EU Carmakers Want Return Of Cash For Clunkers

European carmakers are hurting. They hurt so much, they ask for government-prescribed painkillers. Renault’s COO Carlos Tavares wants a return of cash for clunkers. Credit rating agency Fitch warns there would be nasty after-effects.

“What I would like to see is support for the European and French auto markets,” Tavares told Reuters. Massive cash-for-clunkers programs were a shot in the arm of Europe’s carmakers in the critical years of 2008 and 2009. Tavares wants a re-run. Failing that, he would welcome “any other support measure that boosts demand.”

Europe’s carmakers are hurting to the tune of a nearly 9 percent drop of sales in the first five months of 2012. Some companies hurt more than others. Tavares’ Renault group is in the pangs of a 13 percent drop. Cross-town rival and GM alliance partner PSA suffers from a withdrawal of 19.5 percent of sales through May. Further south, Fiat is looking at a 12.6 percent drop.

Fiat’s Marchionne had lobbied for government support for a painless elimination of overcapacity. This plan has been shot down by an elsewhere occupied Brussels. EU bureaucrats could argue that there was no consensus: German carmakers Volkswagen, BMW and Daimler were openly against the communal slim-fest, and privately argued that survival of the fittest would be a better therapy.

While there most likely will be little hostility against a remake of the Abwrackprämie (as cash for clunkers was known in Germany) from Germany’s auto giants, opposition comes from a surprising camp: Fitch, the rating agency that normally assesses the likelihood of default. In a statement, Fitch says:

“Scrappage schemes give buyers a discount on a new car when they scrap an old one, having an immediate positive effect on sales. However, these schemes have little to no effect on creating new sales. Instead, they encourage buyers to bring forward purchases they would have made later, creating a sudden drop in sales, revenue and profitability when the incentives stop.

In addition, these fixed incentives distort the market by favouring sales of cheaper, lower-margin cars as customers typically seek to maximise the effect of the subsidy.”

The last statement is true. Renault’s Logan was amongst Germany’s best-selling cars during the Abwrackprämie. However, I did not hear anybody complain about sales of lower margin cars.

The first statement is patent nonsense. Nearly all Abwrackprämie sales were new sales, due to the simple fact that one had to retire a car 9 years or older. Owners of these cars usually never buy new, they buy used. Dealers complained (they always complain) that their showrooms were mobbed by customers they had never seen before and likely would never see again. Powered by the Abwrackprämie, German new car sales were up 23 percent in 2009, a year when U.S. car sales plummeted by 21 percent. Germans usually buy 3 million new cars per year. In 2009, it was 3.8 million cars, nearly all incremental sales. In 2010, with cash for clunkers over, German car sales were back to 2.9 million.