Reduced Used Vehicle

Import Restrictions:
Cost Benefit Analysis

Final Draft

Report to the Commonwealth

Government of Australia
Department of Infrastructure and
Regional Development
June
2014

Copyright Castalia Limited. All rights reserved. Castalia is not liable for any loss caused by reliance on this
document. Castalia is a part of the worldwide Castalia Advisory Group.
 Acronyms and Abbreviations

AUD Australian Dollar

CBA Cost benefit Analysis

CBR Cost Benefit Ratio

JPY Japanese Yen

LHD Left Hand Drive

MVSA Motor Vehicle Standards Act

NPV Net Present Value

RHD Right Hand Drive

UK United Kingdom

US United States
Table of Contents
Executive Summary 1
1 Introduction 1
2 Market Analysis 2
2.1 Demand and Supply Factors 3
2.1.1 Analysis of the Japanese used vehicle market 3
2.1.2 Analysis of other international used vehicle
markets 8
2.1.3 Japan is the likely source of used cars into the
Australian market 11
2.2 Estimating Used Import Volumes into the Australian
market 13
3 Market Response to Used Imports 16
3.1 Scenarios of Change 17
4 Costs and Benefits of De-regulation 19
4.1 The Economic Benefits of Deregulation 19
4.1.1 Economic welfare effects in the used car market 19
4.1.2 Economic welfare effects in the new car market 20
4.2 The Economic Costs of Deregulation 20
4.2.1 Used imports will change the composition of the
fleet 21
4.2.2 Safety implications of an ageing fleet 21
4.2.3 Environmental implications of an ageing fleet 22
4.3 Cost Benefit Ratios 22
4.4 Policy restrictions on the age of the imports 23
4.5 Regulatory and Compliance Standards 25
4.6 Sensitivity Analysis 26
5 Conclusion 28

Tables
Table 2.1: Estimated Importing Costs of Used Cars from Japan 6
Table 2.2: Comparable Markets and Volumes of Used Imports 13
Table 3.1: Details of Used Import Baseline and Scenario Volumes 18
Table 4.1: Estimates of Welfare Effects – Used Car Consumers 20
Table 4.2: Car Age and Increased Likelihood of a Fatality when in
an Accident 21

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Table 4.3: Present Value of Safety Externality Costs ($ millions) 22
Table 4.4: Environmental Costs of Reduced Fuel Efficiency ($
millions) 22
Table 4.5: Summary of Costs and Benefits ($ millions) 23
Table 4.6: Cost Benefit Ratios and Total Net Benefit 23
Table 4.7: Reduced Volumes from Age Restrictions 24
Table 4.8: Changes to the level of Consumer Welfare Gains due to
Higher Regulatory Costs 26
Table 4.9: The Age of the Car and the Risk of Fatality 27
Table 4.10: Scenario 1 Safety Sensitivity 27
Table 4.11: The Social Cost of Emissions 27
Table B.1: Weighted Distribution of Imports relative to import
margin under baseline and policy sensitivities 34
Table B.2: Distribution Weighted Import Margin 35

Figures
Figure 2.1: Source of Cars in the Australian Market 2
Figure 2.2: Relative Depreciation Rates in Japan and Australia for
Toyota Corolla 4
Figure 2.3: Relative Depreciation Rates in Japan and Australia for
VW Golf 4
Figure 2.4: Japan Auction Price Range Sample for Used Toyota
Corolla’s 5
Figure 2.5: Japan Auction Price Range Sample for Used VW Golf 5
Figure 2.6: Percentage reduction in Japanese Auction Price to
Australian Used Car Price 6
Figure 2.7: Margin on Landed Japanese Used Imports Compared
with Australian Dealer Price 7
Figure 2.8: Weighted Average Landed Used Vehicle Import
Margin by Age of Vehicle 8
Figure 2.9: Pre Shipment Import Margin of Vehicles from the US
Compared to Australian Dealer Price 9
Figure 2.10: Margin on Landed US Used Imports Compared with
Australian Dealer Price 10
Figure 2.11: Margin on Landed UK Used Imports Compared with
Australian Dealer Price 11
Figure 2.12: Top Selling 2013 Vehicle Models in the Australian and
Japanese Vehicle Markets 12
Figure 2.13: Japanese Used Car Export Volume 2005-2013 13

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Figure 3.1: Market responses to used imports 16
Figure 4.1: Used Car Market Supply Shock 19
Figure 4.2: Fleet Ageing Comparisons under Import Scenarios 21
Figure 4.3: Total Net Benefit ($m) 23
Figure 4.4: Age of Japanese Used Vehicles Imported into New
Zealand in 2013 24
Figure 4.5: Fleet Ageing Comparisons under Policy Restrictions
on the Age of Imports 25
Figure A.1: Relative Depreciation Rates in Japan and Australia for
Toyota Camry 29
Figure A.2: Relative Depreciation Rates in Japan and Australia for
Mazda 2 29
Figure A.3: Relative Depreciation Rates in Japan and Australia for
Mazda 3 30
Figure A.4: Relative Depreciation Rates in Japan and Australia for
Subaru Impreza 30
Figure A.5: Relative Depreciation Rates in Japan and Australia for
Subaru Liberty/Legacy 31
Figure A.6: Relative Depreciation Rates in Japan and Australia for
Toyota Prius 31
Figure A.7: Relative Depreciation Rates in Japan and Australia for
Audi A4 32
Figure A.8: Relative Depreciation Rates in Japan and Australia for
BMW 320i 32
Figure B.1: Weighted Average Landed Used Vehicle Import
Margin by Age of Vehicle 33
Figure B.2: Age of Japanese Used Vehicles Imported into New
Zealand in 2013 34

Boxes
Box 2.1: New Zealand Liberalises the Used Import Trade 3
Box 2.2: Slowdown in the New Zealand Market 15

iii
Executive Summary
There are significant net welfare gains to be realised from deregulating the trade in used
imported cars. Our analysis finds that these gains are in the range of $805 million to
$1,943 million in net present value terms. The biggest driver of this result is gains in
consumer welfare from an expected fall in price and increase in volume of used cars. The
biggest cost is the increased safety risk from an ageing fleet. This risk varies, however, as
there are a range of expected responses to used imports, some of which do not age the
fleet - including increased retirements and an increase in fleet size.
If trade were liberalised it would require a regulatory regime to support it. Several policy
decisions will influence the extent that benefits from the trade can be realised. To realise
the biggest gains this would need to be a light handed regime that facilitated the trade.
The margins available to import and sell used cars for a profit is susceptible to the cost of
regulation.
Other countries have already deregulated the trade
Other countries provide direct experience of the likely impacts of reducing used vehicle
import restrictions on the Australian market. The market response in Australia will be
somewhat different to what we have seen elsewhere - such as in New Zealand, our
nearest comparator. Australia’s has distinct differences to the New Zealand market when
it was deregulated which include a near saturated level of vehicle ownership, relatively
low new car prices as well as higher wealth and preference for new cars. In addition, the
demand and supply balance of used vehicles fluctuates resulting in a high degree of
volatility even in countries with a long established history of importing.
Given this, it is not possible to estimate with a high degree of accuracy the level that this
trade will reach. Judgements will therefore be required. These judgements should and can
be reasonable, however, as long as they are based on a sensible hypothesis, backed up by
data. The central hypothesis underlying this report is that:
 Differences in depreciation rates between Australian and other vehicle
markets could give rise to an arbitrage opportunity. This means that used cars
could be sourced externally and sold in Australia for competitive prices
relative to Australian new and used cars. Arbitrage opportunities would
remain provided that the new demand was not so great that it raised the
wholesale price to eliminate the opportunity and economic factors and
regulatory factors do not change significantly
 The reduction in restrictions would have a further impact if it entailed opening
Australia up to large car markets with a wider range of models, allowing
dealers to source cars that are scarce in Australia or in high demand for one
reason or another. This would facilitate new dealers entering the trade and
increasing competition.
Where would these vehicles come from?
There are several large car markets in the world that might supply a trade in used imports
to Australia. Europe, the USA and Japan are certainly big enough; however, both Europe
(except the UK) and the USA drive on the other side of the road. Japan however, drives
on the left and currently supplies a large export market in used imports whereas Europe
and the USA do not.
Arbitrage opportunities have been shown to exist between the Japanese market and
many other markets who import their cars. Other smaller export markets include

