Impact analysis of
potential changes to
the current
restrictions on the
importation of used
motor vehicles into
Australia
Dealer Group Against Used
Car Imports
9 September 2014
Deloitte Touche Tohmatsu
ABN 74 490 121 060
Dealer Group Against Used Imports
c/- Meon Nehrybecki
Mercedes-Benz Parramatta
PO Box 220
Parramatta NSW 2150
550 Bourke Street
Melbourne VIC 3000
GPO Box 78
Melbourne VIC 3001 Australia
Tel: +61 3 9671 7000
www.deloitte.com.au
9 September 2014
Dear Meon
Final Draft Report: Impact analysis of potential changes to the current restrictions on the
import of used motor vehicles into Australia
Please find attached our final report on the potential impact of changes to the current
restrictions on the importation of used motor vehicles into Australia.
Yours sincerely,
Robert Southern
Partner
Deloitte Touche Tohmatsu
Liability limited by a scheme approved under Professional Standards Legislation.
© 2014 Deloitte Touche Tohmatsu
1
Contents
Executive Summary .................................................................................................................... i
2
3
4
5
Introduction .................................................................................................................... 6
2.1
Background ...................................................................................................................... 6
2.2
Structure of report ............................................................................................................ 7
Market analysis ............................................................................................................... 9
3.1
Overview .......................................................................................................................... 9
3.2
Market segmentation ....................................................................................................... 9
3.3
Demand.......................................................................................................................... 14
3.4
Supply ............................................................................................................................ 16
3.5
3.6
Competition in the retail car market ............................................................................... 19
Information and regulation ............................................................................................. 20
3.7
Key trends in the retail car market .................................................................................. 22
Policy driver and regulatory analysis.............................................................................. 31
4.1
Legal and regulatory framework...................................................................................... 31
4.2
4.3
Past policy rationale for restricting large scale imports .................................................... 34
Current policy rationale for removing import restrictions ................................................ 35
Potential impacts to the retail car market...................................................................... 37
5.1
5.2
5.3
New Zealand experience ................................................................................................. 37
Source markets ............................................................................................................... 40
International comparison ................................................................................................ 42
5.4
Direct effects .................................................................................................................. 45
5.5
Implications for the Australian market ............................................................................ 47
Conclusions ............................................................................................................................. 52
Appendix A – Further charts .................................................................................................... 54
Limitation of our work ............................................................................................................... 57
Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of
member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed
description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms.
Liability limited by a scheme approved under Professional Standards Legislation.
© 2014 Deloitte Touche Tohmatsu
Executive Summary
This report has been commissioned by the Dealer Group Against Used Car Imports
(DGAUCI) to inform an industry response to suggested changes to existing legislation
regulating the large-scale importation of used cars into Australia.
The report analyses potential impacts of removing used car import restrictions on the retail
car market. The impetus for this report stems from industry concerns with suggested
changes to allow the large-scale importation of used vehicles into Australia presented in a
Productivity Commission Review into Australia’s automotive manufacturing industry and
the complexities associated with such a change.
Currently, the DGAUCI is preparing a response to Motor Vehicle Standards Act (MVSA)
review with the aim to inform the review of the complexities of removing used car import
restrictions. The NMBDA has engaged Deloitte on behalf of the DGAUCI to prepare a report
on the potential impacts of removing used car import restrictions on the Australian retail
car market. The analysis in this report was commissioned to help inform the DGAUCI’s
response to MVSA review.
This report provides an overview of the Australian retail new car market and an analysis
into the potential impacts of regulatory change on the retail car market in Australia.
Market Overview
The Australian retail car market is a $74.0 billion industry which employs over 66,000
people, sells in excess of one million new cars each year and adds nearly $6.4 billion to the
Australian economy1. The retail car market in Australia is highly competitive with many
buyers and many sellers actively participating in the market. There are over 4,700 car
dealers in the Australian market dealing in over 60 different marques. Competition
primarily takes place in three market segments: the volume segment, the prestige segment
and the luxury segment.
Table 1.1: Market segmentation in new car market, 2013
Volume
Units sold
% of units sold
740,951
67%
Prestige
Luxury
277,557
25%
91,006
8%
Source: Federal Chamber of Automotive Industries (2014)
The volume segment of the market is by far the largest with 67 per cent of new cars sold in
2013 being volume cars, followed by prestige with 25 per cent of new cars sold in 2013
being prestige cars and luxury with 8 per cent of new cars sold in 2013 being luxury cars
(Table 1.1).
1
Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
i
When put in an international context, Australia’s high level of competition in the retail car
market becomes more apparent. The number of brands and market share of each of these
brands of car are good indicators of the level of competition in a market. Table 1.2 presents
a comparison of these indicators in Australia, Canada, the UK and the USA – Australia has
both a higher number of brands (67) and a lower market size per brand (16,597 unit sales
per brand) than each of these other markets, both indicators suggesting that Australia is
the most highly competitive.
Table 1.2: Competitiveness of global car markets, 2013
Australia
Number of brands in Australia
Sales (car units)
Market size per brand (car units)
Canada
UK
USA
67
49
53
51
1,112,032
1,620,221
2,249,483
13,040,632
16,597
33,066
42,443
255,699
Source: Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (2013),
March 2013 Automotive update
The competitiveness of the Australian retail car market has brought about many positive
outcomes for consumers in the past decade. Australia has experienced a significant
increase in the affordability of cars over the past decade. There are a range of factors
behind this increase including a rising Australian dollar reducing the costs of imported
vehicles, increased competition in the local retail car market pushing down prices and a
steady increase in the disposable income of the average Australian. Chart 1.1 below shows
the decrease in motor vehicle prices as measured by the motor vehicle consumer price
index.
Chart 1.1: Decrease in motor vehicle prices, 2003-2013
115
Motor Vehicle CPI
110
105
100
95
90
85
Source: ABS CPI
Increased affordability has also had wider benefits for the Australian car fleet. Car
ownership has consistently risen in Australia since the 1950s, particularly driven by strong
growth in the new car market in the past 10 years. The injection of new cars into the
market has had some benefits for the age of the relatively old Australian fleet. This trend of
decreasing age of motor vehicles is likely to have productivity benefits and decreased
ii
maintenance costs of the fleet. Additionally, as the Australian car fleet is being renewed
more quickly, the transmission of new technologies (e.g., environmental outcomes and
safety) will be achieved at a much faster rate.
Chart 1.2: Average age of Australian Car Fleet, 1996 to 2013
10.8
10.6
10.4
10.2
10
9.8
9.6
9.4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: ABS Motor Vehicle Census
New Zealand Experience
New Zealand is a market that is often used as an example to demonstrate the benefit of
allowing the import of used motor vehicles and there have been many benefits to New
Zealand’s policy regarding imports of used cars. However, this has had significant impacts
on both the age and the safety of the New Zealand car fleet. Data from 2013 shows that the
age of the New Zealand fleet has been steadily increasing over time – especially in
comparison to the age of the Australian fleet. Chart 1.3 shows the age of the New Zealand
car fleet at several points in time and indicates a gradual upwards trend of vehicle age in
New Zealand as compared to a downwards trending fleet age in Australia.
Chart 1.3: International age comparison of car fleets
Average age of cars in fleet
16
14
12
10
8
6
4
2
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
New Zealand
Australia
USA
iii
Source: New Zealand Ministry of Transport (2013), 2013 New Zealand Vehicle Fleet Annual Spreadsheet; ABS
Motor Vehicle Census various years
The ageing of the New Zealand car fleet has had implications for safety, and reports by the
Monash University Accident Research Centre point out the disparities between the safety
of the Australian fleet, and the safety of used car imports in New Zealand as compared to
the overall New Zealand car fleet2. In recognition of the growing issue with the ageing New
Zealand car fleet, the New Zealand Government has started to implement more stringent
environmental and safety controls on imported used vehicles.
Potential implications of recommended changes
If Australia was to remove import restrictions allowing the large scale importation of used
cars there would likely be a number of implications for the local economy. Economic theory
would suggest that an increase in supply of goods in a particular market will result in both
increases in quantities of the goods sold and a decrease in the level of prices. Considering
the Australian retail car market, theoretically the removal of current large-scale used car
import restrictions would result in a decrease in the price of used cars and may also result
in a decrease in prices of new luxury cars. However given the high level of car ownership in
Australia, the removal of the current restrictions is unlikely to result in a material change in
the overall number of cars sold.
Key changes in the market that will occur as a result of removing current import restrictions
will relate to substitution effects. It is likely that in response to price changes consumers
may substitute planned purchases of local used cars with imported used cars and, to a
limited extent, local new cars.
Table 1.3: Potential substitution effects by market segmentation
Volume
Prestige
Luxury
New
Negligible
Negligible
Low
Used
Medium
Medium
High
These potential substitution effects will be driven by price, which will depend largely on:

The implementation design of the suggested changes to current import restrictions

The volume of available vehicles from source markets

The new car price differential between Australia and other markets.
The substitution effects will likely have wide reaching implications for the retail car market.
It is expected that:

In the short run, the suggested changes will have disruptive effects for car dealerships;
however, in the long run, dealerships will likely adjust to the new status quo
2
Newstead, S., Watson, L. and Cameron, M. (2013). Vehicle safety ratings estimated from police reported crash
data: 2013 update: Australian and New Zealand crashes during 1987-2011; Newstead, S., Watson, L. and
Cameron, M. (2012). Trends in crashworthiness of the New Zealand vehicle fleet by year of manufacture: 1964
to 2010: supplement to Report 313: Vehicle safety ratings estimated from police reported crash data: 2012
update.
iv

Consumers will gain some benefit from reduced prices of used cars, however, the
extent of these decreases is unclear. Additionally, consumers may face information
asymmetries and cognitive bias issues.

