the quality issue came to the forefront in 1997 with accusations of wide scale odometer fraud. It was suggested that the majority of cars that had been imported into New Zealand had false odometer readings. As the odometer reading is a factor used by consumers in the assessment of quality, such wide scale tampering could indicate that the quality of imported used cars is inferior to that of New Zealand new cars. This is not to suggest that odometer tampering does not occur with New Zealand new cars, but there are some checks in the domestic market. The New Zealand registration system records the odometer reading at each re-sale of the car. Thus, as a rough guide, consumers can assess whether the amount of kilometres travelled since the last sale roughly matches what would be expected in the time since that sale. There are often no such checks available for imported used cars.
The ability of manufacturers to advise purchasers of parallel imports about safety recalls is another aspect of some concern to manufacturers' agents and to the Land Transport Safety Authority (LTSA). At present, the LTSA does not receive notices of safety recalls made in the markets where vehicles are parallel imported from. It is currently investigating ways in which it could identify when these recalls are made so it can inform the New Zealand owners of those vehicles. There is also a question of who pays. For a vehicle first registered in New Zealand, the domestic agent of the manufacturer generally takes responsibility for the recall and pays for the necessary repairs. Where a recall involves a parallel imported product, the domestic agent is not responsible. It is the importer that is responsible to their New Zealand consumers. For this reason, the LTSA is looking at putting the importers' details on the files of imported used vehicles.
The importation of damaged cars for either parts or to be repaired and sold in New Zealand is a trend that concerns many industry participants. It was suggested that some panel beaters import damaged vehicles which they repair and on sell to unsuspecting consumers. The safety of repaired vehicles was questioned by a number of interviewees but most seemed to think it was a problem with the checking procedures rather than the parallel importing restriction. The revised procedures proposed by the LTSA are likely to make it more difficult and more costly to bring in such vehicles into New Zealand and hence discourage the practice.
An argument that was only mentioned peripherally by a couple of interviewees was the differences between the design and material used in New Zealand new versus imported vehicles. It was suggested that New Zealand new cars were made to cope with some degree of driving on unsealed roads whereas imported vehicles were not. This would tend to increase the depreciation of imported vehicles in New Zealand conditions. This argument was discarded by the IMVDI who suggested that such differentiation was unnecessary. We believe that even if such differentiation were desirable, consumers benefit when they have the ability to choose the trade off a higher rate of depreciation for a lower price.
The earlier availability of new models through parallel importing could have the opposite effect on quality to that suggested. The new features and high specification of new models that become available in New Zealand earlier could be defined as an increase in the quality of cars.
After Sales Service
Are consumers of parallel imported goods able to free ride on the after sales services provided by the domestic agent and their affiliated retailers? There is no doubt that domestic agents do provide such services as repair facilities and warranties on their vehicles.
Many domestic agents claim that organisations that are not affiliated directly with them cannot adequately deal with repairs of new or nearly new vehicles of their make. Further to this, it was suggested that parallel imports could cause a retrenchment of the authorised dealer network, which would make parts for these vehicles more difficult to source and thus more expensive. While domestic agents do indeed provide specialised training and equipment, similar training and equipment are available on the open market. There does not appear to be any shortage of independent providers.
New vehicles tend to come with warranties that cover the car for mechanical failure for a period of time or the travelling of a certain distance. It is possible that the purchaser of a nearly new parallel import would expect the local authorised dealer network to provide the services required under the warranty. There may be reputation effects for the company if such service expectations are not filled. However, at least some parallel importers of late model vehicles offer a guarantee similar to those offered by the local manufacturers. This, in the opinion of one interviewee, is one of the reasons why imported used vehicles are becoming increasingly substitutable for new cars. The coverage of the warranties on the imported vehicles was questioned by two interviewees who suggested they tended to cover low risk areas and parts that were at risk of failure were not covered.
On balance, there are some legitimate concerns about consumers of nearly new parallel imported vehicles free riding on the warranty provisions provided by the domestic agent.
Used Car Market
Repairs and maintenance are an integral part of the annual expenditure on a vehicle, especially a used vehicle. All consumers are aware of this requirement and generally factor the expected value of these expenditures into their purchasing decision.
This was demonstrated to a certain extent when large scale importing began in New Zealand. Initially consumers were wary of imported vehicles because of concerns about the sourcing of parts. Imported vehicles sold at a discount to New Zealand new cars as a result. Sellers of vehicles specified whether the car was first registered in New Zealand or not because it changed consumer perceptions. In response to this demand, independent parts dealers began importing parts to service used Japanese imports. Some early buyers of imported cars were disadvantaged by the lack of support and had to pay high prices for parts for their cars, but the market developed very rapidly.