1
Singapore, UK, Thailand and Germany, who export some cars to Eastern Europe. The
reasons for high depreciation rates in Japan are increasing taxes with car age, high
disposal costs and strong consumer bias for new vehicles.
From our market analysis on pricing opportunities, if import restrictions were reduced
on used cars in Australia the likely source for the majority of cars would be Japan,
provided regulatory costs and barriers are minimised. Other markets are unlikely to
feature prominently – although small volumes may be sourced from markets such as the
UK or Singapore.
How big would this trade become?
Australia will likely be a moderate importer when factoring price differences, supply
availability and existing car ownership rates, Australia’s already high rate of vehicle
ownership will limit the expected size of the trade proportional to other markets like
Russia, New Zealand and Chile which, for various reasons are or were big importers of
cars relative to their market size.
Our estimate of the expected used import sales volumes is between 50,000 to 100,000
per annum. It will take some time to build up the trade and it will be likely that it
fluctuates as market conditions fluctuate, as has been the experience in other countries
that import the cars.
Factors that will influence the level of volumes include:
 The degree to which Australia adopts Japanese standards and facilitates pre-
approval of these cars for Australian use
 The extent of competition for the purchase of used cars in Japan as other
countries deregulate or market conditions fluctuate
 The extent that the Australian trade impacts the price in Japan (100,000 is
around 10% of the Japanese export trade)
 Japanese economic factors (as any slowdown will shrink the available supply)
 Exchange rates (in particular, a fall in the AUD will make the cars less
attractive)
Three different effects are predicted
This volume of imports can have three possible behavioural impacts on the Australian
market:
 Increase vehicle sales and vehicle ownership
 Reduce demand for new vehicles
 Change the rate older used vehicles are scrapped
We have modelled a baseline whereby the effects are balanced and three scenarios where
in each case the effect of one is stronger than the other two. We then consider the
impact of volume restrictions on this range of CBAs.
What are the economic costs and benefits of deregulation?
Deregulating the used import trade has the potential to unlock considerable economic
net benefits. The economic analysis shows that the benefits outweigh the costs of
deregulating the used import trade by between $805 million and $1,943 million in NPV
terms.

2
This result holds under all of the scenarios that we have modelled. This implies that
whether the biggest impact is to increase the fleet size, to substitute for new car sales or
to increase the scrappage rate of old cars - benefits outweigh the costs.
Fleet ageing is not necessarily an outcome of a used import trade. Fleet ageing occurs
most significantly under the scenario of new vehicle substitution. In that case we see the
lowest net benefit of $805 million and the highest safety cost. In other plausible
scenarios, particularly with increased scrappage rates, the fleet does not age significantly.
The uncertainty in several key variables means that we have described our results in
terms of a range. The most uncertain of these variables is the relationship between age
and safety of vehicles. While this variable is uncertain it is not significant enough in the
analysis to change the conclusion whatever, the level.
Regulatory costs will influence the net benefit
The required range of checks and regulatory assessments on the cars has been well
established in other jurisdictions. Australia would need to develop its own approach to
this, however, and the degree to which this becomes a significant cost burden will detract
from the value obtained by consumers. At the extreme, the margin that the cars offer is
an upper limit on the level of regulatory burden, lest the trade cease to exist.
Increasing the regulatory cost from $700 to $1,100 to import a car reduces the welfare
benefit by $227 million.
Restricting the age of imports will reduce the net benefits
Unrestrained imports offer the most absolute net benefit of $1,272 million in our
baseline scenario. The option to limit the age of the imports significantly reduces the net
benefit. If imports are six years or less in age the benefit falls by $1,011 million to $261
million. If a nine year age limit is imposed the benefits fall by $309 million to $962
million.
The majority of the supply of used cars is in an age bracket between five and ten years
old. A six year age restriction severely limits expected trade volumes to only 7.7% of the
unrestrained expectation.
Next steps and further work
Further work to optimise the regulatory and compliance conditions that might be
imposed would enable further development of the expectations of net benefits that
might be realised.
A more precise estimate of net benefits within the identified range could be achieved
with further work and time.
Further sensitivity testing could be undertaken on aspects that are of particular concern
or interest.

3
1 Introduction
The Commonwealth Government is reviewing the motor vehicle Standards Act 1989
(The Act). The Act delivers national standards for new motor vehicles and regulates the
first supply of used imported vehicles to the Australian market.
The review is looking for options to reduce the regulatory burden on business and to
improve the safety, environmental and anti-theft provisions of the Act. One potential
option is to reduce the restrictions on used car imports. This option has been raised by
the Productivity Commission who found the policy rationale for this restriction was not
strong.
Castalia has been engaged by the Commonwealth to conduct a cost benefit study of a
reduction in used import restrictions. The key questions that we seek to answer are: what
is the effect of a reduction in restrictions on the market outcomes? And, is a reduction in
restrictions cost benefit justified?
In Section 2 we analyse the used vehicle markets in Japan, the US and the UK,
comparing the price differences that exist and the price arbitrage opportunities with the
Australian market.
In Section 3, we examine what the behavioural effects of reducing restrictions in the
Australian market might be and outline the scenarios we will use to test the outcome of
these influences.
In Section 4 we examine the costs and benefits of deregulating the trade in used imports.
This includes testing the sensitivity of regulatory restrictions on the age of used imports
as well as the significance of cost assumptions.
Finally, in Section 5 we present our key conclusions.

1
2 Market Analysis
The vast majority of cars imported into Australia are new. Used imports make up only
2% of all imports. Figure 2.1 below shows the source of cars in the market in the last 14
years.
Figure 2.1: Source of Cars in the Australian Market

Source: Australian Bureau of Statistics

As of 2011, the Australian motor vehicle fleet had 16.4 million registered vehicles, with
an ownership rate of 730 motor vehicles per 1000 people, up from 696 vehicles per 1000
residents in 2006. The motor vehicle fleet grew 14.5% between 2006 and 2011, an annual
growth rate of 2.7% during this five-year period. The United States has a vehicle
ownership rate of 828 per 1000 inhabitants, while New Zealand’s is 708 vehicles per
1000 inhabitants.
Globally fleet age is increasing. Improvements in anti-rust technology in the early 1990s
and improved mechanical reliability have led most fleets to gradually age.
In contrast, the Australian vehicle fleet has become marginally younger in recent years
with the age of the fleet decreasing from 10.1 years to 9.9 years.

2
 Box 2.1: New Zealand Liberalises the Used Import Trade
New Zealand phased out tariffs on cars as part of a broader tariff liberalisation regime
beginning in the 1980s. By 1998 the last tariff was removed. Local assembly ended during
this programme. Imports rose from less than 3,000 in 1985 to 85,000 in 1990. By 2004
over 150,000 vehicles were imported. Second-hand Japanese cars made up the majority of
these cars.