Government will need to consider consumer protection issues, policy issues and the
fiscal costs of such a policy.
These implications are described in further detail in Table 1.4 below.
Table 1.4 Potential implications of removing large scale import restrictions of used cars
Consumers
Industry
Government
New car sales
Benefits
Consumer protection issues
Near-new luxury car prices overseas are
lower than comparable Australian cars.
It is possible that there will be some
substitution between new and used
luxury cars in Australia; however, this is
a small part of the market.
Price of used cars will likely decrease
and there may be an increase in the
number of models and variants
available.
The recall system needs to be able to
cope with an increased number of used
imports. Additionally, Government may
need to assess the adequacy of the
current policy framework to deal with
issues such as potential odometer
fraud.
Value of existing new stock will
decrease as resale value of used cars
decreases.
Used car sales
Costs
Likely to be higher operating costs
associated with imported used cars.
Australian dealers have noted that this
will be due to higher parts and servicing
costs and higher insurance.
Dealer network will require time to
adapt to new sources of supply and
adjust prices
The value of existing cars held by
consumers will fall.
Price of existing used car stock will
decrease, devaluing existing stock
Information asymmetry may lead to
consumers not making the best choice
they can.
Recall management
Dealers and manufacturers face brand
risk if a robust recall management
system is not in place for imported used
cars.
Information asymmetries
Cognitive biases
Consumers, when facing complex
decisions, make mental shortcuts and
may base their decision on factors that
they easily relate to. These could
include factors such as make of car, or
how expensive the same model is in
Australia. If the specification is different
this may not be the best choice for the
consumer.
Policy issues
Fleet safety improvement – allowing
large scale importation of used cars
could increase the age of the fleet and
slow the spread of safety technologies.
Environmental protection – likely to be
an increase in scrapped cars and
possibility of imported cars not meeting
emissions standards
Implementation,
compliance
and
enforcement of new regulation may be
difficult and costly for government.
Fiscal costs
There may also be implications for
luxury car tax and stamp duty revenues
depending on the extent to which the
policy change results in a decrease in
car prices and the volume of new luxury
cars sold.
v
2 Introduction
This chapter provides background for the report and sets out the structure for the remainder
of the report.
2.1 Background
This report has been commissioned by the Dealer Group Against Used Car Imports
(DGAUCI) to inform an industry response to suggested changes to existing legislation
regulating the large-scale importation of used cars into Australia. The report analyses
potential impacts of removing used car import restrictions on the retail car market. The
impetus for this report stems from industry concerns with suggested changes to allow the
large-scale importation of used vehicles into Australia presented in a Productivity
Commission Review into Australia’s automotive manufacturing industry and the
complexities associated with such a change.
Productivity commission review
In October 2013, the Minister for Industry tasked the Productivity Commission (PC) to
conduct a review into government support for Australia’s automotive manufacturing
industry. The broader focus of the review was on the sustainability of Australia’s
automotive manufacturing industry, however, the PC also considered Australia’s current
policy regarding the importation of used motor vehicles. The review has now been
completed and the PC has publicly released both a preliminary findings report and a
positions paper.
In the position paper released in January 2014, the PC came to a draft finding regarding
Australia’s used car import policy:
Draft Finding 3.2
The policy rationale for prohibiting the large-scale importation of second-hand
vehicles into Australia is weak. However, appropriate regulatory measures are
required to ensure that consumer protection, community safety, and
environmental performance standards are maintained before the restrictions
are removed. These concerns are best dealt with directly, through regulatory
standards applicable to all vehicles sold in Australia.
The $12 000 specific duty on imported second-hand vehicles appears to be
largely redundant, providing a prima facie case for its removal.
Following the completion of our report, the PC has since released their final review report.
The core finding recommending the removal of large scale used car import restrictions was
reiterated in the final inquiry report in Recommendation 5.4, though the PC’s stance on this
appeared to have weakened. It is important to note that though the analysis of our report
was carried out in reference to the position paper, our conclusions are not changed
regarding the potential impacts of removing used car import restrictions in Australia.
2014 review of the Motor Vehicle Standards Act 1989
In January 2014, the Assistant Minister for Infrastructure and Regional Development
approved the commencement of a comprehensive review of the Motor Vehicle Standards
Act 1989 (MVSA) with a specific focus to:

Reduce the regulatory burden on business

Improve the safety provisions of the legislation

Improve the environmental provisions of the legislation

Improve the anti-theft provisions of the legislation.
The review is tasked with identifying options for addressing the above concerns, which will
be formally assessed in a Regulatory Impact Statement (RIS). Our understanding is that if
the Government were looking to remove restrictions on large-scale importation of used
vehicles, that this would be considered as part of the review of the MVSA.
Dealer Group Against Used Car Imports
The Dealer Group Against Used Car Imports (DGAUCI) is an association of retail car dealer
associations in Australia who oppose the import of used cars into Australia. The group is
formed by six national car dealership groups:

National Mercedes-Benz Dealers Association

BMW National Dealer Council

Nissan National Dealer Council

Mazda Dealer Association of NSW

Hyundai National Dealer Council.
Currently, the DGAUCI is preparing a response to MVSA review with the aim to inform the
review of the complexities of removing used car import restrictions. The NMBDA has
engaged Deloitte on behalf of the DGAUCI to prepare a report on the potential impacts of
removing used car import restrictions on the Australian retail car market. The analysis in
this report was commissioned to help inform the DGAUCI’s response to MVSA review.
2.2 Structure of report
This report provides an overview of the Australian retail new car market and an analysis of
the potential impacts of regulatory change on the retail car market in Australia. The report
is structured as follows:

Chapter 3 summarises the Australian retail car market and includes detailed
descriptions of market segmentation, key market participants, the dealership business
model, and key market trends.

Chapter 4 describes the regulatory and legislative framework governing the retail car
market, and analyses the policy rationale behind historical regulation of used imports
and the current policy rationale for the suggested removal of used car import
restrictions.
7

Chapter 5 is a detailed analysis of the potential implications of removing used car
import restrictions on the retail car market.
8
3 Market analysis
This chapter provides an analysis of the retail car market and discusses past, current and
future trends.
3.1 Overview
The Australian retail car market is a $74.0 billion industry which employs over 66,000
people, sells in excess of one million new cars each year and adds nearly $6.4 billion to the
Australian economy3. The retail car market can be defined as the market in which the
buying and selling of new and used motor vehicles between retail dealerships and
consumers, companies and government entities takes place. Products sold in the market
are slightly differentiated with different market segments focused on selling volume (low
end), prestige (middle range) and luxury (high end) cars. With many buyers and sellers in
the market, recent years have seen high levels of competition in the retail car market
resulting in lower prices, higher vehicle specifications and diversification of the dealership
business model. These features of the retail car market are described in further detail in the
following sections. Although the retail car market also facilitates the trade for commercial
vehicles, this report focuses on passenger vehicles.
3.2 Market segmentation
The retail market for cars in Australia can be broadly segmented into passenger vehicles
and commercial vehicles. This report has a particular focus on passenger vehicles and as
such, when looking at passenger vehicles, we apply a more granular lens of segmentation.
3.2.1
Passenger vehicles
The retail car market offers a broad range of passenger vehicles that vary significantly in
price and in target market. As such, it is useful to break the market for passenger vehicles
down into segments to allow a more detailed analysis. This segmentation groups each
make of car into categories based on the marketing strategy of the manufacturer. The
specific criteria used to segment brands are based on the manufacturer’s in-market
positioning in regards to volume and unit gross margin. Under the Deloitte system of
segmentation, each brand is classified as volume, prestige or luxury, where:

Volume brands sell a high volume of cars at a low gross margin per unit.

Prestige brands sell a medium volume of cars at a mid-range gross margin per unit

Luxury brands sell a low volume of cars at a high gross margin per unit.
Deloitte’s Motor Industry Services Group maintains a market segmentation database with
information on each of the relevant brands. As brands can adjust their in-market strategy
and move between market segments, this segmentation is only approximate and based on
3
Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
9
currently available data. Table 3.1 shows a sample breakdown of our most recently
available data.
Table 3.1: Market segmentation of brands, sample
Volume
Ford
Holden
Hyundai
Kia
Mitsubishi
Nissan
Prestige
Alfa Romeo
Chrysler
Citroen
Dodge
Fiat
Honda
Luxury
Audi
BMW
Jaguar
Land Rover
Mercedes-Benz
Volvo
Source: Deloitte Motor Industry Services data (2014)
3.2.2
Volume
Volume brands, in addition to the segmentation criteria, generally can be described as
brands which are priced at a lower price range and occupy the majority of the market.
Some notable volume brands operating in Australia include Toyota, Ford and Holden. In
2013, in total there were 721,616 new volume brand vehicles sold, an increase of 4,888
from 2012. Most of the gross profit of volume dealerships comes from new cars (28.8 per
cent) and service (27.1 per cent). For a more detailed discussion of the dealership business
model see subsection 3.4.1.
Table 3.2: Departmental contribution to gross profit, Volume (2012-13)
Department
Contribution to gross profit (%)
New
28.8
Used
13.5
Parts
12.3
Service
27.1
Finance and insurance
18.3
Source: Deloitte Motor Industry Services data (2014)
Over the past 10 years, there has been a decline in demand for Volume cars; this is likely a
result of an increase in income per capita (see Chart 3.1) and a decrease in prices of
prestige and luxury cars relative to volume cars (see Chart 3.2) leading to consumers being
able to afford more expensive cars.
10
Real net disposable income per
capita (base year 2010-11)
Chart 3.1: Real disposable income
60,000
50,000
40,000
30,000
20,000
10,000
0
Source: ABS (2014), Australian System of National Accounts (ABS Publication: 5204.0)
Chart 3.2: Car affordability, luxury car and volume car comparison
Number of weeks to buy vehicle on average
wages (average weekly ordinary time earnings)
80.00
70.00
60.00
50.00
40.00
30.00
Mar 00
Mar 02
BMW 320i 4dr auto
Mar 04
Ford Falcon XT auto
Mar 06
Source: CommSec (2010), CommSec Car Affordability Index
11
3.2.3
Prestige
Prestige cars are priced in the middle space of the market and are marketed to sell a
medium volume with a mid-range gross margin per unit. In 2013, in total there were
277,557 new prestige brand vehicles sold, an increase of 12,532 from 2012. In Australia in
2013, there were 15 prestige vehicle brands with dealerships operating, with some of the
major brands including Mazda, Honda and Chrysler. Most of the profit of prestige
dealerships comes from new cars (29.7 per cent) and service (26.8 per cent). For a more
detailed discussion of the dealership business model see subsection 3.4.1.
Table 3.3: Departmental contribution to gross profit, Prestige (2012-13)
Department
Contribution to gross profit (%)
New
Used
29.7
13.1
Parts
12.4
Service
Finance and insurance
26.8
18.1
Source: Deloitte Motor Industry Services data (2014)
Over the past 10 years, the demand for prestige cars has increased significantly. This has
been driven by predominantly by large increases in sales volumes of Mazda, Volkswagen
and Jeep passenger vehicles as can be seen in Chart 3.3.
12
Chart 3.3: Change in sales volumes of prestige cars from 2004 to 2013
Total
Volkswagen
Subaru
Smart
Peugeot
Mazda
Jeep
Honda
Fiat
Dodge
Citroen
Chrysler
Alfa Romeo
-30,000
0
30,000
60,000
90,000
Sales volumes (units)
120,000
150,000
Source: Federal Chamber of Automotive Industries (2014)
3.2.4
Luxury
Luxury cars are priced at the upper end of the market and marketed as premium cars. In
2013, in total there were 91,006 new luxury brand vehicles sold, an increase of 10,328 from
2012. In 2013, there were 19 luxury car brands operating in the Australian market, with
some of the major brands including Mercedes-Benz, BMW and Audi. Most of the profit of
prestige dealerships comes from new cars (32.7 per cent) and service (29.2 per cent). For a
more detailed discussion of the dealership business model see subsection 3.4.1.
Table 3.4: Departmental contribution to gross profit, Luxury (2012-13)
Department
Contribution to gross profit (%)
New
32.7
Used
10.1
Parts
Service
F&I
14.3
29.2
13.7
Source: Deloitte Motor Industry Services data (2014)
13
Luxury cars have experienced a significant increase in demand over the past 10 years (see
Chart 3.4) especially since 2010. This may be being driven by increased affordability of
luxury cars (see Chart 3.2) and rising levels of demand.
Chart 3.4: Increase in luxury car sales over the past 10 years
90,000
Sales volumes (units)
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
Source: Federal Chamber of Automotive Industries (2014)
3.3 Demand
Demand in the retail car market generally is driven by three main groups: private customers
(or consumers), business customers and government customers. Chart 3.5 shows the
segmentation of this demand in the retail car market in Australia in 2013.
Chart 3.5: Segmentation of demand in the retail car market, 2013
4.4%
30.5%
65.1%
Private customers
Business customers
Government and other customers
Source: Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
14
3.3.2
Buyers
Private customers
Private customer spending accounts for more than 65 per cent of revenue in the retail car
market4. Generally speaking, the core reason private customers purchase cars is to satisfy a
transport need, however, the decision to buy a specific car is driven by a number of factors
including disposable income, price, personal preference, brand loyalty and social norms.
Once a private customer has made the decision to purchase a vehicle, they will often set a
mental budget and aim to get the ‘best’ possible car for this price. This practice is likely a
contributing factor in the rise of prestige and luxury cars in the past 10 years – as Australian
consumers’ disposable incomes have increased and car prices decreased, instead of
purchasing the same cars at a lower price, consumers have sought a higher quality car.
Within the group of private customers, there are several subgroups who behave distinctly
differently from each other. Those aged 25 years and younger5, are typically buyers of
‘volume’ vehicles as they have a high need for transport and a limited capacity to pay.
Families and couples tend to purchase multiple vehicles as they generally have higher
disposable income and a need for flexible transport.
The decision to buy a car is essentially an economic one, in which a consumer evaluates
their need for the benefit of private transport and weighs this up against the cost of
purchasing and maintaining a vehicle. Once the decision to buy a car is made, a subsequent
choice is made between a new or used vehicle. This choice is generally guided by financial
constraints as although most consumers would prefer to purchase a new vehicle, if they
cannot afford to do so, they will purchase a used vehicle.
Businesses
Spending by businesses on cars contributes more than 30 per cent of the revenue 6 to the
retail car market. Businesses generally buy cars for specific purposes. The types of vehicles
vary widely and can include passenger vehicles and commercial vehicles. Business demand
for passenger vehicles is generally limited to the volume and prestige vehicles as luxury cars
are not economical for businesses. Important drivers of business demand for cars include:

Government taxes and incentives

Business confidence
 Economic growth.
Government incentives to businesses proved to be a strong driver of business demand for
cars in the aftermath of the GFC as businesses could claim up to 50 per cent of the cost
back in tax deductions.
4
Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
5
Ibid.
6
Ibid.
15
Government
Spending from government in the retail car market is relatively small (4.4 per cent of total
revenue)7, however, government still has a significant role as a buyer in the market as it has
the ability to make large purchases of a single model of car. These large purchases are
often guided by government strategic direction and policy and in Australia have historically
been directed by policy issues such as support for the Australian car manufacturing industry
and/or environmental considerations.
3.3.3
Price elasticity of demand
The price elasticity of demand plays an important role in the retail car market. Price
elasticity, or the sensitivity of demand to price changes, describes how consumers behave
when there is a price change in a good. High price elasticity means that consumers are
highly reactive to price changes and that a small change in the price (whether upwards or
downwards) will result in a proportionally larger change in how much of that good is
demanded by consumers. Low price elasticity means that consumers are not very reactive
to changes in price and a change in the price of a good will result in a proportionally smaller
change in consumer demand for the good. The price elasticity of demand generally
depends on several factors including:

Availability of substitutes – goods that are easily substituted by other goods generally
have a higher price elasticity of demand

Proportion of income – consumers are generally less responsive to price changes in
goods that only require a low proportion of income, and more responsive to price
changes in goods that require a high proportion of income.

Necessity – the more reliant a consumer is on a certain good, the less responsive the
consumer will be to changes in price of that good.

Brand loyalty – customers who are loyal to a particular brand will be less likely to
respond to price incentives, so the higher the brand loyalty is for a particular good the
lower the price elasticity of demand is for that good.
Demand in the retail car market is generally elastic as there are a wide range of almost
identical substitutes and the cost of a car represents a large proportion of an average
income.
3.4 Supply
3.4.1
The business model
The retail car market in Australia is dominated by the dealership business model. Under this
model, independent car dealers purchase franchise rights from motor vehicle
manufacturers or local importer companies that allow the dealers to:

Use the manufacturers’ branding

Sell the manufacturers’ cars

Employ authorised service staff.
7
Ibid.
16
As part of the franchise agreement, dealers have to pay a franchise fee of up to $2 million8
(for larger dealerships) and have a range of obligations including:

Meet sales targets

Satisfy performance measures

Maintain high working capital.
Retail car dealers operate on very thin margins: the average Australian dealer achieved a
net profit of 1.9 per cent over the 20139 calendar year.
In section 3.2, it was noted that for volume, prestige and luxury car dealers, new car sales
and service were the most profitable departments. However, after accounting for overhead
expenses, this pattern changes. Chart 3.6 shows a breakdown of an average dealer’s 2013
profit after overhead costs have been allocated to each department on the basis of gross
contribution. From this we can see that dealers can maximise profit by focusing on “Other
Income” and “Finance and Insurance”. Other Income largely relates to factory incentives
that are not directly attributed to a vehicle model. These can be associated with the overall
dealership performance as well maintaining brand standards. Note, Chart 3.6 shows that
after allocating overhead expenses, new vehicle and used vehicles sales actually make a
loss and a negative contribution to net profit.
Chart 3.6 Contribution of departments to total net profit
100%
80%
60%
40%
New Vehicles
20%
Used Vehicles
0%
Parts
-20%
Service
-40%
F&I
-60%
Other Income
-80%
* Overhead expenses allocated using departmental contribution to total gross profit
Source: Deloitte Motor Industry Services data (2013)
The dealership business is fundamentally based on the sale of new vehicles but, as Chart
3.6 depicts, this area of the business typically generates little to no profit for the business.
However, by generating sales volumes, dealers create opportunities to build customer
relationships which result in a future stream of revenue. Such revenue includes adding and
installing aftermarket accessories10 on the new vehicle sale, dealership finance and
8
Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
9
Based on the 800 dealers across Australia that report to Deloitte ProfitFocus system, the average dealer
achieved a net profit of 1.9 per cent.
10
Aftermarket refers to additional services such as extended warranty and accessories refer to additional
features such as tinted windows.
17
insurance (F&I), and servicing the customer’s vehicle throughout the life of the car. This
stream of revenue is completed when the car is traded in for another new vehicle.
The profit structure described above is driven by a whole-of-industry dynamic. The ultimate
goal of a manufacturer is to wholesale a vehicle to every member of their target market. As
these target markets become less targeted and more volume driven (in the pursuit of
greater profits) dealers are expected to take these additional vehicles and find customers
for them. As a result of these greater volumes the industry has been experiencing a supply
push market for the last couple of years.
As a way of aligning dealers with the manufacturers’ overall business strategy the
manufacturers create incentives programmes. These targets are generally set at three
levels. The first promotes volume and depending on the strategy of a franchise they may
choose to reward based on vehicles sold or registered, share of PMA, sales only with in the
PMA or wholesale take up. The second layer of incentives generally addresses customer
satisfaction and relates to both front end and aftersales customers (i.e. new car buyers and
service customers). Finally, the third layer of incentives is in place to ensure brand
standards, corporate identity and overall business management is on par with franchise
requirements.
There are a large number of ways that these incentives are implemented and measured. In
particular the first layer of incentives, which encourages the sale of vehicles, is applied by
each brand for each dealership several ways. In the recent years with the supply push
market, a trend has emerged in the retail car market which is commonly known as “the
gamification of the industry”. With the aim of first driving new car volumes and then, later,
addressing stock concerns, the franchises have changed the way dealerships earn profits at
the retail level by introducing complex bonus and incentives programmes. The profit
outcomes of these programmes for dealers are often unpredictable. Manufacturers are
now awarding monthly, quarterly and annual bonuses for achievement of targets.
Multi-franchise dealers (over 90 per cent of the dealers in Australia) need to invest
significant amounts of time and effort to maintain a current understanding of all the
programs in place across all their brands as programmes change on a monthly basis. In
addition to understanding the available incentive programs, dealers need to calculate the
most profitable path for their dealership to take through overlapping, and sometimes
conflicting, incentives. However, there are benefits to be had for those who can successfully
work through the programs on offer and choose the ones most likely to pay off for their
dealership. Dealers who do successfully play the variable margin game fare much better
than those who either do not or cannot.
The average dealer in Australia during 2013 received around $220 worth of incentives for
each new vehicle they sold. However, the top 30 per cent of dealers – those who played the
incentive game well – received more than double that at $460 per unit.
18
Chart 3.7: Incentives for dealers per car sold
$2,000
$1,500
$1,000
$500
$0
Average
Gross per unit
Top 30%
Incentives per unit
Source: Deloitte Motor Industry Services data (2013)
3.5 Competition in the retail car market
The retail car market in Australia is highly competitive with many buyers and many sellers
actively participating. There are more than 4,700 car dealers in the Australian market
dealing in more than 60 different marques. The largest of these dealerships is Automotive
Holdings Group Limited which earned an estimated $3.68 billion in revenue in 2013-14, the
equivalent of 5 per cent market share. Other significant dealerships includes A P Eagers
Limited, with an estimated $2.65 billion in 201311 (3.8 per cent market share)12. The total
estimated market share of the top four retail car dealerships in Australia is approximately
10.8 per cent, indicating that market concentration in the retail car industry is very low13.
Sellers in the retail car market not only face high competition within the market, but they
also face the issue of limited market power in the wholesale car industry, which supplies
the retail car industry. Retail car dealerships source cars predominantly from large
manufacturers in the wholesale car market. However, due to an imbalance in market
power14, dealers often have no choice but to enter into franchise agreements which tend to
favour the manufacturer.
11
Year end for A P Eagers Limited is in December.
12
Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
13
According to the Australian Competition and Consumer Merger Guidelines 2008, an industry is considered to
be concentrated if the Herfindal-Hirschman Index (HHI) value of the industry is greater than 2000. Using the
above market shares to calculate HHI for the retail car market gives a maximum score of approximately 100,
well below the level that would be considered concentrated.
14
The combined market share of the top 4 manufacturers is approximately 39 per cent, nearly four times larger
than the combined market share of the top 4 dealers, which is approximately 10.8 per cent. Whytcross, D.
(2014). Motor Vehicle Wholesaling in Australia. IBISWorld Industry Report F3501. IBISWorld.
19
Competition in an international context
When put in an international context, Australia’s high level of competition in the retail car
market becomes more apparent. The number of brands and market share of each of these
brands of car are good indicators of the level of competition in a market. Table 3.5 presents
a comparison of these indicators in Australia, Canada, the UK and the USA – Australia has
both a higher number of brands (67) and a lower market size per brand (16,597 unit sales
per brand) than each of these other markets, both indicators suggesting that Australia is
highly competitive.
Table 3.5: Competitiveness of global car markets, 2013
Australia
Number of brands in Australia
Sales (car units)
Market size per brand (car units)
Canada
UK
USA
67
1,112,032
49
1,620,221
53
2,249,483
51
13,040,632
16,597
33,066
42,443
255,699
Source: Department of Industry, Innovation, Climate Change, Science, Research and Tertiary Education (2013),
March 2013 Automotive update
3.6 Information and regulation
The Australian retail car market is a well-developed market with many consumer
protections that have been integrated through industry self-regulation and government
regulation. High levels of competition in the retail car market have made self-regulation
possible as car dealers and manufacturers (who supply the dealers) place a high value on
the ‘brand’ of their business and will go to lengths to maintain this.
3.6.1
Information asymmetries
In the retail car industry where such a complex product is being sold, there is a natural risk
of information asymmetry. Information asymmetry is defined as the imbalance of
information between a buyer and a seller of a particular good, which leads to an economic
advantage for either the buyer or seller. An example of this would be if a car dealer was
selling a car to a customer and the dealer falsely informed the customer that the particular
car was very popular and had high resale value – if the customer had no access to genuine
information regarding the popularity and resale information of the car, they may believe
the dealer and be willing to pay a higher price than they would if they knew the truth. Cars
are generally complex products and often consumers are unable to understand or compare
competing claims.
In the Australian retail car market there are numerous consumer protections in place to
alleviate problems of information asymmetry. This is especially important for the used car
market. As new cars tend to have extensive documentation on specifications produced by
car manufacturers, it is possible for customers to research the car that they are interested
in buying rebalancing the information asymmetry. Third part sources such as newspapers,
magazines and speciality car sales websites publish information and often compare
competing vehicles. The quality of a used car, however, is affected by many factors that
only the previous owner knows of – as such there is much regulation in place that protects
consumers from issues of information asymmetries when purchasing used cars. An
20
important component of this is the nation-wide register, the Personal Property Securities
Register, which includes the following for motor vehicles:

Written off status

Registration status

Stolen status.
The market has also provided for additional regulation with numerous websites such as
www.caradvice.com.au, www.carsales.com.au and www.redbook.com.au emerging that
provide information relating to used car prices, specifications, common issues with cars and
tips when purchasing used cars.
3.6.2
Cognitive biases
Cognitive biases often described in the field of behavioural economics, such as salience and
heuristics, are of great relevance in the retail car market. Simply speaking, salience
describes the tendency of consumers to make decisions based only on what is most
relevant to them, and heuristics are decision making shortcuts that consumers employ
when facing complex decisions (i.e. using a rule of thumb measure). These phenomena are
described further in Box 2.1. These cognitive biases are important because many
consumers taking part in the retail car market have limited understanding of motor
vehicles. As consumers are often unaware of the technical attributes of cars, they rely on
heuristics to make decisions and filter out information that is not salient to them.
21
Box 2.1 Salience and Heuristics
Salience
The concept of salience explains the cognitive bias that occurs where people filter out
complex information and only consider information that is relevant to them. Examples of
this effect can include the bias where the size of government expenditure on benefits of
particular government reform are much more understandable to consumers or taxpayers if
they are expressed in amount per capita rather than as the overall amount. Other examples
may include the tendency for consumers to filter out trailing digits of numbers. This has
been found in the United States where consumers purchasing used cars tend to
overemphasise the increase in mileage where the first few digits change and overlook
increases in mileage where the trailing digits change. This was shown where the valuation
of a used car was not greatly different between a car with a mileage of 49,000 mi and
49,500 mi but the valuation would suddenly drop if the mileage of a car increased from
49,500 mi to 50,000 mi.
Heuristics
Consumers display another type of cognitive bias where, in order to make sense of
complicated information, consumers may rely on rules-of-thumb or maintain consumer
brands/products with which they are most familiar. Using rules-of-thumb and familiarity as
a basis for choice can closely approximate the optimal choice process assumed in the
consumer theory of economics. Some examples of heuristics include: deciding that a
particular brand of cars is more reliable than other brand because it is more popular,
deciding that a luxury car has higher specifications than a non-luxury car, or deciding that a
person is more believable and/or trustworthy because they have the title of Doctor.
It is important to note that using heuristics to make decisions is not necessarily wrong,
however, in some cases consumers may not be choosing or deciding what they think they
are.
Source: Busse and Lacetera et al. (2013), Estimating the effect of Salience in Wholesale and Retail Car Markets;
Office of Best Practice Regulation (2012)
3.7 Key trends in the retail car market
To gain a better understanding of the retail car market, it is important to look at key trends
and changes that have been occurring over time. This is important as it can give insight into
how the retail car market has reacted to changes in the past and, hence where it may be
headed in the future.
Key overview statistics
The retail car market has experienced overall growth over the past 10 years as evidenced
by steadily increasing industry revenue and industry value added (see Chart 3.8 and Chart
3.9). During the global financial crisis in 2008-09 industry revenue and industry value added
experienced a dip, most likely as a result of consumers delaying large expenses. Forecasts
for the next five years are predicting stable growth with minor increases in both industry
revenue ($0.3m increase) and industry value added ($0.1m increase).
22
Chart 3.8: Industry revenue
$80,000
$60,000
$40,000
$20,000
$0
Revenue ($m)
Revenue, forecasts ($m)
Source: Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
Chart 3.9: Industry value added
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
Industry Value Added ($m)
Industry Value Added, forecasts ($m)
Source: Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
Though there is a clear trend of steadily increasing industry revenue and industry value
added in the retail car market, the number of retail car dealerships has decreased since
2004-05. After peaking in 2005-06, the number of car dealerships has decreased from 6,342
to 5,915. The beginning of the decrease in the number of retail car dealerships preceded
the global financial crisis but was likely exacerbated by it. As industry revenue and value
added have increased above pre-GFC levels, it is likely that, as retail car dealerships have
found new sources of revenue and profit, the equilibrium number of car dealerships has
changed.
23
Chart 3.10: Motor vehicle dealer establishments
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Establishments
Establishments, forecasts
Source: Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
Employment in the retail car industry follows the trends shown in industry revenue and
industry value-added; however, changes are much smaller in employment than in industry
revenue and value added, indicating that over this period retail car dealerships have been
not decreased overall staff numbers. This is most likely attributable to the fact that sales
and servicing remain labour intensive with the overall number of cars sold increasing apart
from the one-off fall during 2008-09.
Chart 3.11: Employment in the retail car industry
80,000
60,000
40,000
20,000
0
Employment
Employment, forecasts
Source: Whytcross, D. (2014). Motor Vehicle Dealers in Australia. IBISWorld Industry Report G3911. IBISWorld.
24
Key profit areas
Retail car dealers have traditionally made profit primarily from the sale of new motor
vehicles; however, in 2011 there was a significant shift in dealer strategy with a strong
focus on financing and insurance. Traditionally, dealer profits had relied heavily on
consumer confidence (see Chart 3.12) with profits closely tied to actual vehicle sales (and
hence consumer confidence) in a particular year. More recently there has been a stronger
focus on finance and insurance along with lower finance costs to consumers. This appears
to have enabled dealers to make ongoing profits which are not so closely tied to sales in a
particular year.
Chart 3.12: Relationships between net profit as a % of sales and consumer confidence
2.5%
140
135
2.0%
130
125
1.5%
120
115
1.0%
110
105
0.5%
100
95
0.0%
90
Net profit as a % of sales
Consumer Confidence
Source: FCAI, Roy Morgan
Car sales volumes
Car sales volumes increased by more than 175,000, or 20 per cent, between 2004 and 2013.
This increase in sales has been predominantly driven by increases in sales of prestige cars
(68 per cent of the increase) and luxury cars (23 per cent of the increase). The increase in
car sales volumes is likely an indication of the increasing affordability of cars, especially
luxury and prestige cars – this is discussed further in the following section. For more
detailed breakdowns of sales unit volumes see Appendix A.
25
Chart 3.13: Unit sales volumes by market segment
Source: FCAI
Affordability
Australia has experienced a significant increase in the relative affordability of cars over the
past decade. There are a range of factors behind this increase including the appreciation of
the Australian dollar reducing the costs of imported vehicles, increased competition in the
local retail car market pushing down prices and a steady increase in the disposable income
of the average Australian. Chart 3.14 shows the decrease in motor vehicle prices as
measured by the consumer price index. The consumer price index (CPI) is the primary
measure of inflation (or overall increase in nominal prices over time) and is made up of
many smaller indices which measure specific types of goods and services. The motor vehicle
CPI sub-index acts as a good measure of the general increase in prices of commonly
purchased vehicles.
Chart 3.14: Decrease in motor vehicle prices, 2003-2013
115
Motor Vehicle CPI
110
105
100
95
90
85
Source: ABS CPI
26
In addition to looking at the motor vehicle CPI, it useful to examine the specific price
decreases in individual car models. Table 3.6 shows the change in prices of nine common
passenger cars from June 2003 to June 2013. Four of these nine models of cars have
experienced nominal price decreases over the 10 year period and on average there is a 0.5
per cent decrease in prices of these cars. Accounting for inflation15 over this period, a
decrease in prices becomes apparent across the board – all models have experienced an
average 23.9 per cent decrease in price over 10 years, whilst vehicle quality, safety and
features have all improved.
Table 3.6: New car prices over past decade
June 2003
June 2013
Nominal
change
(%)
Real
change
(%)
Ford Falcon, auto
Holden Commodore, Acclaim/Omega auto
$34,660
$37,510
$37,235
$39,990
7.4
6.6
-17.9
-18.5
Toyota Corolla conquest/Ascent 1.8
$21,840
$22,990
5.3
-19.5
Mitsubishi Lancer GLXi/ES 2L manual
$20,990
$19,990
-4.8
-27.2
Audi TT 2.0L Coupe
BMW 320i 2L auto
$74,100
$65,500
$75,050
$58,600
1.3
-10.5
-22.6
-31.6
Mercedes E240 Classic/E220 Elegance
Lexus IS200/IS250
$89,900
$53,490
$84,800
$55,800
-5.7
4.3
-27.9
-20.3
Porsche Carrera 911 manual
$225,300
$206,500
-8.3
-29.9
Consumer Price Index
78.6
102.8
30.8
N/A
Source: Commsec Car Affordability Index (2013)
It is important to note that this decrease in prices is likely a result of both increased
competition between different car manufacturers and the increase in value of the
Australian dollar from 2003 to 2013. Chart 3.15 shows the trade weighted index, an overall
measure of the value of the Australian dollar, from 2003 to 2013. Except for a drop in the
value of the currency in 2008-09, the Australian dollar has steadily risen in value increasing
approximately 15 points. This increase in the value of the Australian dollar makes imports
of cars from other countries into Australia cheaper over time.
15
Inflation here is measured by CPI. The CPI differs from the motor vehicle CPI, which is a subindex and
component of the more general CPI.
27
Trade Weighted Index
Chart 3.15: Change in the Trade Weighted Index, 2003-2013
90.0
80.0
70.0
60.0
50.0
40.0
30.0
20.0
10.0
0.0
Source: Reserve Bank of Australia (2014)
In addition to the decrease in prices of cars in Australia, over the past decade disposable
incomes have risen significantly. Chart 3.16 shows that an average Australian’s disposable
income16 has increased $8,741 in real terms over the period 2003-04 to 2011-12. This
increase equates to a 20 per cent increase in disposable income – allowing Australians’
discretionary spending to significantly increase.
Chart 3.16: Rise in disposable incomes, 2003-04 to 2011-12
Real net disposable income per capita
60,000
50,000
40,000
30,000
20,000
10,000
0
2003–04 2004–05 2005–06 2006–07 2007–08 2008–09 2009–10 2010–11 2011–12
Source: ABS (2014), Australian System of National Accounts (ABS Publication: 5204.0)
Ownership
Australia has traditionally had a very high level of car ownership. There are a range of
reasons for this including geography and climate, low population density, the focus on
suburban development in town planning and a strong cultural affinity with cars. Ownership
of cars in Australia largely increased in the post-World War II era from 234 cars per 1,000
16
Measured by real net disposable income per capita.
28
population in 1955 to its current high levels of 756 cars per 1,000 population in 2014 (see
Chart 3.17). Australia has a very high level of car ownership by global standards and in 2011
had the ninth highest level of car ownership globally17. It is likely that car ownership will
continue to increase in Australia as the number of new cars purchased every year continues
to increase.
Chart 3.17: Car ownership in Australia, 1955 to 2014
800
Cars per 1,000 population
700
600
500
400
300
200
100
0
Source: ABS Motor Vehicle Census
Age of fleet
The Australian car fleet has traditionally been a relatively old fleet with no specific
regulations limiting the age of vehicles, however, in recent years the age of the Australian
fleet has decreased to a relatively low level compared to other markets such as the US,
Canada and New Zealand. This trend of decreasing age of motor vehicles is likely to have
productivity benefits and decreased maintenance costs of the fleet. Additionally, as the
Australian car fleet is being renewed more quickly, the transmission of new technologies
(for example to improve environmental and safety outcomes) will be achieved at a much
faster rate.
17
World Bank World Development Indicators
29
Chart 3.18: Average age of Australian Car Fleet, 1996 to 2013
10.8
10.6
10.4
10.2
10
9.8
9.6
9.4
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Source: ABS Motor Vehicle Census
30
4 Policy driver and regulatory
analysis
This chapter provides context for regulation in the retail car market and analyses the key
policy rationale driving potential changes to import restrictions of used cars.
4.1 Legal and regulatory framework
Standards in the Australian retail car market are primarily regulated by the following pieces
of legislation and regulation:

Motor Vehicle Standards Act 1989 (MVSA)

Motor Vehicle Standards Regulations 1989 (MVSR)

Australian Design Rules (ADRs)

Registered Automotive Workshop Scheme (RAWS)

Competition and Consumer Act 2010.
Other important pieces of legislation for the retail car market are related to the regulation
of car dealership businesses and consumer protection. These include:

Motor Dealers Act 1974 (NSW)

Motor Vehicle Dealers Act 1973 (WA)

Motor Car Traders Act 1986 (VIC)

Property Agents and Motor Dealers Regulation 2001 (QLD)

Motor Vehicle Regulations 1996 (SA)

Second-Hand Vehicle Dealers Act 1995 (SA)

Motor Vehicle (Accident Towing Roster Scheme) Regulations 2001 (SA)

Consumer Affairs and Fair Trading Act (NT)

Australian Consumer Law (Cwth).
Motor Vehicle Standards Act 1989 and Motor Vehicle Standards
Regulations 1989
The MVSA is the broad legislative framework which governs standards of motor vehicles
sold in Australia. The objects of this legislation include achieving uniform vehicle standards
for new vehicles in Australia and regulating the ‘first supply to the market of used imported
vehicles’. One of the key drivers in the initial development of the MVSA was evidence that
demonstrated imported used cars offered lower levels of safety than cars that had been
built to comply with the ADRs. The MVSA also has the benefit of removing the need for
multiple vehicle inspection, certification schemes and approval regimes across different
jurisdictions in Australia.
31
One of the major concerns that the Government had at the time of the drafting of the
MVSA was that large scale importation of used motor vehicles would have negative safety
implications for the Australian car fleet. To this end the Government noted that the MVSA
would ‘enable the Federal Government to establish and apply nationally uniform standards
for motor vehicle safety and environmental equality as expected by the community.18
The mechanism through which the importation of used vehicles is restricted is set out in
sections 13, 16, 17, 18, 19 and 20 of the MVSA19. Though the MVSA restricts the large scale
importation of used vehicles, there is allowance made for the importation of specialty
and/or personal vehicles. Importation of specialty vehicles is carried out through a
Registered Automotive Workshop (RAW).
The MVSR20 is guided by the intent of the MVSA and is the instrument through which the
Government sets up detailed provision for both import restrictions of used cars and
concessions for particular vehicles. Some specific regulations included in the MVSR include:

Provision for a register of specialist and enthusiast vehicles

Provision for a review panel to govern the specialist and enthusiast vehicle register

Rules around the import of used vehicles for personal vehicles

Rules around the import of used vehicles for specialty vehicles

Rules around the import of used vehicles of a certain age

Application criteria to become a RAW21.
Australian Design Rules
The ADRs are rules which set out national standards for vehicle safety, anti-theft and
emissions. The ADRs set performance based standards for vehicles including occupant
safety, structures, lighting, noise, emissions and braking. After having gone through several
review processes and jurisdictional changes, the ADRs are currently in the third edition. The
first edition of the ADRs was developed as a discussion paper and was not legally binding in
any Australian jurisdiction. However, the second edition of the ADRs was selectively applied
as a legally binding standard in certain States and Territories in 1969.
The third edition of the ADRs was developed between 1983 and 1986 and became effective
from 1988 as a national standard for vehicle design. The third edition of the ADRs was
developed for the purposes of the MVSA and in 1989 gained national application when the
MVSA was implemented. Since the implementation of the MVSA, the ADRs are continually
updated and revised and are also subject to a full review every ten years to ensure that
they are relevant, cost effective and do not become a barrier to importation of safer
vehicles and vehicle components.22
18
Second reading speech of the MVSA, as quoted in Consultation Paper on the Motor Vehicle Standards Act
1989, 2013
19
Motor Vehicle Standards Act 1989
20
Motor Vehicle Standards Regulations 1989
21
Ibid.
22
Infrastructure.gov.au, (2014). Australian Design Rules. [online] Available at:
http://www.infrastructure.gov.au/roads/motor/design/ [Accessed 7 Aug. 2014].
32
Current Australian Government policy is to harmonise the national vehicle safety standards
with international regulations, with special reference to the United Nations Economic
Commission for Europe’s (UNECE) international regulations.
Some examples of Australian Design Rules are provided in Table 4.1. Note that as the
specification of the design rules are extensive, we have not included the full specification,
but a description of the purpose of each rule.
Table 4.1: Sample of Australian Design Rules
Design Rule
ADR 1 – Reversing lamps
ADR 2 – Side door latches and hinges
Description
The function of this Australian Design Rule is to
specify the photometric requirements for
reversing lamps which will warn pedestrians and
other road users that the vehicle is about to
move or is moving in the reverse direction, and
which during the hours of darkness will aid the
driver in reversing manoeuvres.
The function of this Australian Design Rule is to
specify requirements for side door retention
components, including latches, hinges, and other
supporting means, to minimise the likelihood of
occupants being thrown from a vehicle as a
result of impact.
ADR 3 – Seats and seat anchorages
The function of this Australian Design Rule is to
specify requirements for 'Seats', their
attachment assemblies, their installation and any
head restraint fitted to minimise the possibility
of occupant injury due to forces acting on the
‘Seat’ as a result of vehicle impact.
ADR 4 – Seatbelts
The function of this Australian Design Rule is to
specify requirements for seatbelts to restrain
vehicle occupants under impact conditions,
facilitate fastening and correct adjustment, assist
the driver to remain in his ‘Seat’ in an emergency
situation and thus maintain control of the
vehicle, and protect against ejection in an
accident situation.
Source: Infrastructure.gov.au, (2014). Third Edition Australian Design Rules. [online] Available at:
http://www.infrastructure.gov.au/roads/motor/design/adr_online.aspx [Accessed 8 Aug. 2014]. Low Volume
Scheme
The Low Volume Scheme was established with the MVSA in 1989 with the intent of
providing an avenue for motor enthusiasts to gain access to specialist and enthusiast
vehicles (SEVs). Initially, the low volume scheme was effective in providing concessions for
the importation of SEVs, however, in the 1999 review of the MVSA it was found that the
Low Volume Scheme had become an avenue for people to import used vehicles into
Australia that could not be classified as a SEV and generally had low safety standards. In
response to this, an amendment was passed for the MVSA in 2001 that established the
RAW Scheme.
33
Registered Automotive Workshop Scheme
The RAW Scheme was implemented in 2001 in response to evidence that the Low Volume
Scheme was not being used for its original purpose of importing SEVs. The RAWS allowed
for the designation of registered workshops which, under amendments to the MVSA, were
the only entity through which the import of used SEVs could take place. It is unclear how
successful the RAW scheme has been in limiting the import growth of used vehicles. Chart
4.1 shows a longitudinal view of used vehicle imports and it appears that though there was
a brief period of time where used imports decreased, there is still strong growth in the area
with more than 50,000 imports of used motor vehicles in 2011-12. The Non-RAW scheme
imports shown in Chart 4.1 are either vehicles which were manufactured prior to 1989 (and
hence predate the MVSA), or are personal vehicle imports – it is unclear what is driving this
growth.
Chart 4.1: Imports of used vehicles
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
1991-92
1996-97
Raws imports
2001-02
2006-07
2011-12
Non-Raws imports
Source: Department of Infrastructure and Regional Development (2013), Consultation Paper on the Motor
Vehicle Standards Act 1989, Australia
4.2 Past policy rationale for restricting large
scale imports
The policy rationale behind the initial restriction of large scale imports of used cars into
Australia has primarily been based on safety concerns. At the time of drafting the MVSA,
the Government was concerned with used car imports not complying with ADRs and as a
result not meeting the standards that Australians had come to expect of motor vehicle
safety. Maintaining safe driving conditions is a primary concern of government and the
main focus of the MVSA (see Figure 4.1). Unsafe vehicles have both personal injury and
broader economic implications. During the development of the MVSA, it was also noted by
Government that ‘each year in Australia some 2,800 people are killed on our roads and
30,000 seriously injured. In addition to the trauma and suffering which results from these
34
crashes, the aftermath of this carnage costs the Australian community some $5,700m
annually.’ 23
Figure 4.1: Objects, Outcomes and Objectives of the Act
What the Act does…
Object of the Act – 3
(a)
Uniform National
Standards
which leads to…
Outcome
Safe vehicles
Outcome
Environmentfriendly and secure
vehicles
Object of the Act – 3
(a)
Regulation of imported
used vehicles
Outcome
Access to market
which contributes to…
Primary policy
objective
Road safety
Policy objective
Reduced environmental
degradation and theft
Policy objective
Choice
(competition)
Source: Consultation Paper on the Motor Vehicle Standards Act 1989, 2013
4.3 Current policy rationale for removing import
restrictions
Productivity commission review
In October 2013, the Productivity Commission (PC) was requested to undertake a review
into government support for Australia’s automotive manufacturing industry. The inquiry
considered the feasibility of government policies designed to assist the automotive
manufacturing industry in Australia. These policies include direct budgetary support policies
wherein the government subsidises certain activities of the automotive manufacturing
industry, and indirect policies where government employs regulation to benefit the
automotive manufacturing industry.
One such regulatory policy is the restriction of importation of second-hand vehicles through
the MVSA. This regulatory policy has the primary aim of ensuring high safety standards in
imported second-hand cars, and achieves this through both limiting the number of secondhand cars that can be imported by an entity each year, and by applying a specific customs
duty of $12,000.
23
Second reading speech of the MVSA, as quoted in Consultation Paper on the Motor Vehicle Standards Act
1989, 2013
35
The PC came to the view in the position paper that restrictions on the importation of
second-hand vehicles, particularly the barriers to large-scale importation of such vehicles,
reduces competition in the car market and removal of such restrictions would benefit the
community as a whole. In support of this view, the PC released a draft finding in relation to
the restriction of importation of second-hand vehicles:
Draft Finding 2.2
The policy rationale for prohibiting the large-scale importation of second-hand
vehicles into Australia is weak. However, appropriate regulatory measures are
required to ensure that consumer protection, community safety, and
environmental performance standards are maintained before the restrictions
are removed. These concerns are best dealt with directly, through regulatory
standards applicable to all vehicles sold in Australia.
The $12 000 specific duty on imported second-hand vehicles appears to be
largely redundant, providing a prima facie case for its removal.
Following the completion of our report, the PC has since released their final review report.
The core finding recommending the removal of large scale used car import restrictions was
reiterated in the final inquiry report in Recommendation 5.4, though the PC’s stance on this
appeared to have weakened. It is important to note that though the analysis of our report
was carried out in reference to the position paper, our conclusions are not changed
regarding the potential impacts of removing used car import restrictions in Australia.
Policy rationale for removing import restrictions
The policy rationale behind the PC’s recommendation is one of free market competition
improving consumer outcomes. The PC points to New Zealand’s experience and argues that
as a result of removing large scale import restrictions of used vehicles, there were
significant benefits for New Zealand consumers in terms of price and choice. Economic
theory suggests that removing market distortions (e.g. import restrictions) will increase the
supply of a good in a particular market and result in increased competition, lower prices
and higher choice of goods. It must be noted that the outcomes of such microeconomic
reform may not be straightforward if there are issues such as market failures or nonrational behaviour of consumers (including bounded rationality – i.e., that the rationality of
consumer decisions is limited by available information and their understanding of that
information available).
36
5 Potential impacts to the retail car
market
This chapter provides context for regulation in the retail car market and analyses the key
policy rationale driving potential changes to import restrictions of used cars.
5.1 New Zealand experience
A useful starting place for the analysis of potential implications for the suggested policy
changes is a brief analysis of New Zealand’s experience with the same policy move in 1986.
New Zealand is a useful comparison to Australia as the government, culture and income per
capita of both countries are similar24.
New Zealand’s decision to remove import tariffs and open up the domestic market to the
large scale import of used vehicles was primarily driven by the desire to improve
affordability of motor vehicles in New Zealand. In the 1970s and 1980s car ownership in
New Zealand was anecdotally very low, and prices of motor vehicles were high. In addition
to this, the New Zealand car fleet was aged, of a low specification, and facing sustainability
problems. The New Zealand government responded to these issues by removing import
tariffs on used car imports, effectively allowing the large scale importation of used cars.
Following the removal of import tariffs, the number of registered motor vehicles in New
Zealand increased dramatically. Chart 5.1 shows the number of registered cars in New
Zealand and the number of registered imported used cars in New Zealand. Up until 1986
the number of used imports was very low, a likely outcome of the import restrictions that
New Zealand had in place prior to 1986; however, after 1986 the number of used imports
dramatically increased and became the predominant type of registered cars in the market.
Anecdotally, this paradigm change in the New Zealand car market came about because
prior to 1986 the car fleet was ageing and of poor quality, so when relatively new cars with
high specification could be imported there was a high substitution of both new and used
cars.
24
There are some differences in terms of car affordability and the history of car manufacturing, however, of all
countries which import used cars, New Zealand is the most comparable.
37
Chart 5.1: Car registrations
250,000
Units of cars
200,000
150,000
100,000
50,000
0
1960
1965
1970
1975
1980
1985
Total number of registered cars
1990
1995
2000
2005
2010
Ex-overseas cars
Source: New Zealand Transport Agency (2014), MVR Statistics Book 2013
Currently there is a high level of approximately 700 cars per thousand populations – one of
the highest rates of car ownership in the world; this is likely a direct result of allowing used
imports.
There have been many benefits from New Zealand’s policy regarding imports of used cars;
however, this may have been at the cost of both the age and the safety of the New Zealand
car fleet25. Data from 2013 shows that the age of the New Zealand fleet has been steadily
increasing over time – especially in comparison to the age of the Australian fleet. Chart 5.2
shows the age of the car fleet at several points in time and indicates a clear upwards trend
of vehicle age in New Zealand as compared to a downwards trending fleet age in Australia.
25
Additional factors also influence the age of the car fleet including new car affordability and other government
policies.
38
Chart 5.2: International age comparison of car fleets
Average age of cars in fleet
16
14
12
10
8
6
4
2
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
New Zealand
Australia
USA
Source: New Zealand Ministry of Transport (2013), 2013 New Zealand Vehicle Fleet Annual Spreadsheet; ABS
Motor Vehicle Census various years
One of the major concerns associated with an ageing vehicle fleet is safety. Though it is
possible that the initial introduction of the New Zealand policy to remove large scale used
car import restrictions resulted in a short term increase in safety of the New Zealand fleet,
the long run effects appear to have had the opposite effect. Studies undertaken by the
Monash University Accident Research Centre (MUARC) into the crashworthiness of vehicles
have found that vehicle age in New Zealand has a statistically significant effect upon
safety26. In addition to this, MUARC constructed models of crashworthiness for the overall
New Zealand fleet as compared to used car imports; it was found that there is a distinct
difference in the safety of these vehicles with imported used vehicles having a higher risk of
crash including a higher risk of injury and death27. Chart 5.3 shows the crashworthiness of
the New Zealand fleet comparing the overall fleet to used imports.
26
Newstead, S., Watson, L. and Cameron, M. (2013). Vehicle safety ratings estimated from police reported
crash data: 2013 update: Australian and New Zealand crashes during 1987-2011;
27
Newstead, S., Watson, L. and Cameron, M. (2012). Trends in crashworthiness of the New Zealand vehicle fleet
by year of manufacture: 1964 to 2010: supplement to Report 313: Vehicle safety ratings estimated from police
reported crash data: 2012 update.
39
Chart 5.3: Crashworthiness of the NZ fleet, overall vs used imports
Probability of crash (%)
60
50
40
30
20
10
0
1964 1969 1974 1979 1984 1989 1994 1999 2004 2009
Overall NZ vehicles
Imported used vehicles
Source: Newstead, S., Watson, L. and Cameron, M. (2012). Trends in crashworthiness of the New Zealand
vehicle fleet by year of manufacture: 1964 to 2010: supplement to Report 313: Vehicle safety ratings estimated
from police reported crash data: 2012 update.
In recognition of the growing issue with the ageing New Zealand car fleet, the New Zealand
Government has started to implement more stringent environmental and safety controls
on imported used vehicles. Some of these new regulations include or are expected to
include:

Fuel quality standards28

Electronic Stability Control29.
It has been questioned30 as to whether or not the implementation of these regulations will
effectively represent to restrict the import of used vehicles as regulations such as
mandating ESC on used imports could greatly decrease the available supply of used
vehicles.
5.2 Source markets
In order to identify the potential implications for the Australian retail car market of large
scale used car imports, it is important to identify possible supply markets. With an
understanding of the likely supply markets, we are able to infer the age and specification of
cars likely to be imported into Australia.
28
Nzta.govt.nz, (2014). Land Transport Rule - Vehicle Exhaust Emissions 2007 | NZ Transport Agency. [online]
Available at: http://nzta.govt.nz/resources/rules/vehicle-exhaust-emissions-2007.html [Accessed 7 Aug. 2014].
29
Globalncap.org, (2014). New Zealand makes ESC mandatory on all imports. [online] Available at:
http://www.globalncap.org/new-zealand-makes-esc-mandatory-on-all-imports/ [Accessed 7 Aug. 2014].
30
Whitehead, V. (2010). Used imports at threat from ESC move. [online] Autotalk. Available at:
http://autotalk.co.nz/news/used-imports-at-threat-from-esc-move [Accessed 7 Aug. 2014].
40
5.2.1
Possible source markets
The first condition for a country to be considered a supply market is that the jurisdiction is a
right hand drive market. This limits the possible supply markets to 14 possible markets. The
next step in identifying possible source markets is to limit possible markets to those with a
high car population and a high level of gross domestic product (GDP) per capita. High car
population gives an indication as to the depth of supply in a market and high GDP per capita
gives an indication of the ability of consumers to frequently change cars – these are both
drivers of the supply of used cars in a market.
Table 5.1: Possible import source markets
Country
Australia
Cyprus
Hong Kong
Indonesia
Ireland
Japan
Malaysia
Malta
New Zealand
Singapore
South Africa
Thailand
Trinidad and
Tobago
United Kingdom
Population
23,130,900
1,141,166
7,187,500
249,865,631
4,595,281
127,338,621
29,716,965
423,282
4,470,800
5,399,200
52,981,991
67,010,502
1,341,151
64,097,085
Cars per 1,000
population
Car population
703
529
80
69
491
588
378
709
708
151
165
172
353
16,256,773
604,029
575,103
17,283,456
2,254,037
74,868,544
11,224,089
300,001
3,166,581
815,649
8,749,369
11,498,516
473,723
516
33,045,547
Source: World Bank (2014), World Development Indicators
From analysis of World Bank World Development Indicators data (in Table 5.1 above), we
have identified that the United Kingdom and Japan are right hand drive markets that both
have high car populations and high GDP per capita and hence are likely supply markets. An
analysis of supply markets for the New Zealand used car imports (see Table 5.2) confirms
that both the United Kingdom and Japan are important supply markets, with most of the
supply of used imports in New Zealand being sourced from Japan. Interestingly, another
supply market for New Zealand is Australia – this may indicate that the price of Australian
used cars is comparable to that of used imports from the UK and Japan.
Table 5.2: Country of Origin of New Zealand Used Imports, 2013
Country of origin
% of total used imports
Australia
Japan
1.41
94.09
United Kingdom
3.01
Other
1.49
Source: www.nzta.govt.nz/resoruces/motor-vehicle-registration-statistics/docs/2013.pdf
41
Perhaps the most important factor behind the high supply of Japanese used cars to the
global market is Japanese Government regulation in the domestic retail car market which
effectively makes owning a car that is six years or older cost prohibitive. Registration and
inspection costs in Japan are linked to the age of a vehicle and increase steeply when a
vehicle is older than six years.
5.3 International comparison
As discussed in the Chapter 3, there have been significant improvements in the
specification of Australian new cars relative to other right hand drive markets such as Japan
and the UK. The higher level of specification in Australian cars partially explains price
differentials that can be observed between new cars sold in the Australian retail car market
and other countries. These specification differences primarily relate to comfort and
aesthetic features. We have provided three examples of these specification differences
below, these examples are provided to show clear evidence of a difference in specification
between the same car model in different countries.
5.3.1
Nissan 370z Coupe
The first car forming part of this analysis, the Nissan 370z is sold in the Australian, UK and
Japanese car markets. The specification options of each of these vehicles differ in each
market. Table 5.3 presents a comparison of each of these features.
Table 5.3: Nissan 370z specification comparison
Specification option
Australia
UK
Japan
Rain Sensing Wipers
NO
YES
YES
YES
NO
NO
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
YES
NO
YES
NO
YES
NO
NO
Leather Seat Trim
YES
NO
NO
4-way Driver Seat Adjustment with Power Slide
Satellite Navigation
Heated Front Seats
YES
NO
NO
YES
YES
NO
NO
NO
NO
BOSE 8 Speakers
YES
NO
NO
Front Seat Belt with Load Limiters and Pre-tensioner
YES
YES
YES
Bi-Xenons with Headlamp Washer
Automatic headlamps
Intelligent Key
Electrically foldable, adjustable and heated mirrors
Advance Drive Assist Display
Fully Auto A/C with Climate Control
ABS, EBD and Brake Assist
ESP with Deactivation Switch
Viscous Limited Slip Differential
Vehicle Dynamic Control with Deactivation Switch
Driver, Passenger, Side and Curtain Airbags
Rear Camera with Predictive Path Technology
Cruise Control
42
Engine Immobiliser & Alarm
Daytime Running Lights
Tyre Pressure Detection
YES
YES
YES
YES
YES
YES
NO
YES
NO
Source: BMW Dealer Council of Australia
From Table 5.4 it is apparent that the Australian model of the BMW 320i generally has a
higher level of specification than the UK model and the Japan model. It is assumed that any
features not included in the above analyses are identical in each model.
5.3.2
Mercedes-Benz C-Class C200
The second model of car that will form part of this analysis is the Mercedes-Benz C200. This
model of vehicle is sold in the Australian, Japanese and UK car markets, however, it has
different levels of specification in each of these markets. The marketing strategy and
branding for this vehicle also differs slightly in each market.

In the Australian market, the base model of the C200 is marketed as a luxury vehicle

In the UK, the C200 is marketed as a prestige vehicle
 In Japan, the C200 is marketed as a luxury vehicle.
The specification options of each of these vehicles, like the branding, all differ slightly. Table
5.4 presents a comparison of each of these features.
Table 5.4: Mercedes-Benz C200 specification comparison
Specification option
Australia
Japan
UK
Adaptive brakes
YES
YES
YES
9 Airbags
YES
YES
OPTIONAL
YES
OPTIONAL
YES
YES
YES
YES
Audible warning for front seat passengers seatbelts
Automatic locking doors with emergency opening
Brake assist program (BAS)
YES
YES
YES
YES
YES
YES
YES
YES
YES
Electronic immobilizer (ELCODE)
Electronic Stability Program (ESC)
Emergency spare wheel
YES
YES
YES
YES
YES
YES
YES
YES
YES
First aid kit
Flashing adaptive brake light
YES
YES
YES
YES
YES
YES
Neck pro crash responsive front head restraints
YES
YES
YES
YES
YES
YES
YES
YES
YES
Seat occupancy sensor for front passenger seat
Warning triangle in boot lid
Reversing camera (in conjunction with coman)
YES
OPTIONAL
OPTIONAL
YES
YES
YES
OPTIONAL
YES
OPTIONAL
Intelegant headlamp control
Telephone prewiring with hands free facility
YES
YES
YES
OPTIONAL
OPTIONAL
OPTIONAL
Anti-lock Braking System (ABS)
Attention assist
Pre-safe system
Safety steering column
Source: National Mercedes-Benz Dealers Association
43
From Table 5.4 it is apparent that the Australian model of the Mercedes-Benz C200 has a
higher level of specification than both the UK and the Japanese version of the base model.
5.3.3
BMW F30 320i
The third car forming part of this analysis, the BMW 320i is sold in the Australian and UK car
markets. Like the Mercedes-Benz C200, the BMW 320i is marketed differently in each
market and has a different level of specification.