The provision of such services to consumers is an entirely separate industry to the manufacture and sale of vehicles, although there are some players which operate in both markets. Many of the authorised retail dealers also have repair shops which provide repair services to purchasers of their vehicles as well as other vehicle users. Given the extensive network of repair facilities available to consumers, free riding on the services provided by the authorised dealer is not a legitimate argument in favour of restricting parallel importing.
5.3 Welfare Analysis
Identifying the welfare effect resulting from the lifting of the import licensing restrictions is not a straightforward task. As mentioned above, the other regulatory and tax changes that occurred at the same time must be controlled for if we are to isolate the impact of the lifting of the restriction. We must also take into account the relationship between the new and the used vehicle markets. The importation of used vehicles will have a direct effect on the used car market and an indirect effect on the new car market. As the relative price of used cars falls, the relative attractiveness of new cars falls. We would thus expect to see a lower demand for new cars as a result.
Figure 7 presents a simplified representation of the markets for two substitutes i.e. the used car market and the new car market. The lifting of the import licensing restriction led to an increase in the supply of used cars, as represented by the shift from S to S'. This lowered the price of used cars (from P to P') and increased the quantity demanded (from Q to Q'). The reduction in the price of used cars increased the relative price of new cars. This led to a decrease in demand for new cars, as represented by the shift in the demand curve from D to D' in Figure 7. From this we would expect the price and the quantity of new cars to fall (from P to P' and from Q to Q').
Figure 7 Impact of an Increase in Supply in Markets for Substitutes |
Used Car Market |
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| New Car Market |
 |
There are a number of welfare changes evident as a result of the original increase in supply. First there is a welfare transfer from sellers to buyers in the used car market, as represented by the rectangle A. The triangle B is the welfare gain resulting from the increased supply of used vehicles. A similar set of changes occurs in the new car market. There is a transfer of surplus from producers to consumers as represented by the area C and there is a small loss of consumer surplus (area D). Area D includes consumers who would have received a small consumer surplus from purchasing a new vehicle at the higher price but presumably now receive much higher consumer surplus by purchasing a used vehicle at a lower price.
To estimate the welfare gain from the lifting of the import licensing restriction, we need to estimate the size of the gain of area B and net out the welfare loss of area D.
To do this we need to identify the changes in new and used car prices that have resulted from the lifting of the import licensing restrictions.
The importation of used vehicles for commercial resale (as opposed to used vehicles accompanying returning travellers) was allowed by license in 1985. However, it wasn't until the removal of import licensing in 1989 that large scale importation of used vehicles began. As a starting point, we can look at the price in a year prior to the importation of a substantial number used vehicles for commercial resale, i.e. 1985, and a relatively recent price, i.e. 1996, as representing the two equilibria, P and P' respectively.
A useful measure of the changes in new and used car prices comes from the motor vehicle component of the consumer price index (CPI). This index is a measure of quality adjusted transaction prices for new and used vehicles. For example, if the prices of new cars increased by 10% when GST was introduced, the price index would increase by 10%. The index represents a broad sample of the market. The only problem with using the index to identify P and P' is that prices are expressed in index numbers rather than in dollars. We discuss the issues involved in translating index numbers into monetary values later in the report.
Figure 8 Index of Car Prices (1981-1997)Base (1993=1000) |
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| Source: Statistics New Zealand |
Figure 8 illustrates the new and used car price indices as well as the general CPI. There is a significant difference between the two series, particularly over the period under investigation.
We can use the price indices to help us try to explain what occurred in the market for new and used vehicles over the period from the late 1980s to the early to mid 1990s. The index provides a good illustration of how each of the regulatory and other changes impacted on the market. For example, in 1986, when GST and the excise tax on new vehicles were introduced, the prices of new cars increased by 15%. This is what we would expect if all of the price changes were passed through to the consumer. Similarly, over the period during which the tariffs were removed, the price of new cars begins to fall relative to the price of the general bundle of goods, as expected.
If we take the period from the beginning of 1985 to the end of 1996, and compare the car price index and the general CPI we will get an estimate of the relative price movements.
- New car price index increased by 36%
- General CPI increased by 90%
Thus the car price index fell relative to the CPI by 54% over the period from March 1985 to December 1996.