The number of Japanese-used vehicles being imported peaked in 2004 and has been in
decline since then. Sales of New Zealand-new vehicles continued to increase over the
entire decade. The decline in volume of Japanese-used vehicle imports largely reflects
changing economic conditions and suggests that the domestic market had reached
saturation. As a result of the reduced number of used vehicles entering since 2004, the size
of the light vehicle fleet has remained reasonably stable at around 2.95 million light
vehicles since 2007.
Source: NZ Ministry of Transport: ‘The Ageing of the Light Vehicle Fleet’: Available from
www.mot.govt.nz

2.1 Demand and Supply Factors

Our demand and supply analysis is based on the following general hypothesis, namely:
 Trade in used imports depends on exploiting arbitrage opportunities between
different markets. For this arbitrage to exist there needs to be effective
differences in depreciation rates between the markets. There also needs to be
an ability to overcome the regulatory and transport costs and barriers to
importing used cars. Arbitrage opportunities can appear and disappear as
economic conditions change
 Trade would also depend somewhat on the extent to which it provided
consumers with a broader range of vehicle models. This would facilitate new
dealers entering the trade and increasing competition.
In this section we assess what arbitrage opportunities exist across prospective sources of
used vehicle internationally – appropriate vehicle sources are broadly limited to mature
vehicle markets that have similar compliance standards to Australia. We analyse the
extent, if any, of pricing arbitrage that exists between sources of used vehicles compared
to the current used vehicle market in Australia.
The evidence suggests that there are arbitrage opportunities from the Japanese market to
other markets. Somewhat less certain are the arbitrage opportunities that exist in markets
across Europe and North America.
2.1.1 Analysis of the Japanese used vehicle market
Currently vehicle arbitrage opportunities exist between Japan and several other left hand
drive (LHD) countries. While Japanese taxes are a contributing factor, strong consumer
preference for new cars has resulted in a relatively inexpensive used car market. These
influences have resulted in attractive prices for used vehicles, which are already
purchased and exported to a wide range of countries.
Our market analysis shows, however, that depreciation rates are model specific and vary
depending on the relative supply and demand balance between each vehicle category and
by vehicle condition and age.
Our preliminary analysis of ten Japanese and European vehicle models sold both in
Japan and Australia shows higher depreciation rates in the Japanese market than in

3
Australia. We have chosen these ten vehicle models as they consistently represent the top
models sold in Australia. In 2013, these models accounted for 18 percent of all sales in
Australia.
The difference in depreciation rates is illustrated in Figure 2.2 using the Toyota Corolla
and the Volkswagen (VW) Golf in Figure 2.3. The Toyota Corolla was the best-selling
car in Australia in 2013. Approximately 40,000 Toyota Corolla’s were sold in Australia
comprising about 17% of all small car sales and about 8% of overall passenger car sales.
Similarly, around 17,000 VW Golf’s were sold in Australia in 2013, making it the top-
selling European model in Australia.
Figure 2.2: Relative Depreciation Rates in Japan and Australia for Toyota Corolla

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

Figure 2.3: Relative Depreciation Rates in Japan and Australia for VW Golf

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

While both vehicles depreciate at a faster rate in Japan in comparison to Australia,

European cars in the Japanese market depreciate at a faster rate than Japanese vehicles.
This is observed by comparing Figure 2.2 and Figure 2.3, and the depreciation rates of
the remaining 8 vehicles of our analysis in Appendix A.
Our estimation of the depreciation curves above was calculated from average auction
prices across a large sample of Corolla’s and Golf’s at each age year for a common
condition category.

4
We observe a large range of variability in the price of used cars in the Japanese market as
illustrated Figure 2.4. For near new Toyota Corolla’s this variability can remove price
opportunities for some of the market – however these price opportunities become more
established and certain as the vehicle ages.
Figure 2.4: Japan Auction Price Range Sample for Used Toyota Corolla’s

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

The spread in Japanese auction prices also converges for the Golf as they age, as seen in
Figure 2.5. Despite the spread, the price for a used Golf in Australia remains higher in
comparison to the auction prices across a wide range of years.
Figure 2.5: Japan Auction Price Range Sample for Used VW Golf

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

5
Auction prices suggest arbitrage opportunities between Japanese and Australian
used car prices
Based on these differing depreciation curves in Australian and Japanese markets, we
summarise in Figure 2.6 the expected pre-shipment import margin for the key vehicles
that encompass approximately 18% of total light vehicle sales in Australia.
Figure 2.6: Percentage reduction in Japanese Auction Price to Australian Used Car
Price

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

Arbitrage opportunities are sufficient to absorb import costs to Australia

The pre-shipment import margins are quite substantial as seen from Figure 2.6. However
there are several costs likely to be involved with shipping these vehicles into Australia.
These costs are summarised below in Table 2.1.
Table 2.1: Estimated Importing Costs of Used Cars from Japan
Type of Cost Amount
Shipping/Transportation Cost $950
Regulatory assessment $700
Tariff 5%
Tax (GST on all of the above) 10%
Dealer Margin $1000

As discussed below, the cost of regulatory compliance is a critical policy instrument and
can have an important bearing on the economics of second hand car imports. For the

6
purposes of our analysis, we have assumed a similar regime and therefore compliance
cost structure to that which exists in New Zealand.
Currently, all new and used motor vehicles, including motorcycles, imported into New
Zealand must be certified by the New Zealand Transport Agency (NZTA) and must
comply with New Zealand legal requirements before they can be registered for use on
public roads. The costs involved with this assessment includes a structural inspection,
which is approximately AU$160, and a compliance check of about AU$460. We have
assumed an import cost of AU$700 for an equivalent Australian regime.
Transportation costs will vary according to the type of car and the origin and destination
port. The range of costs is estimated at between $500 and $2000. Our initial modelled
level of $950 is an estimated average. The sensitivity of the overall cost benefit
assessment to these costs is addressed in the sensitivity testing in Section 4.5.
Once these costs are accounted for, the price margins on landed Japanese imports
decrease, but still remain positive, for the ten vehicles in our analysis. These arbitrage
opportunities are especially high for European vehicles sourced from Japan. This is seen
in Figure 2.7.
We disclose our full details of our research on relative depreciation rates between Japan
and Australia in Appendix A.
Figure 2.7: Margin on Landed Japanese Used Imports Compared with Australian
Dealer Price

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

Overall, the landed price margin of these models from Japan is positive. The price
margin rises substantially from a new car to a one year old vehicle and peaks for models
which are six years old.
We calculate the average price margin by weighting each vehicle to its market share in
Australia, as shown in Figure 2.8.

7
Figure 2.8: Weighted Average Landed Used Vehicle Import Margin by Age of
Vehicle

$5,000
Landed Price Margin of Japanese Used Imports

$4,000

$3,000

$2,000

$1,000

$0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

-$1,000

-$2,000
Vehicle Age

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

2.1.2 Analysis of other international used vehicle markets

Volatility in conditions including volatility in depreciation rates and exchange rates mean
that arbitrage opportunities might appear and disappear from other markets. Any trade
from unknown markets would need to be supported by a regulatory environment that
facilitated the trade.
Is there an arbitrage opportunity in other markets?
It cannot be ruled out that unforeseen markets could emerge and supply cars to
Australia. At present there do not appear to be any candidates for significant volumes.
The reasons for this are:
 We cannot find compelling evidence that there are any comparable regulatory
factors driving depreciation rate differences and therefore arbitrage
opportunities in other markets
 There is very little trade from any other markets currently
 There is a limited number of mature markets comparable to Australia who
drive on the left hand side of the road outside Japan
Although Europe and North America offer another potential source of used vehicles, the
cost for right-hand-drive (RHD) conversions will very likely be prohibitive. Conversion
costs would be avoided if vehicles are sourced from the United Kingdom (UK).
However, the UK has some of the highest new car prices in Europe, with many
consumers in the UK choosing to purchase new cars in other European member states -
where pre-tax prices are much lower than in the UK.
While Thailand and Southeast Asian countries may provide attractively priced vehicles,
consumers are unlikely to purchase used imports from these countries with questionable
compliance standards.

8
Cost estimates for used imports from the United States and United Kingdom
suggest limited opportunity exists in these markets
As illustrated in Figure 2.9, we find there are arbitrage opportunities between the price of
used cars in the US and Australia, as reflected in pre-shipment import margins.
Figure 2.9: Pre Shipment Import Margin of Vehicles from the US Compared to
Australian Dealer Price

Source: Collected from various used car auction sites in the US and Drive Australia car valuations

As with the Japanese market we need to subtract shipping, regulatory compliance costs
and taxes, as well as include the cost of converting these vehicles from RHD to LHD.
The conversion cost varies significantly – we assume conversion costs will be about
$11,000 per vehicle1.
After subtracting these costs from the pre-shipment margins we find there are no
arbitrage opportunities in the US market for the vehicles we have assessed. This implies
that the US is unlikely to be a large supplier of vehicles to the Australian market.

