German Clunker Scheme Reduces Safety Equipment

The predominant critique of the cash-for-clunkers programs that have proven so popular in the US and Europe is that they cause unsustainable demand bubbles which cause sales to collapse after they expire. Sure enough, a look at the German market’s Q1 performance shows that the OEMs who most benefited from the program (primarily firms who focus on low-cost cars) are seeing far more significant declines than US-market firms have seen. In the first three months of this year, firms like Hyundai (-40%), Fiat (-58%), Suzuki (-54.6%) and Kia (-49.4%) have been suffering mightily from a hangover caused by the world’s most generous cash-for-clunker program. But the big news isn’t this small-car bust: it’s the fact that these firms’ success last year have caused the percentage of cars on German roads with electronic stability programs (ESP/ESC) to fall.

The April print edition of Auto Motor und Sport reveals that the percentage of ESP-equipped new car sales in Germany fell three percent in 2009 compared to 2008. Based on national insurance data, the magazine figures 78 percent of all vehicles sold last year had ESP equipped, but that 190k vehicles were sold without the safety equipment. This goes against long-standing trends that were driving German-market ESP-equipped percentages inexorably upwards: in 2006 only 58 percent of all nameplates on the German market had ESP as standard equipment, while last year a full 74 percent offered ESP as standard. The difference is that, by stimulating demand for the most stripped versions of the cheapest cars on the market, Germany’s C4C program incentivized consumers to buy non-ESP-equipped vehicles.

Granted, a three percent decline will hardly have the most dramatic effect on national highway safety in Germany. What this unintended consequence does bear on, however, is an EU-wide effort to make ESP standard on all vehicles. By 2012, the EU will require all new vehicle lines and commercial vehicles to come equipped with ESP, and by 2014 it will require that every vehicle sold in Europe be equipped with ESP. In the US, standard ESP will be mandatory for all new vehicles sold starting in 2012. The European Union has regularly bemoaned the fact that Europe lags behind NAFTA on ESP adoption rates, arguing that the deficit costs thousands of lives and millions of dollars.

With Germany’s cash-for-clunkers program now expired (after spending about $7b), it’s safe to assume that consumer safety concerns and government regulation will more than make up for the slide in ESP adoption caused by the program. Still, it’s likely that the EU will remember this decline in safety, and discourage any future clunker programs until mandatory ESP fitting becomes law in 2014. But then, if the German market hasn’t stabilized by then and needs additional assistance, the clunker hangover will have been far greater than even the most jaded skeptics had predicted.