In the Australian market, the base model of the 320i is marketed as a luxury vehicle

In the UK, the 320i is marketed as a prestige vehicle.
The specification options of each of these vehicles, like the branding, all differ slightly. Table
5.5 presents a comparison of each of these features.
Table 5.5: BMW 320i specification comparison
Specification option
Australia
UK
Servotronic
YES
YES
YES
YES
OPTIONAL
OPTIONAL
OPTIONAL
OPTIONAL
Rear seat folding headrests
YES
YES
YES
OPTIONAL
OPTIONAL
OPTIONAL
PDC front and rear
Lights package
YES
YES
OPTIONAL
OPTIONAL
Sensatec
Auto Transmission
YES
YES
OPTIONAL
OPTIONAL
Tyre pressure monitoring
NO
YES
DAB +
NO
YES
Electric seats with memory function
Navigation System Business
Through loading system
Extended storage package
Front Armrest
Source: BMW Dealer Council of Australia
From Table 5.4 it is apparent that the Australian model of the BMW 320i generally has a
higher level of specification than the UK model. It is assumed that any features not included
in the above analyses are identical in each model.
5.3.4
Price comparison
The Federal Chamber of Automotive Industries has recently released a comparison of
international car prices. Case studies were undertaken of fully optioned popular Australian
car models and similarly optioned models in the UK and New Zealand. The FCAI analysis
indicated that for many models of car Australian prices were at least comparable and in
many cases cheaper than overseas market. An important caveat on the analysis is that
prices reported were manufacturers’ list prices and excluded stamp duty and registration
costs.
44
Table 5.6: Price comparison
Australia
New Zealand
UK
Toyota Corolla Ascent Sport Hatch
AUD $23,540
NZ$37,490
AUD$24,250
Mazda 3 Neo Hatch
BMW 3 series 320i
AUD$23,792
AUD$69,400
NZ$32,795
NZ$88,900
AUD$31,405
AUD$68,808
Mercedes-Benz ML350 BlueTec Diesel
AUD$102,236
AUD$100,410
Source: FCAI (2014), Vehicle price and specification comparison, Available online at
http://www.fcai.com.au/specification/vehicle-price-and-specification-comparison
5.4 Direct effects
If Australia was to remove import restrictions allowing the large scale importation of used
cars there would likely be a number of implications for the local economy. Economic theory
would suggest that an increase in supply of goods in a particular market will result in both
increases in quantities of the goods sold and a decrease in the level of prices. Considering
the Australian retail car market, theoretically the removal of current large-scale used car
import restrictions would result in a decrease in the price of used cars and may also result
in a decrease in prices of new luxury cars. However given the high level of car ownership in
Australia, the removal of the current restrictions is unlikely to result in a material change in
the overall number of cars sold.
Key changes in the market that will occur as a result of removing current import restrictions
will relate to substitution effects. It is likely that in response to price changes consumers
may substitute planned purchases of local used cars with imported used cars and, to a
limited extent, local new cars.
5.4.1
Price impacts
If the Australian Government was to remove current restrictions on large scale importation
of used cars, it is likely that there will be an effect on prices; given the complexities31,
estimation of the magnitude of such a change is difficult. However, as the following analysis
requires an indication of how price might change, we have considered an indicative range
of price changes based on case studies of markets similar to Australia (see Table 5.6). It is
likely that prices for cars in the prestige and luxury end of the market will experience the
greatest drop in price, we consider that this will be most applicable for luxury cars priced at
over $150,000.
An important consideration when looking at price impacts is that if Australians start
importing used cars from countries such as Japan and the UK, demand pressures may cause
the price of used imports to rise. Although New Zealand enjoyed relatively free access to
the Japanese supply of used cars in the 1980s and 1990s, in recent years there have been
31
Government regulation is likely to be a strong factor driving prices for used car imports as there are many
consumer and environmental concerns that Government would need to address in implementation of such a
policy. At this early stage where the Government has not yet publicly released possible policy changes this leads
to many unknowns.
45
an increasing numbers of competitors for this supply resulting in price increases32. Given
that Australia has over five times the population of New Zealand, if Australia were to start
competing for this supply as well it is conceivable that, for many parts of the market,
consumers would not have access to significantly lower prices.
As used cars are a substitute good for new cars, changes in the prices of used cars are likely
to affect the prices of new cars. However, as used cars are not a perfect substitute for new
cars, this change in price is likely to have a lower magnitude than the change in price of
used cars.
Considering the above, indicative price changes for the retail car market may include:

No significant change for new cars in the volume segment of the market

Minor price decreases for used cars in the volume segment of the market

No significant change for new cars in the prestige segment of the market

Minor price decreases for used cars in the prestige segment of the market

Low to medium price decreases for some new cars in the luxury segment of the market

Medium price decreases for used cars in the luxury segment of the market.
5.4.2
Quantity impacts
Although it is not expected that there will be a material change in the overall number of
cars sold, it is likely that consumers will substitute planned purchases of local used cars with
imported used cars for local used cars and, to a limited extent, local new cars. In explaining
these changes it is useful to differentiate between two types of demand in the Australian
retail car market:

Replacement of the existing fleet

Expansion of the existing fleet.
Replacement of the existing fleet occurs as consumers trade in and upgrade their existing
cars. This occurs usually as either a result of a desire for a lifestyle improvement or a need
to replace an ageing car. It is expected that the rate of replacement will remain the same,
however, substitution will occur between imported used cars and local used cars and local
new cars.
Expansion of the existing fleet occurs as wealth increases over time, more people are able
to purchase cars and some people are able to purchase multiple cars. As described in
Chapter 3, in recent years increasing affordability of cars has strongly contributed to the
expansion of the Australian car fleet to the point that for every 10 Australian residents
there are nearly 8 cars33. Given that a certain portion of the Australian population is not
able or not willing to drive34 it is likely that this level of car ownership is close to a level of
‘full car ownership’. In light of this, it is not expected that a price decrease brought about by
32
RIA Novosti, (2014). Right-hand Drive Fuels Revolution in Russia’s Far East. [online] Available at:
http://en.ria.ru/analysis/20121003/176382673.html [Accessed 7 Aug. 2014].
33
ABS (2013), Motor Vehicle Census
34
Including those who cannot legally hold a driver’s license.
46
used vehicle imports will drive a material increase in demand for cars in the Australian
market.
5.4.3
Substitution effects
As discussed above, it is expected that if restrictions on the large scale importation of used
cars were to be removed that there would be a degree of substitution between purchases
of:

Imported used cars and Australian used cars

Imported used cars and Australian new cars.
Assuming the approximate levels of price changes described in 5.4.1, it is likely that there
will be the following substitution effects in the Australian car market.

A low level of substitution between Australian new cars and used imports, mostly in the
luxury car segment of the market
 A medium to high level of substitution between Australian used cars and used imports.
These substitution effects will have a range of outcomes for the Australian car market:

Volume of cars in the fleet – as discussed previously, this is not expected to change as a
result of the suggested policy change.

The ratio of new to used cars transacted each year – the ratio of new to used cars is
expected to decrease, indicating that there will be an increase in the age of the fleet.
This effect is likely to be small as substitution effects between local new cars and
imported used cars are expected to be small.

The age profile of the fleet – changes in the overall age of the Australian car fleet are
highly dependent upon the age of cars being imported from source markets. It is
possible that the average age of the Australian fleet will decrease if imported used cars
are younger than similar Australian used cars being sold in the market, however, if used
cars being imported are older than similar Australian cars being sold in the market this
could result in an ageing of the Australian fleet. The ratio of new to used cars
transacted each year will also influence the overall age of the Australian fleet as any
substitution between new and used cars will result in an ageing of the fleet. On
balance, it is likely that there will be some degree of ageing of the Australian fleet,
however, the extent of this is highly dependent upon the age of used imports.

Dilution of cars built for Australian market – cars built specifically for the Australian
market have been designed to handle the Australian climate, roads and fuel. If there is
a high degree of substitution between cars built for the Australian market (Australian
used and Australian new) and imported used cars, there may be a decline in the safety,
security, reliability and environmental standards of the Australian fleet. Assuming a
medium level of substitution between imported used cars and cars made for the
Australian market, it is likely that there will be a significant dilution effect having a
range of implications for the Australian market.
5.5 Implications for the Australian market
Outcomes discussed in the previous section refer to observable changes in the structure of
the Australian car fleet that may occur as a result of removing restrictions on large scale
importation of used cars into Australia. These outcomes, in and of themselves, are not of
47
concern, however, changes in these outcomes have important implications for the
Australian retail car market. These implications are described below, each from the
perspective of a stakeholder: industry, consumers and the government.
5.5.1
Industry
Any change to existing arrangements regarding import restrictions of used cars is likely to
disrupt the retail car dealerships in Australia. One of the strongest disruptions would be in
the area of quantity and price. It is expected that in the short term, dealerships will suffer
losses to profitability as prices may decrease and sales of the local new and used cars
decrease. This loss in profitability is likely to be exacerbated by thin profit margins and the
reliance of dealerships on the sale of a new or used car to generate a stream of future
revenue. In the medium to long run, it is expected that dealerships will be able to adapt and
may even diversify their existing business model to include used car imports, however, this
will require dealerships to cope with disruption to their business model. Other implications
for dealerships include the:

Devaluation of stock – Any decrease in market prices of new and used cars will result in
a devaluation of existing dealerships’ car stock. Depending on the level of stock holding
this could be a significant cost for some dealerships.