1 Assumption taken from RHD Conversion online forum for Australians,

http://www.mustang.org.au/forum/index.php?topic=19655.0

9
Figure 2.10: Margin on Landed US Used Imports Compared with Australian
Dealer Price

Source: Collected from various used car auction sites in the US and Drive Australia car valuations

In the UK market we observe price arbitrage opportunities but only for European
vehicles. European models sourced from the UK on average have landed prices cheaper
when compared to the same models sold in Australia - as highlighted in Figure 2.11
While there may be potential imports from the UK market these price opportunities are
smaller on average than European cars sourced from Japan. Therefore, the opportunities
in the Japanese market will limited the supply of imports from the UK.

10
Figure 2.11: Margin on Landed UK Used Imports Compared with Australian
Dealer Price

Source: Collected from various used car auction sites in UK and Drive Australia car valuations

2.1.3 Japan is the likely source of used cars into the Australian market
Given our market analysis, we expect the Japanese market will meet the majority of
Australia’s demand for used imports. Our analysis above shows:
 There are regulatory factors driving higher depreciation rates in Japan as
registration fees increase for older cars and from high disposal costs
 Arbitrage opportunities do exist between the Japanese and Australian markets
meaning that used imports can be sourced from Japan and sold at competitive
prices in Australia
 There are no costs for changing from left hand drive as there would be with
cars sourced in Europe or the USA. Japanese cars are built to very similar
specifications as those built for the Australian market.
In additional to the price differential we expect there will be a secondary impact on the
range of vehicles available. Used imports will likely expand the range on offer in the
market and provide another important driver of used import demand.
Why will the model range expand from access to Japanese Used Imports?
In addition to pricing opportunities, Japanese cars also offer a different set of features
than similar cars sold new in the Australian market. The opportunity to secure vehicles
with unique and different features to those in Australia will also support import volumes.
The Japanese new vehicle market is about five times larger than the Australian market,
which provides access to a more extensive model range. Figure 2.12 shows the
differences in sales volumes and car preferences for new vehicles in both Japanese and
Australian markets.

11
Figure 2.12: Top Selling 2013 Vehicle Models in the Australian and Japanese
Vehicle Markets

Chrysler Fiat

Fiat UD Trucks

Peugeot BMW MINI

Renault Volvo
Lexus Audi
Audi
Mitsubishi Fuso
Subaru
BMW
BMW
Lexus
Suzuki
Hino
Mercedes-Benz
Mercedes-Benz
Kia
Isuzu
Mitsubishi
VW
Nissan
Mitsubishi
Honda
Subaru
Volkswagen
Mazda
Ford
Daihatsu
Mazda
Nissan
Holden
Suzuki
Hyundai
Honda
Toyota
Toyota
0 50,000 100,000 150,000
0 500,000 1,000,000 1,500,000 2,000,000
Australia Top Selling Passenger Vehicles
Japan Top Selling Vehicles

Source: Australian Government, Japan Automobile Association

Will price arbitrage opportunities remain once Australia enters the used import
market?
Arbitrage opportunities will remain provided that new demand does not raise the
wholesale price substantially and that economic and regulatory factors do not change
significantly.
We expect that moderate import volumes are unlikely to remove arbitrage opportunities.
However, past evidence shows the changing economic conditions in Japan has affected
the availability of used vehicles – which may constrain volumes.
This can be observed in Figure 2.13 where in 2008, the Japanese used car export market
peaked with 1.1 million cars exported and then declined by almost half following the
financial crisis in 2009. Since then volumes have almost recovered to the pre-crash levels
with about 950,000 exported in 2013.
There is also competition amongst countries for Japanese used imports that may also
impact supply. Russia is the largest buyer with New Zealand, Chile, Kenya and South
Africa importing significant volumes also. Demand from these countries and they price
they are willing to bid will impact the pricing opportunities available in Australia.

12
Figure 2.13: Japanese Used Car Export Volume 2005-2013

Source: Ministry of Finance—Trade Statistics of Japan

2.2 Estimating Used Import Volumes into the Australian market

Year on year volatility in the Japanese export market can approach 150,000 and a five
year difference can be as much as 500,000 in recent market history. The sum of demand
fluctuates in the market, and we expect arbitrage opportunities will also fluctuate
accordingly. Table 2.2 provides more detail on the country specific demand for Japanese
used vehicles. The largest importer, Russia, peaked at 500,000 vehicles in one year in
2007, but has averaged about 130,000 per annum over the last three years. Other
substantial importers trade in the range of 50,000 to 100,000 per annum.
Table 2.2: Comparable Markets and Volumes of Used Imports
2011 2012 2013
All Other 332,545 434,051 457,797
Russia 98,992 131,999 157,944
United Arab Emirates 50,054 60,440 68,102
New Zealand 65,974 59,271 87,129
South Africa 52,720 45,736 48,567
Chile 62,233 54,992 70,868
Kenya 32,107 38,849 51,729
Australia 5,256 5,365 5,854
Source: Ministry of Finance—Trade Statistics of Japan

All of these countries have lower current ownership rates and lower GDP per capita
compared to Australia. The population of Chile is around the same size as Australia while
those of Russia, Kenya and South Africa are substantially larger. Lower car ownership

13
rates leave more potential for growth in car sales and lower GDP increases demand for
used cars relative to new cars. Bigger markets provide more opportunity for sales.
Australia likely to be a moderate importer of used cars predominantly from Japan
Our analysis has proven reasonable price arbitrage opportunities exist to support a
moderate volume of used imports into Australia. However these opportunities are often
model specific and fluctuate significantly. Margins are often highest on less common
vehicle such as European cars sourced from Japan. In addition, we expect competition
for Japanese used vehicles will continue to be strong and the supply may contract as the
Japanese population declines.
We therefore expect the used import volumes in Australia will not exceed 100,000 or
about 10% of the existing market. On the assumption volumes are moderate and
arbitrage opportunities are maintained, a used import trade of 100,000 additional per year
is unlikely to influence the price sufficiently to remove the arbitrage opportunities
completely.
Factors that will influence import volumes
The factors that will influence import volumes fluctuating above or below this level
include:
 The degree to which Australia adopts Japanese standards and facilitates pre-
approval of these cars for Australian use
 The extent of competition for the purchase of used cars in Japan as other
countries deregulate or market conditions fluctuate
 The extent that the Australian trade impacts the price in Japan (100,000 is
around 10% of the Japanese export trade)
 Japanese economic factors (as any slowdown will shrink the available supply)
 Exchange rates (in particular, a fall in the AUD will make the cars less
attractive)
These influences can be illuminated by the experience in the New Zealand used import
market in Box 2.2 below.

14
Box 2.2: Slowdown in the New Zealand Market
Most cars imported were manufactured in the period 1995-1997 and the peak inflows were
in the year 2003 and 2004:

The conditions in the early 2000s that led to the peak of vehicles entering the fleet
included:
 strong economic growth in both Japan and New Zealand leading to increased
availability of older vehicles in Japan (as Japanese people bought new vehicles) and
increased demand for such vehicles in New Zealand
 readily available, low cost credit
 a strong exchange rate against the Japanese Yen
 relatively little competition from other buyers in the Japanese market for used vehicles
 no restrictions on the type or age of vehicles able to be imported
The 2008 recession and the emission standard rule introduced in 2012 along with increased
competition from Russia and other countries mean that none of these conditions exist
now.