Not all of this drop in real prices can be attributed to the lifting of the import licensing restrictions and the increased competition that resulted. We must first account for the tariff reductions over the period. It is very difficult to identify the reduction in retail prices we would expect to see as a result of the changes that occurred between 1984 and 1996 because:
- tariffs apply to wholesale prices not retail prices - we would thus expect a 5% fall in the tariff to result is less than 5% fall in retail prices;
- there are a variety of tariff rates and these change by different amounts over the period;
- in 1986 the change from a sales tax to an excise tax changed the value on which the tax was levied, and changed the relative tax burden on CKD and CBU vehicles.
We must emphasise that we are only able to provide ball park estimates of a breakdown of the fall in retail prices into its tariff-related and other components.
In 1985, the normal tariff on CBUs was 55%, the sales tax was 30% on most vehicles. The normal tariff on CKDs was 35% and the same sales tax applied. By 1996, the normal tariff on CBUs was down to 25%, and the excise tax had been removed as had the tariff on CKDs. Thus for CBUs and CKDs the total reduction in "taxes" was 60% and 65% respectively.
To estimate the impact we would expect on retail prices as a result of these "tax" changes we have to make some broad assumptions. First, we assume that the normal tariffs applied to all new vehicles. Secondly, we assume that the cost to which the tariffs are applied is about 50% of the retail price. The tariff as a proportion of the retail price has declined to about 15%. If we take an average proportion over the period of about 25%, then a 62.5% fall in tariffs would be expected to lead to about 10% decline in the retail price.
The actual real price fall is 54%. This tells us the real price has fallen further than we would have expected if the price changes were due solely to the tariff and tax changes. Exchange rate fluctuations could account for some of the difference, but we would expect these to be incorporated into the changes in the general CPI. If the real price change in new cars cannot be accounted for by tariff and tax changes, or currency movements, we conclude it is likely to be due to the increased competition resulting from additional used car imports.
On the face of it, the used car price index did not appear to decline by as much as new car prices relative to the CPI. The index shows a 45% real decline in the price of used cars. This is not what one might expect and not what casual observation would suggest. However, we think this apparent inconsistency can be explained by the significant change in the quality composition of the used car market.
For the purposes of this investigation, we believe the trade up gap11 between new and used cars provides more relevant information on the relative price change. There have been a number of such estimates made, ranging from 4% to 15%. We don't have reliable estimates of the trade up gap for the whole period. If, as a ball park estimate, we take the average change of 10%, then we can say that used car prices fell by an average of 10% more than new car prices over the period.
To calculate the welfare impact we need not only the change in prices provided by the indices, but also an estimate of the "average price level" in dollar terms. This is difficult given the diverse range of vehicles available in New Zealand. We took a sample of cars and identified their 1996 new price and the price of a 3 year old car in the same year as an estimate of the level of used car prices. This will, on average, over estimate the price of used cars since most of them are older than 3 years old and thus over estimate the welfare impact.
- New car price $37000
- Used car price $25000
We also need the change in the quantity of vehicles over the period, which we can get from the vehicle registration statistics. In 1985, there were 81516 new cars registered while in 1996 there were only 64414.12 Registrations of vehicles that had previously been registered overseas increased from 2918 to 111764 over the same period.
Welfare loss in new car market equals change in price * change in quantity *0.5 (area D)
In 1996 dollars, the new car component of the CPI tells us that the value of a 1985 new car is 44%13 higher than the retail price of a 1996 vehicle. Thus the price change is estimated to be $16,280 (i.e $53,280 - $37,000). The decline in quantity is about 17,000 vehicles. Thus the total welfare loss is $138 m.
Used car market gain:
In 1996 dollars, we would expect the value of a 1985 used car to be 54% higher than the retail price of a 1996 used vehicle. (i.e. 44% for new cars plus extra 10% decline through trade up gap). The difference equals $13500 ($38500 - $25000). The change in quantity equals 108000. Thus the total welfare gain has been $729m.
The net gain to society $729m less $138 m i.e. about $590 million. This excludes the transfer to overseas manufacturers to NZ consumers.
Please note that these calculations provide a ball park estimate only. The estimate is likely to be on the upper bound of a range of possible estimates depending on the assumptions used for the calculations.
5.4 Sub-Market Analysis - Trucks
As a small case study within the motor vehicle market, we interviewed two representatives from either side of a current dispute involving the parallel importation of trucks. A similar set of arguments applies to the market for trucks as has been discussed for the passenger vehicle market. Safety is a much more prevalent issue and the size of the price differences appears to be significantly higher.
Price
It has been suggested that new trucks can be imported into New Zealand from the United States, converted from left hand drive (LHD) to right hand drive (RHD) and still be sold at a discount of $50,000 which is approximately 25% less than the price of a NZ new truck (see Appendix D for an example provided by one of the interviewees).
