Brian Gaynor: Second-hand cars: a Japanese love affair

COMMENT

New Zealand is having a huge love affair with Japanese used cars. As Table 1 shows, 142,075 second-hand motor vehicles were exported from Japan to New Zealand in the September 2003 year compared with 120,310 in the previous September year.

We are by far the biggest customers of Japanese used cars, taking 20.7 per cent of total exports in the September 2003 year compared with 21.1 per cent in the previous year.

The figures are even more startling on a per capita basis. In the latest period, Japan exported a second-hand car for every 28 people living in New Zealand compared with one for every 30 individuals in United Arab Emirates.

(Dubai, in the United Arab Emirates, is primarily a re-export centre. In the early 1990s Pakistani emigrant workers bought most of UAE's imported used cars and sent them back to Pakistan. More recently the Pakistan Government has tightened regulations and UAE is now a re-export centre for Africa.)

The ratio of population to used car imports in the other top five countries are: Russia 1:2510; Britain 1:1150; Philippines 1:2470.

Second-hand car exports have become big business in Japan and they are now running at an annual rate of US$2.9 billion ($4.1 billion).

New Zealanders buy the cheaper cars. Malaysia and Indonesia import Japanese used cars in the US$14,000 to US$17,000 price range. Other Asian countries, including Hong Kong and Singapore, buy vehicles between US$10,000 to US$12,000 while New Zealand, Britain and Russia buy cars in the US$3000 to US$4000 range.

Exports to the Philippines, Peru, South Africa and United Arab Emirates average below US$3000 a vehicle on an FOB (free on board) basis.

Official New Zealand statistics, contained in Table 2, show the growing importance of used cars. Second-hand imports represented only 4.6 per cent of total new registrations in 1985, but they took off in 1989 and the following year they represented 53.4 per cent of new registrations. In 1995 imported used cars totalled 80,976 or 55.2 per cent of new registrations and in 2000 they had risen to 116,124 or 66.8 per cent of new registrations.

The motor vehicle sector has had four consecutive boom years, particularly used car imports. These second-hand vehicles represented 68.9 per cent of new registrations in 2001, 68 per cent in 2002 and 69 per cent last year.

As second-hand cars accounted for more than 60 per cent of new registrations for each of the past eight years our roads are now chock-a-block with cheap Japanese imports.

There are several reasons New Zealand is the world leader in imported Japanese used cars. The initial wave was caused by the removal of import regulations on autos and auto parts in 1989 and an easing of the inspection requirements in 2002 has stimulated demand since then.

New Zealanders and Japanese drive on the same side of the road and the relatively low wage and salary structure in this country has also forced individuals to look for cheaper cars.

Regulatory controls in Japan have also been eased. It is no longer necessary to have separate licences for each vehicle exported and the Japan Auto Appraisal Institute does not have to certify that each vehicle meets certain standards and is free from functional flaws.

The car market is going through the same revolution as the airline industry since the introduction of no-frills discount airlines. Consumers are being offered a much wider price range and they are showing a strong preference for low-priced used car imports.

This has stimulated the market and new registrations have climbed steadily from 154,094 in 1998 to a record 227,425 last year. It is not surprising that Auckland's roads have become more and more congested.

Even in the 1980s boom, new registrations never exceeded 100,000. In 1984, the best year of the decade, there were just 98,437 new registrations made up of 96,418 new cars and 2019 imported used cars. Since then imported used car registrations have risen 78-fold.

The boom in second-hand imports has benefited two listed companies, Ports of Auckland and Turners Auctions.

Ports of Auckland is the country's largest seaport as far as imports are concerned. Statistics New Zealand says it accounted for 58 per cent of total imported ship cargo, by value, in the June 2003 year and 45 per cent of the country's total imports through seaports and airports. Ports of Auckland handled 145,600 imported vehicles, both new and used, in the June 2001 year, 166,700 in 2002 and 186,000 last year.

The port handles more than 80 per cent of the country's car imports.

In the six months to December 2003 the port handled 88,398 vehicles compared with 91,158 in the six months to December 2002.

Chief executive Geoff Vazey said this week: "Imported vehicle numbers continue to make an important contribution and this is expected to continue into the future".

Turners Auctions was listed in October 2002 after the issue of 4 million shares, representing 15 per cent of the capital, to the public at $1.50 each. Guinness Peat Group was the main shareholder with 38.8 per cent.

The company imports unregistered used vehicles and has an estimated 80 per cent of the country's motor vehicle auction business but only 7 per cent of total used vehicle sales.

It sold 65,431 used vehicles by auction in the June 2002 year and 73,000 last year (a high percentage of these are Japanese imports brought in by third parties).

The company's average commission is normally between $290 and $300 a vehicle.

This week Turners announced net earnings of $2.83 million for the six months ended December compared with $2.97 million for the previous corresponding six-month period. The profit downturn was due to losses incurred by its new pilot operation in Vancouver, Canada.

The group's fleet operation (its own Japanese used car imports division) reported sales of 2670 units for the six months compared with 1690 units for the corresponding period the previous year. Gross margins were up 47 per cent, partly reflecting the strong NZ dollar versus the Japanese yen.

Turners reported 40,000 vehicle auction sales, a 15 per cent increase over the six months to December 2002, but the average commission fell from $296 to $290.

The disappointing result was mainly because of a $528,000 loss contribution from its Canadian operation. The company said its company's auction-based strategy was not yet working in Vancouver but the board "remains confident that this market represents a good opportunity in the medium term".

The problem for Turners is that the New Zealand market, with its huge number of cheap imported second-hand Japanese cars and the high propensity of New Zealanders to buy and sell vehicles, offers an ideal operating environment but British Columbia does not.

British Columbia has few used car imports and had only 91,223 new motor vehicle sales in the December 2003 year. It also has only 1.79 million licensed passenger vehicles for a population of 4.2 million compared with 2.02 million cars in New Zealand for a population of 4 million.

Last year Guinness Peat Group reduced its shareholding from 38.8 per cent to 19.99 per cent at $2.68 a share the day after Turners announced its expansion into Canada.

Could this indicate that GPG believes Turner Auctions will not replicate its New Zealand success overseas as it has been a big beneficiary of the used car import boom here and similar conditions do not exist in Canada or other overseas countries?

* Disclosure of interest: none

* Email Brian Gaynor