New Zealand tightens restrictions again

In 2007, the New Zealand Government introduced legislation requiring imported vehicles
to match current recognized exhaust-emissions standards, to reduce the level of emissions
from motor vehicles operating on New Zealand roads. Under the 2007 rule, used cars built
to Japanese standards were required to meet the minimum emissions standards from 1
January 2012. This meant most cars manufactured before 2005 could not be imported
from this date.
Source: NZ Ministry of Transport: ‘The Ageing of the Light Vehicle Fleet’: Available from
www.mot.govt.nz
Source: ‘The Dealer to Household Used Car Market’ Statistics New Zealand – Price Index News –
October 2013

15
3 Market Response to Used Imports
There are three ways that used imports will influence the makeup of vehicle fleet in
Australia. Used imports could increase the size of the fleet, substitute for new vehicle
sales or they may accelerate the scrapping of older used vehicles. We outline the market
conditions where these influences are most dominant.
1. Increase vehicle sales and vehicle ownership – Countries with high
demand for mobility may see a significant uplift in vehicle sales – especially
during early economic development. In mature economies, there is likely to be
less demand for additional vehicles since the rate of vehicle ownership is near
the point of saturation.
2. Reduce demand for new vehicles – Used imports will substitute for new
vehicles when imports compete near the age of new vehicles – such as
between 1-5 years old. The extent of the response will depend on the price
difference relative to the new vehicle market.
3. Change the rate at which used vehicles are scrapped – We expect the tail
end of the vehicle market or older vehicles will retire faster as the price of
used vehicles falls. This effect will be most prevalent in mature economies
where the reduction in price will enable users of older cars to afford more
reliable and newer vehicles.
We summarise the market structure of these influences in Figure 3.1 below.
Figure 3.1: Market responses to used imports

Increase in the Vehicle Fleet

Emerging Economy
Large Volumes
Scenario 3 Unrestrained Imports

NZ 1990

Poland 2004

Moderate Volumes Baseline

Restrictions that limit Low Volumes
Vehicle age Mature Economy
Scenario 1 Scenario 2 Unrestrained Imports
Automobile
Association

Reduction in New Accelerated Vehicle

Vehicle Market Retirements

In Australia all of these effects will occur to some degree. Our baseline proposition is to
assume that the three effects occur in proportional amounts. Our three scenarios of
possible outcomes each weight the three effects differently to highlight the importance of
these responses. We note that the Motor Association has predicted an extreme outcome,
namely a one-for-one reduction in new vehicle sales – following the abandonment of
restrictions. We model a similar outcome in Scenario 1.

16
It is also plausible that Australia could accelerate retirements in response to a fall in price
of older cars. As the value falls the decision to continue to maintain an old car changes.
The oldest cars (excluding classic and specialty cars) will have little value, and therefore
are more likely to be scrapped for newer, cheaper imported second hand vehicles. We
expect that the response will be the greatest at the low end of the market – where small
absolute price differences result in large percentage changes in the vehicle price. As the
price of used vehicles decline the purchasing power of vehicle buyers will increase
resulting in accelerated retirements of older vehicles – now priced out of the market. This
will have the effect of reducing the age of the vehicle fleet. Scenario 2 models the
outcome if this effect is dominant.
Australia has a higher vehicle ownership rate than most other major countries with the
exception being the USA. All major countries have settled at different levels of vehicle
ownership rate based on the specific circumstances that they face. It is plausible that
Australia could increase its fleet size in response to a price reduction. Scenario 3 models
the effect if this is the dominant factor.
3.1 Scenarios of Change
Our baseline proposition is modelled on a trade of about 100,000 used imports per
annum and a balance of the three possible responses. The three scenarios of change are
described in detail in Table 3.1 below:

17
Table 3.1: Details of Used Import Baseline and Scenario Volumes
Y1 Y2 Y3 Y4 Condition
Total Used 55,000 77,000 103,000 108,000
Imports
Reduction in New 11,000 22,000 34,000 36,000 3.3% reduction
Car Sales in new sales

Base Case – (Balanced Uplift in Fleet 11,000 22,000 34,000 36,000 3.3% growth in
impact) Size overall sales
Increase in vehicle 33,000 33,000 35,000 36,000 Retirements
Scrappage increase: (+3%
ages 15-19)
(+5% >19yrs
old)
Total Used 41,000 71,000 104,000 107,000
Imports
Reduction in New 30,000 57,000 86,000 89,000 9% reduction in
Scenario 1 – Car Sales new sales
(Dominant impact on Uplift in Fleet 3,000 6,000 9,000 9,000 1% growth in
new vehicle sales) Size overall sales
Increase in vehicle 8,000 8,000 9,000 9,000 Retirements
Scrappage increase: (+1%
for ages 15 and
older)
Total Used 87,000 94,000 103,000 106,000
Imports
Reduction in New 7,000 7,000 10,000 11,000 1% reduction in
Car Sales new sales
Scenario 2 -
(Dominant impact on Uplift in Fleet 7,000 7,000 10,000 11,000 1% growth in
rate of scrappage) Size overall sales
79,000 80,000 83,000 86,000 Retirements
Increase in vehicle increase:
Scrappage (+10% for ages
15 and older)
Total Used 38,000 68,000 99,000 109,000
Imports
Reduction in New 3,000 6,000 9,000 10,000 1% reduction in
Scenario 3 - Car Sales new sales
(Dominant impact on
fleet size – subject to a Uplift in Fleet 27,000 54,000 81,000 90,000 9% growth in
maximum level of Size overall sales
vehicle ownership) Increase in vehicle 8,000 8,000 9,000 9,000 Retirements
Scrappage increase: (+1%
for ages 15 and
older)

18
4 Costs and Benefits of De-regulation
The expected trade in used imports, should deregulation occur, will have economic costs
and benefits. The expected volume of trade represents the fact that there must be
positive welfare effects from the trade at some level, otherwise it would not occur. This is
not the end of the story; however, as public policy ramifications are also present. The
major policy concerns when regulating the Australian vehicle fleet are safety and
environmental policy objectives.
The cost benefit analysis in this section quantifies the relative level of net welfare effects
and safety and environmental costs. Aside from the uncertainty of market fluctuations in
the volume of the trade, these assessments carry their own uncertainty. We analyse
several scenarios of costs and benefits that incorporate our uncertainty ranges for key
variables.
We have limited our analysis to the major costs and benefits, which are, consumer
welfare effects and safety and environmental costs.
4.1 The Economic Benefits of Deregulation
The arbitrage opportunities identified in the market analysis are expected to lead to a fall
in the price of used cars. The reduced price represents a welfare gain for consumers. The
total amount of the welfare gain depends on the volume of cars sold and the extent of
the price drop (among other things). We measure the change in consumer surplus to
estimate the welfare benefits to consumers in the used car market.
The impact of a supply shock in the used car market is illustrated in Figure 4.1 below. As
the supply increases there is a consumer welfare gain as more trades occur and price falls.
Figure 4.1: Used Car Market Supply Shock

4.1.1 Economic welfare effects in the used car market

The expected level of the price reduction is determined by analysing the market data of
arbitrage opportunities. In that assessment we identified the available margin for
importers accessing a cheaper used car. The car business is competitive with many car
yards competing for business in every city and entry and exit are not uncommon. In a
competitive market the profit margin levels of sellers will be bid down and consumers
will receive most of the benefit from the reduction in costs. This implies that rather than

19
a rise in seller margins we would expect to see a fall in prices as margins are bid back to a
normal level.
We identify the average margin that will be bid away by competition and passed through
to consumers as $2,400 for the volumes we identify – the calculation of this number is
detailed in Appendix B. Table 4.1 below shows the level of consumer welfare effects in
our three scenarios:
Table 4.1: Estimates of Welfare Effects – Used Car Consumers
Volume after Ramp Average Consumer
Scenario Annual Change
Up in 2018 Margin2
Base Case 103,000 2,400 $123,600,0003
Scenario 1 104,000 2,400 $124,800,000
Scenario 2 103,000 2,400 $123,600,000
Scenario3 99,000 2,400 $118,800,000

