Editorial: Britain Makes Scrappage Schemes Euro-nanimous

Edward Niedermeyer
by Edward Niedermeyer
editorial britain makes scrappage schemes euro nanimous

Britain’s recently presented budget contains a new vehicle scrappage incentive, making Old Blighty the final major European economy to jump on the alleged “green stimulus” bandwagon. Thirteen other European nations, including France, Germany, Italy, Spain and Poland, have introduced similar measures, which provide government incentives to new car buyers who scrap an older vehicle. But will Britain’s new program (which offers up to $2,900 in incentives) have the same salutary effects on new car sales as France (March sales up 8 percent) and Germany’s (March new registrations up 40 percent)? Closer to home, how will the solidified Euro-consensus on scrappage schemes affect the chances of a similar program in the US? Although the programs have already been hailed as the savior of European new car-sales, these things don’t always translate well across different markets. Under a critical lens, issues with the latest British plan indicate a number of problems with bringing such a program stateside.

Britain’s plan to provide about $3K towards a new car purchase per 10-year-or-older scrapped vehicle seeks to limit the measure’s impact on an already-tight budget, likely in response to Germany’s massive oversubscription to the program. As our Bertel Schmitt has reported, what began as a €1.5 billion program has ballooned into a €5 billion expenditure. To limit this kind of cost overrun, the British plan (sensibly enough) limits the offer to “only” 300,000 purchases. But beyond the numerical limitation, the British government is also requiring the “auto industry” to provide half of the incentive, about $1,500 per car. Who will be responsible for providing the second half of this incentive (importers, retailers, manufacturers)? Still no word from Downing Street.

Commentators like The Telegraph‘s Mike Rutherford have expressed concerns as to whether the industry will actually step up with the extra $1,500. It’s safe to say that the industry’s enthusiasm level likely won’t equal the government’s, which will see its modest outlay more than returned by new vehicle VAT receipts. Moving past the question of whether this is a $1,500 incentive not a $3K incentive, Rutherford isn’t alone in expressing serious doubt as to whether consumers will materially benefit from the measure.

A web-based auto retail manager defines part of the problem to Bloomberg: “The U.K. car market is entirely different to those on the continent in that buyers typically change their car after three years when the finance agreement and warranty expire.” Besides a possible shortage of older cars to be scrapped, there’s also an issue of new vehicle availability, as imports to the Isles have been cut in line with falling demand.

And, as Rutherford points out, many 10-year or older vehicles may be worth considerably more than even the manufacturer-matched full $3K (especially considering Britain is crawling with classic and near-classic car nuts). Even more troubling, the incentive could end up shrinking the massive incentives already offered by manufacturers on new cars. $7,000 incentives on Fords and 40 percent discounts on Opels could dry up in the face of government stimulus, actually creating worse conditions for new car buyers. Throw in the likelihood of a dramatic drop-off in sales when the stimulus runs out (assuming it functions as planned) and the devastating effects on newer used car prices and fleet values (estimated to wipe out nearly $9 billion in value nationwide) and the British plan appears fraught with potential problems, even having learned from the experiences of continental cash-for-clunker experiments.

Back in the states, there seems to be little doubt that some form of cash-for-clunker scrappage bill will become law. Reuters reports that Goldman Sachs is already upgrading FoMoCo’s rating on the twin assumptions that GM and Chrysler will enter bankruptcy and that a clunker bill will be passed. Two competing bills have already been introduced (Tom Harkin’s S.3737 and Betty Sutton’s H.R.1550) and industry lapdog John Dingell has promised to include a similar provision in the upcoming climate change bill. This despite warnings from Britain that clunker bills are extremely inefficient as an environmental measure at best, and could actually increase carbon emissions.

The major concern with a possible US clunker bill is the indication that only “domestically produced” vehicles would qualify for federal bob. Both Harkin and Sutton’s bills have some form of “Buy American” stipulations. Harkin’s is particularly protectionist, while Sutton’s includes vouchers for certain vehicles built in North America (although at lower levels than vehicles “manufactured in the US”). Dingell will certainly try his darndest to funnel voucher money directly to Detroit. Though these measures seek to mitigate a lack of manufacturing stimulus that has been a noted criticism of European scrappage bills, yet more unintended consequences await such provisions: namely challenges on free-trade terms from Canada and Europe.

But such measures will be necessary to ensure any benefit at all to the US industry, which has weaknesses in its small-car portfolio, where scrappage-stimulated sales have been boosted the most. Absent environmental and manufacturing benefits (assuming the US wants to avoid a nasty trade war), a scrappage bill will benefit only scrap yards and new-car dealers. And yet an overabundance of dealers is fundamental to the auto industry’s wider woes. Though Europe’s scrappage results look good on paper to a sales-starved US industry, the consequences don’t seem to outweigh the benefits.

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2 of 19 comments
  • Golden2husky Golden2husky on Apr 25, 2009
    All these people took advantage to buy autos and now won’t be back in the market for years. This is going to turn out badly.... Damn!! I finally agree with something that bluecon posts! A jokes aside, this is totally correct. By artificially stimulating demand, these buyers won't be back for a long time. So the normal demand curve will take its toll by crushing future sales for years to come. Remember the sales collapse after "Employee Pricing for Everyone"? Beware the law of unintended consequences...

  • on Apr 26, 2009

    @golden2husky Quote Alexander Fraser Tytler "A democracy cannot exist as a permanent form of government. It can only exist until a majority of voters discover that they can vote themselves largess out of the public treasury. » A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves money from the public treasure. From that moment on, the majority always votes for the candidates promising the most money from the public treasury, with the result that democracy always collapses over loose fiscal policy followed by a dictatorship. The average of the world's greatest civilizations has been two hundred years. These nations have progressed through the following sequence: from bondage to spiritual faith, from spiritual faith to great courage, from courage to liberty, from liberty to abundance, from abundance to selfishness, from selfishness to complacency, from complacency to apathy, from apathy to dependency, from dependency back to bondage."

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