By on April 23, 2009

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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19 Comments on “Editorial: Britain Makes Scrappage Schemes Euro-nanimous...”


  • avatar
    no_slushbox

    This won’t be nearly as successful as the British government’s previous method of keeping old cars off the road, British Leyland.

    Protectionism issues will hopefully prevent clunker culling legislation in the US.

  • avatar
    26theone

    Sorry still need clarification here.. Is the incentive given on top of what you get in a private party sale for the old vehicle? Who “owns” the old vehicle, does it have to be scrapped immediately?

  • avatar
    RetardedSparks

    I could stand to benefit from a C4C bill but I’m afraid the sudden spike in “demand” will make already irrationally recalcitrant dealers yet more unbearably greedy. Aside from the aforementioned evaporation of incentives I’m sure price flexibility on “conforming” vehicles (over 30 mpg in some versions of the law) will disappear, too.
    “Pay list, and get your discount from Uncle Sam” will be the attitude.

    I might have to go out and try to make a deal before the Fed-financed-floodgates open.

  • avatar
    no_slushbox

    RetardedSparks:

    You bring up a good point. The idiots bringing up cash for clunkers legislation in Congress will probably not succeed. The proponents of the legislation only want it with protectionism built in, but the protectionism will never be allowed.

    However, while the possibility of cash for clunkers legislation still looms buyers are going to be hesitant to buy and dealers are going to be hesitant to deal, screwing up the existing market even more.

  • avatar

    One of the reasons for the overwhelming success of Germany’s program is that it is very simple. Surprisingly simple, considering it comes from “why simple if it can be done complicated” Germany. It doesn’t come with any “buy German” strings attached. It’s big enough to make a difference. and it leaves room for manufacturers (typically of larger cars) to “match” the government program and add another EUR 2.5K for a nice EUR 5K chunk. A program that requires the manufacturer (dealer, importer, whoever) to match the government will be doomed.

  • avatar
    Edward Niedermeyer

    RetardedSparks: And your financing too! Welcome home, prodigal 620 FICO score!

    Bertel: But what government wants $1.5b in costs to turn into $5b? The Brits are trying to adjust for that, and our fine elected leaders seem hell bent on creating a consequence-free “perfect stimulus.” It’s just not there.

  • avatar

    Ed: The German program already produced 1.3m units. Considering that the normal German annual new car market is 3m, this is HUGE. If I’d be a worry-wart, I’d be afraid of overheating the car market.

    Knowing the German market, these sales are mostly incremental, because owners of 9 year and older clunkers rarely buy new, they mostly buy used. With 19 percent VAT on the car (and any subsequent car related purchases) the money should be more than revenue neutral.

    Germany’s largest budget item is social costs to the tune of EUR 123.59b – compared with that, 5b is a drop in the bucket. Don’t drop it in the bucket, and there will be a hefty budget overrun for social costs.

  • avatar

    OT, but it sounds like a Chrysler C11 filing will happen sometime next week…

  • avatar
    Edward Niedermeyer

    Bertel: Sure, but for all the sales increases, it hasn’t pulled Opel out of any trouble. I think our leaders aren’t picturing Americans flocking to GM or Chrysler with their hard-earned crushing rebates either, hence the “buy American” measures. But a national stimulus for retail and manufacturing with a green bow on top is a lie. The car industry is global.

    And none of this changes the fact that people won’t rush back to GM or Chrysler with anyones money until they radically reinvent themselves.

  • avatar
    Lumbergh21

    The green washing is utterly ridiculous when you consider the additional material and energy costs to manufacture the new cars and scrap the old ones that wouldn’t have been incurred otherwise. I’m sure some form of cash for clunkers will make it through the House and Senate for an eagerly awaiting President to sign.

  • avatar
    no_slushbox

    Bertel Schmitt:

    The revenue neutral nature of clunker culling in Germany is what makes the US much different.

    “Knowing the German market, these sales are mostly incremental, because owners of 9 year and older clunkers rarely buy new, they mostly buy used. With 19 percent VAT on the car (and any subsequent car related purchases) the money should be more than revenue neutral.”

    Some states in the US have no sales tax. In the states that do all of the revenue goes to the state, not the federal government. Also, used cars face the same sales tax rates as new cars since the tax is based on the sales price, not the value added.

    There will be no offesetting revenue to the US federal government, so this will be a major expense for the US government, and it will be a major expense that either 1) uses ugly protectionism to exclude foreign cars or, 2) massively subsidizes foreign manufacturers at US taxpayer expense if foreign cars are not excluded.

  • avatar
    johnthacker

    Commentators like The Telegraph’s Mike Rutherford have expressed concerns as to whether the industry will actually step up with the extra $1,500.

    How do they ensure that the industry actually steps up with an extra $1,500? Can’t the car industry just raise the invoice price by $1,500 and then provide an “extra” $1,500 incentive? If you say that they can’t raise prices first, aren’t you penalizing in some manner companies that have already cut prices (or have cut prices more) and helping those that were about to announce new incentives but can now participate in this instead? Does this help manufacturers of high-margin cars more than manufacturers of low-margin mass-market cars?

    And I shudder to think if the example if for the government to determine the “true” price of the car when determining if the proper $1,500 incentive has been paid.

  • avatar
    Corvair

    Some cars will be more valuable than the rebate. Check out the retail prices of ten year old Toyotas. Even in a private sale, they’re worth more than the $1,500 to $3,000 incentive. So it will be *important* for legislators to limit the program to Detroit iron.

  • avatar

    Bertel is right, I think. The bottom line is, it is cheaper for the German government to shell out the C4C bucks than at least an equal amount of social security cash.
    As these measures in Germany were simply meant as a short-term incentive to prevent devastating developments on the job market (and automotive is a huge sector in the German economy) one might agree that it makes sense (although I anticipate unwanted medium- to long-term side-effects, having recently discussed everything with my favorite independent clunker repair shop).
    But how about the UK? Is the automotive branch in the UK really such an economical heavyweight?
    If the pretended effects of such programs are to be “green”, why subsidize the car industry? Why not give incentives to people who want to scrap their old power-hungry TVs and deep-freezers? Why not subsidize new windows, doors and roofs for houses? Or scrap more than ten year old houses, at all (starting with Buckingham Palace). Boy, would the UK go green…
    And a protectionist US program? Oh god. Can’t see it getting to work. So, I will I be able to buy any car built in the US, or only Detroit stuff, whether it is built in Mexico, Canada, or elswhere?
    But of course, our well-known attention whores in politics (world-wide) see there is more glamor in “saving” their car industry than in caring for proper-built, efficient houses, cow barns and hog houses.
    In the meantime, dealers in white ware and brown ware, and even the tourist industry in Germany do already recognize losses, as those people who bought a new car, even with the C4C money, have not much cash left anymore to be spent on other things this year.
    Let’s wait a little. Next year there will be a lot of wailing and gnashing of teeth, after these programs have been stopped.

  • avatar
    Kristjan Ambroz

    That online guy quoted by Bloomberg needs a bit of an understanding of the market he operates in, as well – 70% of all car sales in the UK are used cars and what he’s looking at is barely 30% of the market. Even for the people who tend to buy new, only 50% or so ill resell within the first three years of ownership.

  • avatar
    bluecon

    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.

  • avatar
    1996MEdition

    Great picture…..had 72 & 74 Midgets and at least one of them looked like this all the time! Part one for the other until I could find a replacement part…..always have a backup if you own one.

  • avatar
    golden2husky

    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…

  • avatar
    bluecon

    @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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