The net impact on sellers of used cars has more factors to consider. Used car sellers will
face an increase in volume, and a fall in cost. The producer welfare gain will be positive.
4.1.2 Economic welfare effects in the new car market
Consumers will also benefit if increased competition leads to a fall in new car prices. This
effect will be limited by the high proportion of wholesale cost in a car. But, if
manufacturers and importers set a lower margin to compete with imported used cars
then consumers benefit here also. Fewer cars may be bought which would lead to less
consumer welfare - offsetting a gain from a lower price.
New car dealers will face a fall in volume and a fall in margin. Many dealers may of
course be both new and used car sellers. For all sellers the volume effect will be a gain as
more cars will be sold as prices fall.
For the purposes of this study we assume that there is no net change in producer surplus
across both markets. The counteracting effects of these changes make the result
immaterial to a cost benefit analysis. Transfers will occur, as some suppliers gain and
some lose, but transfers are not included in a CBA, only net changes. This analysis is
focussed on the long run while recognising that there will be transitional issues that will
depend on policy options yet to be made.
4.2 The Economic Costs of Deregulation
A decision to deregulate based on economic welfare alone would be clear cut. However,
public policy objectives of reducing the social cost of road accidents and reducing the
environmental cost of vehicle emissions are also relevant, and may outweigh the benefits
in some scenarios.

2 Average consumer margin is based upon light handed regulation costs, we calculate consumer margin as a function of
the allowable age of imports relative to the margin curve
3 The calculation for consumer welfare gains is not a simple multiplication. Here we use a rule of one half which states
that the price difference and the quantity difference are multiplied and then halved to represent the net gain to
consumer (surplus) welfare.

20
Used imports will change the composition of the fleet. As the fleet changes the age of the
fleet will change also. The age of the fleet is an important proxy for the safety and
emissions characteristics of the fleet.
4.2.1 Used imports will change the composition of the fleet
We have developed a fleet model that determines the expected age of the fleet over
twenty years. This model allows various scenarios of deregulation and market outcomes
and provides expected fleet age outcomes. Details of the fleet model are outlined in
Appendix B.
The fleet age under each scenario is represented in Figure 4.2 below:
Figure 4.2: Fleet Ageing Comparisons under Import Scenarios

Business as Usual Baseline - Expected Outcome

Scenario 1 - New Market Impact Scenario 2 - Retirement Impact
Scenario 3 - Quantity Impact
Average Age of Light Vehicles (Years)

11.2
11.0
10.8
10.6
10.4
10.2
10.0
9.8
9.6
9.4

Year

4.2.2 Safety implications of an ageing fleet

The social costs of road accidents are enormous. Our estimate of the total economic cost
of fatalities and life threating injuries is $5.9 billion. This is based on the Commonwealth
Governments statistical value of life of $3,500,000. One year of lost life is $151,000. Any
small percentage change in this cost is a significant impact.
The age of a car has an impact on the risk of a life threating injury or fatality when
involved in an incident. One major US study has made a statistical correlation between
age and risk of fatality when involved in an accident. This is described in Table 3.2 below.
Table 4.2: Car Age and Increased Likelihood of a Fatality when in an Accident
Car Age 0-3 4-7 8-11 12-14 15-17 >17
Increase in Risk of a fatality 0% 10% 19% 32% 50% 71%
Compared to New Vehicles
Source: US Department of Transportation, http://www-nrd.nhtsa.dot.gov/Pubs/811825.pdf

There is not a guarantee that the relationship between age and risk over the last eighteen
years will continue for the next eighteen years. It could be higher or lower depending on
the development of safety technology and other factors. We deal with this uncertainty by
undertaking sensitivity analysis.
Using this data and the outcomes of the fleet model we can assess the increasing (or
decreasing) risk of a fatality based on the change in the age of the fleet. We do this by

21
creating a risk weighted index as the fleet ages (relative to baseline expectation). This
index is then used to predict incremental increases in the social cost of injuries and
fatalities.
Table 4.3: Present Value of Safety Externality Costs ($ millions)
NPV (7.5% discount NPV Increased NPV Increased Total
rate) Fatalities cost Injury cost
Base Case $13.1 $42.8 $55.9
Scenario 1 $309.5 $174.0 $483.5
Scenario 2 ($325.4) ($136.3) ($461.7)
Scenario 3 $133.4 $99.9 $233.3
Source: Castalia Fleet model, NHD,

4.2.3 Environmental implications of an ageing fleet

With increasing fleet age the level of emissions increases. Older cars are generally built to
previous standards which allowed higher emissions. Modern cars seek to be more fuel
efficient which reduces emissions. Our fleet model predicts fuel efficiency as the fleet
ages.
The environmental costs of an ageing fleet are twofold. There are externalities within
Australia that lead to health effects such as respiratory problems. There is also the climate
change externality across the entire world.
The social cost of health effects of emissions have been studied in Australia. The cost of
these health effects is estimated at $3,800,000,000. Incremental increase in health costs
from an ageing fleet is assumed to incrementally increase this cost (against a falling
baseline).
Quantifying the externality of climate change costs is difficult. A carbon tax was used to
internalise that externality but is not to be continued. If the tax was in place then no
double counting of that cost is required here. If the tax is not in place then the carbon
tax can be used a as a proxy for this externality cost. Table 4.4 below describes the health
effects of an ageing fleet under our three scenarios:
Table 4.4: Environmental Costs of Reduced Fuel Efficiency ($ millions)
NPV (7.5% discount Health Costs Carbon Tax Total
rate)
Base Case $199 $11.5 $31.4
Scenario 1 $56.9 $33.0 $89.9
Scenario 2 ($30.3) ($17.6) ($347.9)
Scenario 3 $34.6 $20.1 $54.7

4.3 Cost Benefit Ratios

A summary of the costs and benefit under the four scenarios is shown in Table 4.5
below:

22
Table 4.5: Summary of Costs and Benefits ($ millions)
NPV - 7.5% Base Case Scenario 1 Scenario 2 Scenario 3
Discount
Benefits Consumer Surplus $1,358.9 $1,378.9 $1,552.6 $1,284.1
Costs Social cost of Safety $55.9 $483.5 ($467.7) $233.3
Social cost of emissions $19.9 $56.9 ($30.3) $34.6
Carbon tax $11.5 $33.0 ($17.6) $20.1

Cost Benefit ratios and the total net benefit of our four scenarios are shown in Table 4.6
below:
Table 4.6: Cost Benefit Ratios and Total Net Benefit
$ millions Costs Benefits Ratio Total Net
Benefit
Base Case $87.2 $1,358.9 1: 15.5 $1,271.6
Scenario 1 $573.4 $1,378.9 1: 1.4 $805.5
Scenario 2 ($509.5) $1,433.7 N/A $1,943.2
Scenario 3 $288.0 $1,284.1 1:3.5 $996.1

Our analysis shows a positive net benefit for all four deregulation scenarios. In all cases
there is a considerable consumer welfare benefit. Costs vary depending on the market
response to the used imports. The relative gain is shown in Figure 4.3 below:
Figure 4.3: Total Net Benefit ($m)

$2,500.00

$2,000.00

$1,500.00

$1,000.00 Costs
Benefits
$500.00 Net benefit

$0.00
Base Case Scenario 1 Scenario 2 Scenario 3
($500.00)

($1,000.00)

4.4 Policy restrictions on the age of the imports

Table 4.7 below describes the variance in net benefit if policy restrictions are placed on
the age of the imports. We vary our baseline scenario to represent the impact on net
benefits if imports are restricted to under six or nine years of age. This means that 7.7%

23
and 61.8% of the original volumes are imported if restricted to under six and ten years
respectively. For these restrictions, consumer welfare falls by $1,011 million and $309
million when compared with the base case.
Table 4.7: Reduced Volumes from Age Restrictions
Less than age 6 = Less than age 10 No Restrictions
7.7% of Base Case = 61.8% of Base (Baseline)
Volumes Case Volumes
Total Net Benefits ($ $261.0 $962.2 $1,271.6
millions)
Variance ($1,010.6) ($309.4) $0

