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Scrapping Schemes Gather Pace Across Europe

Can This Be A Rare Win/Win Situation? No.
Negative Implications For Mix, But Beggars Can’t Be Choosers.
Britain Strangely Reluctant To Join In.

Government incentives for people to swap new cars for old seem to provide an almost magical solution where everybody wins.

With many potential buyers sitting on their credit cards because they simply have no clue whether they will have an income next week, offering real money to dump their 10-year old clunkers is a huge incentive to buy.

This has the second advantage of usually meaning that the replacement car is likely to be much more fuel efficient than the old one, so there’s another win. German buyers swayed by the promise of up to €2,500 towards a new car are likely to be at the cheap end of the market, so the new little motor is almost certainly going to be a fuel sipper. And then governments will see another positive. Each new car will generate VAT.

The real world
But of course in the real world there are going to be negatives. According to Citigroup Global Markets, this will force automakers’ mix down to much less profitable levels. It also going to pull sales forward, running the risk of just putting off the evil day.

Deutsche Bank said that the German scheme will likely increase sales in 2009 by between 300,000 and 400,000, France’s €1,000 will add between 100,000 and 200,000, while Italy’s up to €700 will boost sales by 100,000.

“This represents an equivalent of 5 per cent of the European car market,” analyst Gaetan Toulemonde said.

Meanwhile, the British government sits on its hands.

Joe Greenwell, President of the Society of Motor Manufacturers and Traders, and Ford U.K chairman, expressed his frustration at the lack of government action on a scrapping scheme. The SMMT has been lobbying for such action since November 2008.

He told a meeting in London that if action is not taken soon on a scrapping scheme, the British automotive industry faces dire consequences.

Analysts reckon that a scrapping incentive of £2,000 (€2,200) would boost sales in Britain by about 280,000, at a gross cost to the taxpayer of £560 million (€620 million). Increased sales taxes would leave a net cost of £160 million (€180 million).

But not everybody will win.

“Implementation of incentive measures are likely to boost vehicle sales in the near term, the nature of the incentives granted would push vehicle demand further towards smaller less profitable segments at the expense of the upper bigger margin segments,”  Deutsche Bank said.

But beggars can’t be user choosers.

“Such programmes fit perfectly with the green complexion of early aid packages. Cars over 12 years old emit an average 190 g/kms of carbon dioxide (CO2) and if replaced at the average new car CO2 level expected in 2009 of 150 g/km bring a 21 per cent benefit in average efficiency,” said Citigroup Global Markets analyst John Lawson.

“Scrapping incentives still leave individuals free to make their own decisions on purchasing by brand. As they are only possible on a national level the design of their schemes – overtly small car oriented in the past in France and Italy – can also suit national manufacturing priorities to retain more of the benefit within the domestic manufacturing base,” Lawson said.

Neil Winton – February 12, 2009

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