Global Economics

Car-Scrapping Plans: Germany's Lessons


Merkel's cash-for-clunkers scheme has boosted auto sales, saved factory jobs, and rid the roads of gas guzzlers. But the costs are high

The global auto industry may be facing its worst crisis ever, but you'd never know it at Ford Motor's factory in Cologne. There, workers are putting in extra shifts on weekends to cope with demand for the compact Fiesta. In fact, Ford (F) sales have been booming in Germany. Customers have placed orders for 68,500 Fiestas, Ka subcompacts, and midsize Fusions in the four months to April, more than triple the year-earlier figure.

Thanks for this gravity-defying performance go??t least in part??o the German government's so-called environment bonus, which Germans prefer to call the Abwrackpr??mie, or "wreck rebate."

The program, launched in January and renewed in March, is Chancellor Angela Merkel's most visible economic stimulus measure. It pays $3,320 to people who scrap a car that's at least nine years old and buy a new car instead. The scheme has more than offset the effects of the global downturn on domestic auto sales, preserved factory jobs, and encouraged people to replace gas-guzzling, exhaust-spewing clunkers with the latest engine technology.

Spreading to Britain

But the program has also had negative effects, which U.S. policymakers might do well to consider as they move toward introducing a similar program in the U.S.

Cash-for-clunkers programs are definitely a trend. Last month, the British government announced a $453 million plan to provide a $3,000 rebate for motorists who trade in cars older than 10 years old. Under the proposals??hich will last until March 2010 or until the money runs out??he taxpayer will fork out half of the money, with automakers picking up the rest. France also has a scrappage scheme that offers buyers a more modest ??1,000 ($1,330) for trade-ins of cars 10 or more years old. The premium is credited with an 8.1% jump in car sales during March.

There's little question that such programs have beneficial effects, not only for the economy but also the environment. Although Europeans were never as enamored of SUVs and big pickups as Americans, Germany's program has encouraged drivers of very old vehicles to trade up to cleaner, more fuel-efficient cars. A 2009 Ford Ka gets 25% better fuel economy than the 1999 model, and emits 28% less CO2.

The program also has helped German automakers avoid major layoffs. Total unit sales in Germany were up 18% in the four months to April vs. a year earlier, helping to offset a catastrophic 40% decline in export sales. Even though most of the German car companies have cut worker hours or shut down for short periods, there have not yet been mass jobs cuts. The automakers are Germany's largest industrial employers, and the wreck rebate is one reason why the nation's unemployment rate has risen fairly modestly so far.

Harmful for Other Merchants

But the rebate also has some major downsides. Retailers, for example, have complained bitterly that the program sucks spending from other categories. German retail sales fell 1.5% in March??he third monthly decline in a row?? decline that retail industry groups blame partly on incentives to buy cars rather than other goods.

The rebate also is expensive. Nominally it will cost $6.6 billion if Germans take full advantage of the program. The real cost is harder to figure. Increased sales will boost sales tax revenues, and the state will avoid the cost of unemployment benefits for workers who might have lost their jobs. On the negative side of the balance sheet, the program will kill jobs in other parts of the economy, for example auto repair shops or used-car dealers. A study by the Halle Economic Institute, a major think tank, estimates that the net burden on the German government budget will be $3.5 billion.

That seems like a modest price to pay. However, another problem is that much of the money?5%, according to the Halle study—will go to people who would have bought cars anyway. And a large chunk of German taxpayer dollars will flow to manufacturers outside the country. While Ford makes the Fiesta in Cologne, the Ka comes from a factory in Poland. Fiat (FIA.MI), Renault (RENA.PA), and other non-German carmakers are among the main beneficiaries of the rebate.

Meanwhile, some of Germany's most important car companies are seeing little benefit. Though Volkswagen (VOWG.DE), Opel (GM), and other makers of lower-priced vehicles have scored big, few people are trading in their nine-year-old clunkers for Mercedes (DAI) or BMWs (BMWG.DE). Porsche (PSHG_P.DE) said recently that not a single customer has taken advantage of the program—possibly because people are embarrassed to appear at a Porsche dealership with a decrepit car. The premium carmakers are more likely to benefit from the cash-for-clunkers program in the U.S., one of their most important markets, than the German version.

Delaying the Pain?

Inevitably, the effects of the rebate program also are starting to wear off. The number of Germans applying for the refund has plunged in recent weeks, according to German press reports. Ford says orders in April for the Ka, Fiesta, and Fusion are up 56% from a year earlier—a very good increase, to be sure, but a substantial slowdown from earlier in the year. France, too, saw its program run out of gas, with auto sales down 7% in April.

Moreover, the rebate is not the only thing driving German sales at Ford. The company has launched complete redesigns of the Fiesta and Ka in recent months, both of which address the economy-class buyers most likely to still be driving a nine-year-old car. Ford has further boosted sales with cheap financing and service packages in conjunction with the wreck rebate. You can drive away in a new Ka for $130 a month, with no down payment, and Ford will throw in a four-year service plan.

Whether Germany's wreck rebate is a success depends on how long the auto industry downturn lasts. If it continues, the rebate may merely delay the pain and set the stage for a steeper downturn later in the year. Economists Ulrich Blum and Sabine Freye, authors of the Halle Institute study, while critical of many aspects of the program, concede that it may have prevented long-term damage to the auto industry that could be the result of an extended downturn. "If the German auto industry can repeat its earlier successes," they write, "then in hindsight the program will be seen as a problematic, but effective insurance policy."


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