Although the import margin of used imports is higher for younger vehicles, volumes
decrease substantially. There are clear arbitrage opportunities with the Japanese market.
In New Zealand, about 73% of all Japanese used vehicle imports are between 6 and 10
years of age inclusively – as illustrated in Figure 4.4. This is because consumers are more
sensitive to the price point of older, lower cost vehicles and because the supply of
younger used vehicles in Japan will be limited. We expect Australian consumers will have
similar pricing sensitivity – where age restrictions will limit volumes.
Figure 4.4: Age of Japanese Used Vehicles Imported into New Zealand in 2013

20%

18%

16%
% of Vehicle Imported in 2013

14%

12%

10%

8%

6%

4%

2%

0%
24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Vehicle Age Imported

Source: Adapted from ‘New Zealand Transport Statistics’, 2014

These restrictions on the age of used imports will also influence the ageing of the fleet.
Figure 4.5 compares the differences in the way the vehicle fleet will age when both age
restrictions and differences in import volumes are considered. Since volumes are small
when restricted to less than six years we observe a minor difference in the fleet age. In
the ten year restriction we see a larger impact in the fleet age – which results in a younger
fleet in the medium term as higher volumes (even though they are older than the six year
restrictions) cause a larger impact to the fleet age.

24
Figure 4.5: Fleet Ageing Comparisons under Policy Restrictions on the Age of
Imports

Business as Usual Baseline - Expected Outcome

Baseline Restricted to < 6 yrs Baseline Restricted to < 10 yrs

Average Age of Light Vehicles (Years)

11.0
10.8
10.6
10.4
10.2
10.0
9.8
9.6

Year

4.5 Regulatory and Compliance Standards

We understand there is a degree of anxiety from community participants and
stakeholders on how to protect consumers from vehicle quality issues. These issues
primarily relate to:
 Legitimacy of history - including mileage and potential for hidden damage
 Model specifications - including safety and emissions standards
 After market service factors – including availability of parts and warranties
Deregulation will require a regulatory response
These issues can be resolved through regulatory and other means. Any deregulation will
require a regulatory response to these issues.
The example of New Zealand is instructive in this case. When importing a car into New
Zealand checks are performed in Japan and in New Zealand. Biosecurity, odometer,
ownership and water or accident damage are the major assessments. New Zealand
maintains a register of cars that are allowed to be imported. This sets the standard for
safety and emissions. The vehicle must also receive a licensing inspection for use on the
road.
The New Zealand rules have tightened in recent times. In 2012 an emission standard was
imposed which prevented cars built before 2005, when the standard was adopted in
Japan, from being imported. The effect of this will fade as time passes. The New Zealand
regime could still be described as facilitative of used imports.
The New Zealand experience with odometer fraud is informative. Initially odometer
fraud (winding back or ‘clocking’) did occur in the New Zealand market. Market
responses to this were varied. Some manufacturers brought in their own parallel
imported vehicles and certified them themselves including Toyota Signature Class.
Odometer certification is now standard in Japan and technological advances in cars have
limited this possibility in modern cars.

25
The regulatory assessments and standards impact the cost benefit analysis
Options exist for the nature of the deregulation and in particular the required age and
standard of cars that are allowed into the country. There are also options for the
stringency of tests that are required on importation. During our cost benefit analysis we
understand the consequences that flow from reducing vehicle safety and increased
emissions.
Regulatory checks and processes could effectively prohibit imports if the cost were to be
substantial. For the purposes of this analysis we will assume that the sum of the
compliance and regulatory assessment costs do not effectively eliminate the potential
trade. A regime similar to the New Zealand regime would enable total regulatory costs in
the range of $500-$900 per car.
4.6 Sensitivity Analysis
Sensitivity testing shows the dependence of results on particular assumptions. By holding
all other assumptions constant and letting one variable change we can show the
relationship between that variable and the outcome.
The baseline scenario is used to test the sensitivity of the assumptions. We examine only
the most significant here and we include the following assumptions:
 The consumer welfare gain on used imported cars
 The relationship between age and risk of fatalities
 The social cost of emissions
The level of consumer welfare gain is an important component of the CBA. Our
assumption on the level of this gain is therefore important. Many factors could change
this assumption including market factors changing and regulatory costs exceeding the
level we have modelled. If regulatory costs, for example, were $400 higher we would see
a $227 million dollar fall in consumer welfare gains.
Table 4.8: Changes to the level of Consumer Welfare Gains due to Higher
Regulatory Costs
Lower Baseline Higher
The consumer margin gain on $2000 $2400 $2800
used imported cars ($)
Total Net Benefits ($ millions) $1045.1 $1,2716 $1,611.3

Variance ($ millions) ($227) $0 $227

26
The relationship between the age of the car and the risk posed is the critical assumption
in calculating the cost.
Table 4.9: The Age of the Car and the Risk of Fatality
More Risk Baseline Less Risk
The elasticity of safety risk to 0.625 (more fatalities) 0.5 0.4 (less fatalities)
fatalities & Injuries
Total Net Benefits ($ millions) $1,254.9 $1,271.6 $1,285.0

Variance ($ millions) ($17) 0 $13

Under Scenario 1 the impact of fleet ageing is the greatest. If the risk of a fatality is high
and this scenario eventuates we can see the impact on cost in Table 4.10 below. In this
scenario a significant increase in social cost of vehicle safety is incurred of $530 million.
The cost benefit is still positive nevertheless at $275 million. Conversely, if the risk of a
fatality is lower than modelled in the baseline, there is a $265 million decline in the social
cost.
Table 4.10: Scenario 1 Safety Sensitivity
More Risk Baseline Less Risk
The elasticity of safety risk to 1.0 (more fatalities) 0.5 0.25 (less fatalities)
fatalities & Injuries
Total Net Benefits ($ millions) $275.2 $805.5 $1,070.7

Variance ($ millions) ($530.3) 0 $265.2

The social cost of emissions is the significant environmental cost. There is considerable
uncertainty around the exact level of this cost. We test the significance of this below in
Table 4.9:
Table 4.11: The Social Cost of Emissions
Higher Cost Baseline Lower Cost
The social cost of emissions 3.51b 2.81b 2.25b
Total Net Benefits ($ millions) $1,266.7 $1,271.6 $1,275.6

Variance ($ millions) ($5) 0 $4

Our sensitivity analysis shows that:

 the result is robust to changes in all of the variables
 the degree of consumer welfare gain that is available is the most important
variable
 a policy choice to restrict the age of imports has a significant negative effect
on the benefits that will be realised

27
  a light handed regulatory regime will be critical for the consumer welfare gain
to be realised
 Significant safety costs occur under a scenario of new vehicle substitution and
a strong relationship between age and risk.

5 Conclusion
Deregulating the used import trade has the potential to unlock considerable economic
net benefits. The economic analysis shows that the benefits outweigh the costs of
deregulating the used import trade by between $805 million and $1,943 million in NPV
terms.
This result holds under all of the scenarios that we have modelled. This implies that
whether the biggest impact is to increase the fleet size, to substitute for new car sales or
to increase the scrappage rate of old cars, the benefits outweigh the costs.
Fleet ageing is not necessarily an outcome of a used import trade. Fleet ageing occurs
most significantly under the scenario of new vehicle substitution. In that case we see the
lowest net benefit of $805 million and the highest safety cost. In other scenarios,
particularly with increased scrappage rates, the fleet does not age significantly.
The uncertainty in several key variables means that we have described our results in
terms of a range. The most uncertain of these variables is the relationship between age
and safety of vehicles. While this variable is uncertain it is not significant enough in the
analysis to change the conclusion whatever the level.
Regulatory costs will influence the net benefit
The required range of checks and regulatory assessments on the cars has been well
established in other jurisdictions. Australia would need to develop its own approach to
this, however, and the degree to which this becomes a significant cost burden will detract
from the value obtained by consumers. At the extreme the margin that the cars offer is
an upper limit on the level of regulatory burden, lest the trade cease to exist.
Increasing regulatory costs from $700 to $1100 to import a car reduces the welfare
benefit by $227 million.
Restricting the age of imports will reduce the net benefits
Unrestrained imports offer the most absolute net benefit of $1,272 million in our
baseline scenario. The option to limit the age of the imports significantly reduces the net
benefit. If imports are five years or less in age, the benefit falls by $1,011 million to $261
million. If a ten year age limit is imposed the benefits fall by $309 million to $943 million.
The majority of the supply of used cars is in an age bracket between five and ten years
old. A five year age restriction severely limits expected trade volumes to only 7.7% of the
unrestrained expectation.