Recall management issues – Current recall management systems do not have processes
in place for dealing with recall of used imported vehicles. This may result in significant
brand costs for dealerships (and manufacturers) as when recalls occur, owners of
recalled used import vehicles will not likely be informed of a recall and as a result are
likely to have a negative perception of a particular car brand. Currently, recall
management systems are managed effectively through industry self-regulation and
failsafe government regulation.
The above effects are likely to be more pronounced in the luxury car segment as it is here
estimated that substitution between purchases of new cars and used imports will occur.
5.5.2
Consumers
Implications for consumers of the removal of restrictions on the large scale importation of
used cars are complex. It is reasonable to expect that such a policy will have some benefits
to customers; however, there are also other considerations that need to be taken into
account including increased operating costs, and consumer protection issues.
Benefits likely to be derived for consumers relate to decreases in car prices and an
increased choice of cars (there are often different models available in other countries). The
size of benefits accruing to consumers is likely to be determined by the magnitude of price
changes and the availability of genuinely different car models35.
Though there are many upfront financial benefits of used import vehicles, it is likely that
used import cars will have higher operating costs than similar cars in the Australian market.
These costs are likely to stem from three major areas: parts and servicing and insurance.
35
Consumers are unlikely to derive additional benefits of increased choice unless there is availability of used
import models which are substantially different from models available on the Australian market. If this is not the
case, consumers may in fact incur higher search costs for when purchasing vehicles.
48
In the short run, it is likely that there will be limited local availability of some parts for used
import cars and as such servicing costs will be higher as these parts will need to be supplied
from the source market. According to Australian motor vehicle dealers, given a lack of scale,
it is probable that costs of importing parts will be very high. Experience from New Zealand
has suggested that this is so much of a problem that often, in order to obtain unavailable
parts, mechanics will resort to taking apart other used import cars for parts. In the long run,
it is possible that a parts market will emerge to service used imports in Australia, however,
this has not been the case in New Zealand36 (possible due to its small market size).
Insurance costs are another factor which may significantly increase the operating costs of
used import cars. Currently, insurance arrangements in Australia for Specialist and
Enthusiast Vehicles (SEVs) are handled by specialty insurance firms which charge very high
premiums to insure used imports. Another possible problem related to insurance is that, as
has been the case in New Zealand, some insurers will not offer insurance for imported used
vehicles.
Consumer decision making
As identified in Chapter 5.3, cars sold in Australia often have a higher specification as
compared to international markets such as the UK and Japan. This difference in
specification can cause confusion for consumers when comparing car prices in Australia to
overseas markets. This confusion can be captured and described by the concepts of
information asymmetry, heuristic decision making, and salience.
If import restrictions on used cars were to be removed, information asymmetries may arise
in the short run as it is unlikely that there will be sufficient information for consumers to be
aware of differences in the same model of a car when it is sourced from different markets
around the world. Such information asymmetries may lead to consumers overestimating
the value of cars they are purchasing and making a sub-optimal purchasing decision. In the
long run, it is likely that information issues would be resolved through experience and
through information available on car purchasing.
Regardless of whether information asymmetries are resolved in the long run, consumers
face a behavioural issue relating to salience and heuristic decision making. As articulated
previously, consumers when faced with complex choices (such as purchasing a car) tend to
make a decision based on what is meaningful to them, and employ mental shortcuts to
arrive at a decision.
An example illustrates this concept effectively. In the UK, the BMW 3 series is sold as a
prestige fleet model car, whereas the same model is sold as a luxury private car in Australia.
Correspondingly, the BMW 320i is at a much higher specification in Australia than in the UK
but also has a much higher price tag. For a consumer considering the purchase of such a
luxury car in Australia, two of the main considerations that are salient (or relevant) to the
consumer are brand, model and price. As brand and model are more salient to a customer
they are likely to make the following heuristics based decisions:

36
BMW is a luxury brand in Australia, so a BMW from the UK is also a luxury car
Consultation with Deloitte New Zealand Motoring Industry Services Team.
49

The model of the used import is the same as the model as the Australian version, hence
they have the same level of features.
Such a decision process will likely lead a consumer thinking that a used import of a BMW
320i from the UK is the luxury car good that they are interested in and then make a decision
to purchase the car entirely on price. This would lead the consumer to buying the UK used
import even if it may not be the car they wanted to purchase.
5.5.3
Government
Removing restrictions on used imports will have implications for the Government in a
number of areas. These implications can be grouped into consumer protection issues,
policy issues and fiscal issues.
Consumer protection issues
Government has a community responsibility to make certain arrangements for consumer
protection and safety. One important area of this is product recalls. Currently, product
recalls in the retail car market are mainly handled by the car industry regulating itself,
however, if large scale importation of used cars were to be allowed this level of regulation
would likely not be sufficient. In the case of a consumer individually importing a vehicle,
they may be responsible for any product recalls. Such a system is not likely to work.
Most imported used cars are unlikely to have warranties attached as they are generally
restricted to the market of original sale. Even in the case where an imported used car may
have a global warranty, local dealers are not required to pay for repair and replacement.
Our understanding is that if a consumer imports a used luxury car that is covered under a
global warranty, the consumer will have to pay for costs of repair up front and then claim
the costs back from the manufacturer (as an Australian dealership is not obligated to pay
the costs up front). One example of this is if a consumer takes an imported used MercedesBenz to get the engine replaced, they may have to pay up to $80,000 up front. Such high
costs could be cost prohibitive and prevent consumers from benefiting from a warranty.
This has implications for recall regulation and consumer protection generally.
Fiscal issues
Stamp duty is levied on the sale price of all vehicles, the lower the price of vehicles sold, the
lower that stamp tax revenue will be. This may have implications for state and territory
governments.
There may also be implications for luxury car tax revenue, however, this will be determined
by the extent to which the removal of current restrictions affects the number of new luxury
cars sold. We note that in its final report, the PC recommended the removal of the luxury
car tax and the import tariffs, which would have material impact for the prices of new cars
and related tax and stamp duty revenue.
50
Policy issues
Policy issues further complicate the suggested changes. Government is committed to
increasing the safety37 of the Australian car fleet and improving environmental outcomes –
objectives which could potentially be hindered by allowing the import of used cars. As
discussed previously, a likely outcome of allowing used car imports is the ageing of the
Australian fleet as well as an increase in number of cars that are not manufactured for the
Australian market. These changes in fleet outcomes have been found to be related to
negative safety outcomes. A study by the MUARC in 2013, found that an ageing vehicle
fleet has a statistically significant relationship with the risk of crash, injuries sustained in car
crashes and deaths from car crashes.
Some of these issues can be resolved through regulation, however, implementation and
enforcement is likely to be difficult and costly. Due to the nature of used imports, quality
and compliance checking cannot be performed through ‘type testing’ or ‘batch sample’
testing; this could lead to very high costs of enforcement.
37
Motor Vehicle Standards Act 1989
51
Conclusions
The Australian retail car market is a highly competitive market. There are over 4,700 car
dealers in the Australian market dealing in over 60 different marques with over 350
different models being sold. Competition primarily takes place in three market segments:
the volume segment, the prestige segment and the luxury segment.
Table 5.7: Market segmentation in new car market, 2013
Volume
Units sold
% of units sold
Prestige
Luxury
740,951
277,557
91,006
67%
25%
8%
Source: Federal Chamber of Automotive Industries (2014)
The volume segment of the market is by far the largest with 67 per cent of new cars sold in
2013 being volume cars, followed by prestige with 25 per cent of new cars sold in 2013
being prestige cars and luxury with 8 per cent of new cars sold in 2013 being luxury cars
(Table 1.1). This competition has had a number of implications for the market in recent
years including forcing motor vehicle dealerships to change their existing business model
and contributing to downward pressure on the prices of new vehicles in Australia. As a
result of the decrease in prices of new cars and the recent increases in Australians’
disposable incomes, affordability of new cars has greatly increased. This increase in
affordability of new cars is also likely to have put pressure on prices of used cars and will
continue to do so. Concurrent to the increase in affordability of new cars, competition in
the retail car market has also led to improvements in the specifications of Australian cars,
elevating the standards of Australian cars above many comparable markets such as the UK,
New Zealand and Japan.
Though it can appear that Australian car prices are much higher than car prices in similar
markets, the magnitude of this price differential may not be that large. After taking into
account relevant taxes and the higher specification of Australian cars, it appears that
Australian car prices are, only to a limited extent, higher than prices in some other markets,
and in some cases may be lower than in other markets.
The MVSA was introduced in Australia in 1989 to ensure common national motor vehicle
standards and to restrict imports of used cars; the overarching intent of this piece of
legislation was to improve safety and environmental outcomes for the Australian car fleet.
It appears that the MVSA has to some degree been successful in achieving those outcomes
as the Australian car fleet has been found to be safer and more modern than similar
markets such as New Zealand38.
If the current restrictions on the large scale importation of used cars were removed, there
would likely be some benefits to consumers; however, such a policy change would have
implications for the current market structure including:
38
Newstead, S., Watson, L. and Cameron, M. (2013). Vehicle safety ratings estimated from police reported
crash data: 2013 update: Australian and New Zealand crashes during 1987-2011.
52

Motor vehicle dealerships would likely not benefit in the short term but are likely to
adapt their business model in the long run to incorporate imported used cars.

Consumers would face issues of higher operating costs with imported used cars, and
are likely to face adverse selection issues as a result of information asymmetries and
cognitive bias.

Government would likely be required to implement a range of consumer protection
processes. In addition to this may have an adverse impact on some policy outcomes
such as improving safety outcomes of the Australian car fleet and ensuring
environmental standards of Australian cars.
A summary of these implications is provided in Table 5.8.
Table 5.8 Summary of market implications of removing large scale used car import
restrictions
Industry
Consumers
Government
New car sales
Benefits
Consumer protection issues
Near-new luxury car prices overseas are
lower than comparable Australian cars.
It is possible that there will be some
substitution between new and used
luxury cars in Australia; however, this is
a small part of the market.
Price of used cars will likely decrease
and there may be an increase in the
number of models and variants
available.
The recall system needs to be able to
cope with an increased number of used
imports. Additionally, Government may
need to assess the adequacy of the
current policy framework to deal with
issues such as potential odometer
fraud.
Value of existing new stock will
decrease as resale value of used cars
decreases.
Used car sales
Costs
Likely to be higher operating costs
associated with imported used cars.
Australian dealers have noted that this
will be due to higher parts and servicing
costs and higher insurance.
Dealer network will require time to
adapt to new sources of supply and
adjust prices.
The value of existing cars held by
consumers will fall.
Price of existing used car stock will
decrease, devaluing existing stock.
Information asymmetry may lead to
consumers not making the best choice
they can.
Recall management
Dealers and manufacturers face brand
risk if a robust recall management
system is not in place for imported used
cars.
Information asymmetries
Cognitive biases
Consumers, when facing complex
decisions, make mental shortcuts and
may base their decision on factors that
they easily relate to. These could
include factors such as make of car, or
how expensive the same model is in
Australia. If the specification is different
this may not be the best choice for the
consumer.
Policy issues
Fleet safety improvement – allowing
large scale importation of used cars
could increase the age of the fleet and
slow the spread of safety technologies.
Environmental protection – likely to be
an increase in scrapped cars and
possibility of imported cars not meeting
emissions standards
Implementation,
compliance
and
enforcement of new regulation may be
difficult and costly for government.
Fiscal costs
There may also be implications for
luxury car tax and stamp duty revenues
depending on the extent to which the
policy change results in a decrease in
car prices and the volume of new luxury
cars sold.
53
Appendix A– Further charts
Chart 5.4: Volume car segment - unit sales volumes
Toyota
Holden
Hyundai
Ford
Nissan
Mitsubishi
Kia
Suzuki
Isuzu UTE
2013
Renault
2004
Great Wall
Skoda
Ssangyong
Chery
Proton
Daihatsu
Daewoo
Marque
0
50,000
100,000
150,000
200,000
250,000
Source: FCAI
54
Chart 5.5: Prestige car segment - unit sales volumes
Mazda
Volkswagen
Subaru
Honda
Jeep
Peugeot
Fiat
Chrysler
2013
Alfa Romeo
2004
Dodge
Opel
Citroen
Smart
Saab
MG Rover
Marque
0
20,000
40,000
60,000
80,000 100,000 120,000
Source: FCAI
55
Chart 5.6: Luxury car segment - unit sales volumes
Mercedes-Benz
BMW
Audi
Land Rover
Lexus
Volvo Car
MINI
Porsche
Jaguar
Infiniti
Maserati
2013
Bentley
2004
Ferrari
Aston Martin
Rolls-Royce
Morgan
McLaren
Maybach
Lotus
Lamborghini
Hummer
0
5,000
10,000 15,000 20,000 25,000 30,000
Source: FCAI
56
Limitation of our work
General use restriction
This report is prepared solely for the use of the National Mercedes Benz Dealer Council.
This report is not intended to and should not be used or relied upon by anyone else and we
accept no duty of care to any other person or entity. The report has been prepared for the
purpose set out in our engagement letter dated 3 June 2014. You should not refer to or use
our name or the advice for any other purpose.
57
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