By Aude Lagorce
NEW YORK (Dow Jones) -- A government-sponsored plan to boost
sales of new cars in Germany has helped to lift that market out of
the doldrums in the past three months, spurring the U.S. and other
countries to mull similar schemes even as industry experts worry
such measures will backfire.
The so-called "scrappage" incentive in place in Germany gives
buyers 2,500 euros ($3,323) toward a new car when they trade in a
model older than nine years.
The measures, which are financed by the government, have proved
extremely popular. It helped boost car sales in Germany by nearly
22% in February and 40% in March and has been extended until the
end of the year after attracting 1.2 million applications in its
first two months.
According to the German car importer's association, VDIK, about
600,000 cars have been bought with the scheme since it was ushered
in at the end of January.
Germany's cabinet is expected on Wednesday to approve a plan to
spend a total of 5 billion euros, rather than the 1.5 billion euros
first allotted, on the program.
Similar incentives in France and Italy have also yielded
positive results, with both countries registering a rise in new car
sales in March.
In the U.K., however, where no such plan is in place, new car
sales have slumped 30% since the start of the year.
And it's not the only market in crisis. Around the world, demand
for new cars has collapsed in recent months as key Western
economies have slipped into recession, unemployment has started to
rise and consumer spending has taken a dive. Many auto
manufacturers, both in Europe and the U.S., have switched to
part-time working and imposed pay cuts to avoid mass redundancies
as they sharply reduce production.
Despite this raft of measures, General Motors and Chrysler are
now teetering on the brink of bankruptcy, and governments across
the globe are desperate to save them.
Scrappage incentives, because of their success in some European
countries, are top of the list of measures politicians in the U.K.
and the U.S. are considering.
Pressure on U.K., U.S. governments for incentives
In the U.S., scrappage bills have already made their way to the
U.S. House of Representatives, and President Barack Obama last week
publicly endorsed a "cash for clunkers" program for the first
time.
Action could now be very quick, partly because the situation is
so dire and partly because the administration has publicly
committed to doing something to stimulate sales, analysts said.
"We have urged the government for a few months now to look at
some creative, innovative way to get car sales going again. We feel
like there have been loads of bailouts but nothing done with the
revenue side of things," said Michelle Krebs, senior editor at
Edmunds' AutoObserver.com.
The U.S. car market has deteriorated faster than Europe's in the
past few months, slumping nearly 37% in March to 857,982 units.
U.S. carmakers have tried to stimulate sales by offering
discounts averaging over $3,000 per vehicle according to Edmunds.
Last week, inspired by the success Hyundai's job-loss protection
plan, Ford Motor and GM launched a similar offer to take back the
vehicle acquired in case the customer loses his job, as well as
beefed up auto warranties.
But the government is concerned that the discounts and
additional warranties won't be enough to lure U.S. consumers back
into dealerships and is exploring additional ways of stimulating
sales.
The U.K. has not exactly done nothing to help its carmakers. In
fact, it's promised to guarantee up to 2.3 billion pounds of loans
to the industry to soften the blow from the recession. But with
sales falling further each month, pressure is building on the
government to do something soon.
The Society of Motor Manufacturers and Traders, which sees U.K.
car sales falling nearly 20% to 1.72 million units this year, has
urged the government to introduce a plan in its budget on April 22
offering motorists 2,000 pounds ($2,937) for trading in their old
car for a greener model.
Cash-for-clunker bill could pass in matter of weeks
There are currently two "cash-for-clunker" bills in Congress.
Although they are at an early stage and would still need to be
referred to the appropriate congressional committee for debate
before being passed into law, analysts at Thomas Weisel Partners
said in a note to clients that the topic has now clearly become a
"top priority."
John Wolkonowicz, an auto analyst at IHS Global Insight, said
that with the right momentum the bill could be passed in a matter
of weeks. Congress returns from recess on April 20.
But there are concerns in the industry that such a plan could
end up doing more harm than good.
In Germany, although scrappage incentives have boosted sales,
they've only really helped one domestic carmaker: Volkswagen AG ,
as consumers rushed to buy smaller cars. The affordable Skoda brand
has sold 80,000 vehicles under the scheme.
For the other two German carmakers, BMW and Daimler , which
specialize in bigger cars, the legislation has actually been a
catastrophe, said Ulrich Hortsmann, analyst at Bayerische
Landesbank.
Daimler on Wednesday said it's expecting a "significant"
first-quarter loss.
"And even at Volkswagen, it's actually boosted sales of models
manufactured in Spain," he said, adding that the positive effect on
German manufacturers is actually highly debatable.
Hortsmann also expressed concern that sales could fall from a
cliff once the scheme expires.
Ranjit Unnithan, an analyst at J.P. Morgan, said that's what
happened in the mid 1990s. In France, for instance, sales rose 18%
during the incentive period, and then fell 17% after
completion.
"With unemployment rates in Europe not expected to decline
before the fourth quarter of 2010, we remain skeptical about the
sustainability of current demand levels in Europe and retain our
cautious view on the sector," Unnithan said in a note to
clients.
What's American?
In the U.S., one of the key issues of the legislation will be
whether it rewards the purchase of any new car or only American
cars.
Edmunds' Krebs said she would be opposed to the law specifying
consumers are only eligible to the scheme if they buy American,
partly because what American is would be difficult to define. Is an
American vehicle one that's sold by a U.S. manufacturer or one
that's built in the U.S., she asked.
Wolkonowicz, meanwhile, argued that the plan would have the most
chance of success if the green agenda was severed from it.
"They need to decide what this scheme is about. To me, it's not
about the environment, it's about getting people to buy new cars.
So it should reward anyone who buys a new car and lose the trade-in
element," he said.
He also argued that most people who own a car older than eight
years own it because they can't afford a newer vehicle. In a
recession, he believes there's no chance such consumers will be
saddling themselves with a big loan for a new vehicle they had
already decided they couldn't afford.
But even assuming they would actually consider a new car, the
math doesn't work, experts pointed out.
The bills being floated would offer consumers between $3,000 and
$5,000 when they trade in their old cars, however, both Wolkonowicz
and Krebs said the owners could probably get nearly as much money
from the vehicles by selling them on the second hand market.
"So there is really no financial benefit there at all for the
owner," Wolkonowicz said.