28
Appendix A: Relative Depreciation Rates in Japan and
Australia for Various European and Japanese Made
Vehicles

Figure A.1: Relative Depreciation Rates in Japan and Australia for Toyota Camry

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

Figure A.2: Relative Depreciation Rates in Japan and Australia for Mazda 2

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

29
Figure A.3: Relative Depreciation Rates in Japan and Australia for Mazda 3

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

Figure A.4: Relative Depreciation Rates in Japan and Australia for Subaru Impreza

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

30
Figure A.5: Relative Depreciation Rates in Japan and Australia for Subaru
Liberty/Legacy

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

Figure A.6: Relative Depreciation Rates in Japan and Australia for Toyota Prius

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

31
Figure A.7: Relative Depreciation Rates in Japan and Australia for Audi A4

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

Figure A.8: Relative Depreciation Rates in Japan and Australia for BMW 320i

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

32
Appendix B: Calculation of Average Landed Import
Margin
We have detailed the expected landed used vehicle import margin by age, which is
weighted by the relative sales share of ten key vehicles in the Australian market. The
import margin is predominately influenced by Japanese vehicles that hold a higher
market share than European vehicles. This import margin of landed vehicles is given in
Figure B.1.
Figure B.1: Weighted Average Landed Used Vehicle Import Margin by Age of
Vehicle

Source: Collected from various used car auction sites in Japan and Drive Australia car valuations

To calculate the average landed import margin we make an assumption on the likely age
and weighting of used imports in any given year. For this assumption we use the age-
weighted used vehicle import curve from the New Zealand market in 2013 - as illustrated
in Figure B.2. This curve shows how the total sales of used imports are divided by age.

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Figure B.2: Age of Japanese Used Vehicles Imported into New Zealand in 2013

20%

18%

16%
% of Vehicle Imported in 2013

14%

12%

10%

8%

6%

4%

2%

0%
24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Vehicle Age Imported

Source: Adapted from ‘New Zealand Transport Statistics’, 2014

Since our data only provides accurate import margins for vehicles up to 15 years of age
we normalize the above distribution to 15 years. However, for policies that restrict the
age of imports this distribution will be further truncated. We detail the distribution of
used import by age in Table B.1 – the distribution must sum to 100% of the market.
Table B.1: Weighted Distribution of Imports relative to import margin under
baseline and policy sensitivities
Vehicle Age 1 2 3 4 5 6 7 8 9 10 - 15
Import Margin ($) 2,446 2,432 3,179 3,592 3,559 4,047 3,112 2,734 1,609 1,973
Unrestrained Distribution of
Imports to the Margin Curve 0 0.01 0.01 0.02 0.03 0.09 0.11 0.19 0.17 0.36
(%) – Baseline and Scenarios
Under 10 years Distribution of
Imports to the Margin Curve 0 0.02 0.02 0.04 0.05 0.15 0.17 0.3 0.26 0
(%) – Policy Sensitivity
Under 6 years Distribution of
Imports to the Margin Curve 0.03 0.13 0.16 0.31 0.37 0 0 0 0 0
(%) – Policy Sensitivity

Multiplying the expected age distribution of imports on an annual basis by the landed
import margins by age, we have calculated an average weighted consumer margin. This
margin changes when age restrictions are introduced as this impacts the used vehicle age
distribution, which in turn impacts the average margin. Table B.2 details our estimation
of the expected consumer margin for our scenarios and policy sensitivities.

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Table B.2: Distribution Weighted Import Margin
Consumer Margin $ % of Import Volumes
Unrestrained – Baseline and Scenarios $2,400 100%
Under 10 years – Policy Sensitivity $2,800 61.8%
Under 6 years – Policy Sensitivity $3,300 7.7%

Restricting the age of used vehicles concentrates the imports around the higher margin
ages. In parallel, the volume of imports declines (often significantly) as demand declines
for high value vehicles. This implies that although the consumer margin increases with
newer used imports, this will be more than offset by the decrease in volumes.

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Appendix C: Castalia Fleet Model Description
Overview of the fleet model
Our fleet model is disaggregated into three primary light vehicle categories – light
passenger cars, light SUVs and light commercial vehicle. For each of these vehicles we
further disaggregate these into Australian New (imported and domestic) and Used
Imports.
Our model uses a calibration period between 1980 and 2013 to estimate the number of
vehicles by age of manufacture at our base year in 2013. The calibration period uses the
historical data of:
 Light vehicle ownership
 Market share of each light vehicle type
 Population
 Average age of the fleet at our base year in 2013
Using these factors we estimate the survival curve of the fleet or the percentage of
vehicles that retire from the fleet based upon their age. For example, there will be
relatively few retirements in vehicles between ages 0-10, however retirements accelerate
in older vehicles – as older vehicles age, an increasing share of their original numbers are
retired or scraped. This survival curve is determined by modelling the number of
retirements over the initialisation run from 1980 that leads to the average age of the fleet
equalling the average age today – about 10 years old.
Projecting future sales and trends in the vehicle fleet
New vehicle sales are a function of the number of retirements that occur in any given
year plus the growth in the vehicle fleet. How the demand for new vehicles evolves over
time has an important influence on how the existing fleet will age over time. A reduction
in the sales of new vehicles relative to the fleet size will naturally result in the average age
increasing.
To calculate how vehicle sales will evolve we estimate how the influencing factors will
change in time – these include:
 How vehicle ownership will change – we estimate this by linking future
growth in the fleet to either population growth (constant vehicle ownership)
or a combination of population growth and growth in per capital income
(increasing vehicle ownership)
 The saturation point of vehicle ownership – We estimate saturation will
occur at around 750 vehicles per 1000) – this is the point where vehicles per
capita de-couple from income growth and vehicle price.
 Forecasting the make-up of vehicle sales - We assume the market shares
of vehicle types in 2013 will remain the same – although the ratio between
Australian new and used imports will change depending on the scenario and
regulatory constraints specified
 Population and per capita income – These are projected from statistics
published by international agencies

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  Vehicle survival curve (the percentage of vehicles left at each age) – We
assume the survival curve remains constant unless used imports are
introduced in which case we test these sensitivities in our scenarios.
Assumptions and Sensitivities
While the fleet model has a high degree of accuracy in calculating fleet outcomes, these
are dependent upon on highly uncertain assumptions. The most uncertain assumptions
include:
 How the survival curve will change in time
 How vehicle ownership will change in future
 Consumer reaction to lower used car prices
– Impact on the fleet size
– Impact on the new vehicle market
– Impact to the rate of older vehicle retirements
The assumption on these factors will determine the trajectory of the fleet model and the
expected outcomes.
Running the model and outputs
The ‘Run Scenario’ button will calibrate the model to the assumptions entered on the Key
Assumption tab and the fleet composition and macroeconomic inputs entered on the Key
Inputs tab.
The Outputs tab details how a number of outputs which are used in the cost benefit
analysis as well as providing useful information on how the fleet will evolve under the
policies and assumptions specified. These outputs include
 The average age of the fleet
 The composition of the fleet by age
 Average fuel economy of the fleet
 Safety risk profile of the fleet

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