Road Trip down Memory Lane

New Zealanders have a passion for cars. With the exceptionof the US, our love affair with the automobile has led to New Zealand having more cars per head of population than anywhere in the world. The car industry is verydifferent to how it once was back in the late 1980s. The significant changes toregulations around importing vehicles have influenced New Zealanders’consumption of cars.

Farewell tariffs

During the early 1980’s the relative cost of car ownershipwas expensive. The high price of buying a vehicle resulted in a high proportionof income being spent on cars and vehicle-related expenses. High prices were spurredby restrictions on the importation of Completely Built Up (CBU) vehicles andhigh tariffs associated with importing Completely Knocked Down (CKD) vehicles.

Between 1984 and 1988 the tariffs on CKD vehicles werereduced and then abolished in July 1988. At the same time, a 35% import dutywas kept on CBU vehicles to protect New Zealand’s car assembly industry. Theremoval of the restriction on the importing of CBU vehicles gradually led tothe phasing out of the local assembly of passenger cars.

Reductions in tariffs and regulation changes also led torelative price falls for cars during the 1990s. In 1990 the excise duty on carswas abandoned and the tariff on CBU vehicles was slowly reduced before the governmentannounced the immediate withdrawal of all tariffs on virtually all motorvehicle imports in 1998.

Car consumption climbs

Changes to these tariffs led to the relative price of usedcars declining by 36% between December 1987 and the start of the 21stcentury. The benefits associated with the price falls over this time werelargely felt by first-time car buyers, whereas those who already owned vehiclessaw massive depreciation on their asset, offsetting some of the price fall.

In terms of private vehicle ownership, consumers spend agreater proportion of their income on the purchasing of cars than they do onpetrol. In other words the depreciation cost of a vehicle is greater than thepetrol costs associated with owning a vehicle. Therefore declines in thepurchase price of cars have a greater effect on the overall ownership coststhan the same proportional decline in the price of petrol would.

The price falls must be viewed with some caution though asthe car price indices published by Statistics NZ are adjusted for improvementsmade to the cars. Cars continue to develop and gain additional features (suchas ABS, airbags, etc). The index is adjusted for improvements, the intuitionbeing that you get more for your money. So this could signal that the dollarvalue of cars hasn’t changed as much as it appears because of the increase in thefeatures included in new cars, which are effectively accounted for as a pricefall.

Graph 1

Since 1987 the proportion of income spent on vehicles andvehicle-related expenses has been relatively steady, averaging 11.5% of totalhousehold expenditure, down from an average of 13.7% prior to 1987. Due tofluctuations in petrol and car prices, the relative price of car ownership ismore volatile than the penetration rate (number of cars per head ofpopulation), but there is a correlation between the two. The trend has seen theprice of car ownership decline, and with this we have effectively consumed morecars and kept the proportion of our spending roughly the same, raising thepenetration rate. In December 1987 there were 0.40 cars per head of population;this reached an all-time high of 0.55 in December 2007 before the onset of therecession, a 38% increase.

The scrap heap

The introduction of imports in 1988 has had an effect on thescrap rate of cars. The lower replacement price and the shorter lifespan ofimports means they are scrapped more frequently than when new cars dominatedthe market. The annual scrap rate climbed from 2.9% in June 1989 to 7.0% at theend of 1991, spurred by the economic recovery following the 1987 crash.

Replacement demand is a large source of underlying demand.As the scrap rate increases so does this source of demand and it exists evenwhen the size of the fleet is not growing. Between 1995 and 1997 the car fleetgrew by 5.3%, or 87,860 cars. Over the same period there were 479,505 newregistrations, meaning that 391,646 cars, just under a quarter of the carfleet, were consigned to the scrap heap in just two years.

Graph 2

The health of the economy has an effect on the scrap rate aswell, as during good times people are more inclined to replace their car.Between 1997 and 1999, during the Asian Crisis, economic growth was poor, correspondingwith a reduction in the scrap rate as owners struggled to afford new vehiclesand instead hung on to their old cars. Again, the effects of the current recessionare evident, with the scrap rate undergoing a sharp decline. The annual scraprate had sat within the 6-8% band for every quarter between March 2001 and June2008. It then rose to 9.4% in September 2008, but has since plummeted. As ofJune 2009 the annual scrap rate was down to 4.9%.

Aging car fleet

The graph below shows the change in the number of cars byyear of manufacture between 2004 and 2005. In 2005, there were more cars foreach year of manufacture after 1994 than there had been in 2004, as a result ofused imports entering the country. For cars produced prior to 1994 (12 yearsand older), the number of cars scrapped outweighed any new additions to the carfleet from used imports. Historical data shows that 12 years old has been the turningpoint (where the scrapped number of cars outweighs new additions to the fleet) everyyear since 2000.

Graph 3

The graph also shows a large number of cars produced in 1996being added to the car fleet. This spike was due to the introduction of newfrontal impact standards in 2002. Cars produced in 1996 were generally theoldest cars to met the new standard so there was a large influx of carsmanufactured in 1996 over the following few years. By 2007 there were 260,509cars that were manufactured in 1996, accounting for 10% of the total car fleet,and 52,000 more cars than there was for any other year of production.

New Zealand’s car fleet has aged every year since our dataset began in 1998 when the average age was 11.20 years – by 2008 the averageage had climbed to 12.55 years. This spike of cars manufactured in 1996 ishelping to increase the average age of the car fleet over time. But now thatthis spike of cars is older than 12 years of age, these cars are likely to bescrapped at an increasingly rapid rate, which could add to replacement demandfor cars.

Conclusion

Historical data shows that the increased ease of importingcars and the abolishment of tariffs have boosted the affordability of carownership in New Zealand. The relative price of car ownership has declined, andthis change has stimulated an increase in the penetration rate within New Zealand.

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