The domestic agent of a US truck manufacturer confirms that the parallel imported trucks are cheaper than their New Zealand counterparts but suggests there are other reasons for the difference, in particular the level of servicing provided.
The market for "new" trucks includes unused as well as nearly new trucks that have travelled less than a certain mileage. One estimate for this cut off point was about 100,000 kilometres. There is a high degree of substitutability between new and nearly new trucks but almost no interaction with other used trucks.
Availability
As to be expected there were differing opinions about what was likely to happen to the range of trucks available if the restriction were lifted or changed. Participants felt that local distributors could close their New Zealand operations if import competition increased. Buyers in New Zealand would have less choice in buying locally but would be able to access a wider range of imported vehicles.
If authorised distributors closed their New Zealand operations, it could be difficult for owners of trucks to get parts or servicing.
Safety
The authorised dealer also questions the safety of the converted trucks. There are no LTSA checks done on the work and there have been examples of poor work leading to some "deathtraps" on the roads.
Safety recalls are also a concern for the authorised distributors. Most safety recalls are made within the first one or two years of a truck's sale. It would be difficult to include parallel imported products in such a recall.
After Sales Service
It appears that the truck market differs somewhat from the car market in that the New Zealand distributors have a much larger role in the servicing and parts market. Currently the price paid for a truck includes a warranty as well as a service and parts supply agreement. These components would be separated if parallel importing were permitted in new trucks.
The Road Transport Forum (RTF), a body representing truck operators, indicates that this would be a positive outcome. In their opinion the bundling of after sales service with the price of new trucks stifles competition in servicing as buyers are unaware of the costs of the individual components. If the warranty, servicing and parts supply were priced separately, buyers could make more informed choices. At present, there are few independent servicers or suppliers of parts but it was suggested that alternative providers would start up if conditions permitted.
Pre Sales Service
The removal of the parallel importing restriction is likely to reduce the amount of promotional activity produced by the New Zealand distributors. Buyers would have to find other sources of information about the relative merits of different trucks. If local distributors disappeared, this would involve buyers having to search for information on overseas distributors. It was suggested that this would provide the incentive for an organisation to act as an intermediary to provide buyers with information about the range and prices available from overseas. However the RTF believed that the local distribution network would not necessarily disappear as a local presence would give a company an advantage over foreign rivals.
The RTF considered that the nature of the buyers was relevant in this aspect of the market. The companies were selling trucks to business people who should be relatively more informed about their choices than ordinary consumers.
5.5 Conclusions
The change in consumer welfare as a result of the lifting of import restrictions would provide some quantitative measure of the gains or losses from such an action. However, such a calculation is not a simple task. It is difficult to separate out the impacts of the removal of the restriction from the changes that have resulted from the removal of tariffs on new and used cars, the removal of the new car excise tax and movements in the exchange rates. The technical detail of the welfare calculation is presented in Appendix E. Because of the difficulties we have experienced with the data, we are required to take a less rigorous approach.
The detriments from opening up the market to used imports have been:
Concerns about the quality and safety standards of the vehicles available in New Zealand. There are some legitimate concerns here but it is not clear that a parallel importing restriction is necessarily the best way to deal with these. It was suggested by a number of interviewees that tighter checking of imports would virtually eliminate this argument. Other parties felt it was not necessarily an easy option to implement.
Confusion by consumers about the differences between parallel imports and the authorised domestic product. Some free riding on the reputation of the New Zealand agent has occurred as a result of consumers' inability to distinguish between imported used and other New Zealand new vehicles. This is particularly prominent in the case of nearly new vehicles where consumers expect warranties to be validated by the authorised dealer irrespective of where they purchased the vehicle. However, these detriments can be minimised by appropriate labelling and consumer education.
As the tariffs have fallen further the domestic assembly of vehicles has declined dramatically. Parallel importation of used vehicles has also contributed to its decline but the marginal effect is likely to have been small in comparison to the impact of the tariff changes. Some domestic agents have now begun to import used vehicles for resale in New Zealand. Surely this will impact on their new car sales? How do they reconcile this action with the arguments that imports of used vehicles are bad per se?
Inadequate repair and maintenance facilities for imports leading to increased post purchase costs. This problem was only a temporary one with a support infrastructure developing to fill the demand from owners of imported vehicles.
Losses in resale value for existing vehicle owners. For most consumers any losses that occur from a reduction in resale value are gained by the reduction in the price paid for their replacement. The only consumers to lose are those who sell their vehicle but do not replace but in aggregate this is offset by the gains to those consumers who purchase a vehicle without selling another.
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