Germany’s Solution to Big Auto’s Woes: Scrap That Clunker!

Germanys Solution to Big Autos Woes: Scrap That Clunker!

Amid the gruesome headlines generated by the world’s auto industry these
days, it almost read like a typo: new car registrations in Germany rose 21%
year-on-year in February, the country’s Association of the Automotive
Industry announced March 3. This, though, was no error. The 278,000
cars put on the road, crowed Matthias Wissmann, VDA’s president, amounted to
“the highest level of sales in the month of February for ten years.”

Why the splurge German drivers have latched onto a juicy new deal. Under a
scheme started in January, car owners who trade in a vehicle more than nine
years old for a new, greener model can expect $3,172 from the German
government as well as a break from paying road tax for at least a year.
Similar “scrapping schemes” have been launched in recent months in France,
Italy and Spain. Now motor manufacturers in Britain are pleading with its
government to follow suit.

It’s not hard to fathom why. Carmakers are grappling with an extraordinary
shortage of both credit and customers. Sales in Europe — the $700 billion auto
industry there accounts directly or indirectly for one in ten jobs — dropped
to a 15-year low last year, with little sign of a pickup in 2009. Toyota announced earlier this week that 4,500 staff at its British factories would
see their pay and hours slashed by 10% for a year starting in April. German
and British governments are still in talks with General Motors over
potential aid for the U.S. automaker’s beleaguered European subsidiaries,
Opel in Germany and Vauxhall in the U.K. GM says it needs some $4.2 billion
to save its businesses in the region.

Amid that carnage, scrapping schemes can offer something for the pain. The
aim is to pump up weak car sales while taking older, potentially more
polluting vehicles off the road at the same time. And it seems to be
working — at least in Germany. With new car orders in Europe’s largest car market also rising in February, the VDA expects registrations for the first
quarter of 2009 will trump those seen in the same period last year. A more
modest $1,300 on offer to French motorists hasn’t been enough to prevent car
sales there sliding 13% last month. Scrapping schemes in Italy and Spain
failed to halt even steeper falls.

And even when it works, there’s no guarantee that the money will go to
domestic carmakers. In Germany, sales of the Volkswagen Polo and Opel’s
Corsa have been boosted by the government’s initiative but a surge in orders
for Fiat and Renault means “two-thirds of the additional
sales are imported cars,” says Ferdinand Dudenhöffer, an auto industry
expert at the University of Duisburg-Essen. “And most of the German cars
which are booming are at least partly produced elsewhere.”

That might help explain the British government’s hesitation to launch an
initiative of its own. Almost 90% of all cars sold in the U.K. are imported,
with most of those arriving from continental Europe. So a British scrapping
scheme “wouldn’t be a huge boost to British car factories,” says Garel Rhys,
president of Cardiff University’s Centre for Automotive Industry Research.
“In a sense it would be the British taxpayer subsidizing factories in
France and Germany.”

More worrying for the industry: what happens when the offers expire Like
others in Europe, Germany’s scheme is capped. Driver applications equivalent to a third of the scheme’s $1.9 billion budget have already been submitted, with the remainder expected long
before Dec. 31, when the scheme was scheduled to expire. When similar
initiatives were launched in France and Italy in the early ’90s, Rhys says,
“there was a big sag in the market when the scheme ended.” That same prospect has angered
some in the industry. Christian Streiff, boss of France’s Peugeot-Citroen,
warned of the schemes’ “inverse effect” in the long term by pre-programming
an implosion of the market once the subsidy comes to an end.

That means the tens of billions of dollars of direct auto industry support
provided by Europe’s governments will be of much greater help in the
long term. In London on Wednesday, the U.K. government gathered carmakers
and banks to kick start the distribution of some $3.2 billion in loans and
loan guarantees it’s pledging. With registrations forecast to slide 20% in
Britain this year, the government will be hoping that isn’t just money for
scrap. — With reporting by Bruce Crumley / Paris and Petra Krischok / Berlin

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