German Passenger Car Market Rises 39.7% in May as Scrapping Scheme Continues to Boost Sales

The German passenger car market experienced its second strongest sales month since the implementation of the country's 2,500-euro (US$3,310) scrapping incentive in January with an increase in sales of 39.7% year-on-year (y/y) to 384,578 units, according to the latest data released by the KBA. This is just behind the result of 401,000 units that was recorded in March when advance orders for new passenger cars ordered initially as a result of the scrapping incentive were delivered to showrooms. May's results show that the effects of the scrapping incentive continue to be highly positive for the German market four months after its initial launch. The overall effect the scrapping incentive has had on the year-to-date markets has also been marked. Overall passenger car sales for the first five months of 2009 have increased by 22.8% to 1.63 million units. This is a highly impressive accelerated growth rate in comparison to the combined sales volume at the equivalent point last year and the effect of the scrapping incentive on this figure can hardly be overstated.

In terms of sales growth by manufacturer, the big winner was Germany's and Europe's biggest carmaking brand Volkswagen (VW), which sold a staggering 82,108 units in May alone, a highly impressive 60.2% y/y increase on the company's sales total during May 2008. This was a simply fantastic sales result for VW and was fuelled significantly by aggressive incentives on the run-out version of the current generation, coupled with the scrapping incentive, while sales of the new Mark VI Golf also continued to boom. The extent of VW's extraordinary sales drive in Germany during May is truly revealed by the fact that it sold more than twice as many new cars than any other vehicle brand during the month. Somewhat surprisingly perhaps, the second placed brand in the May German sales charts was Opel. The company has been constantly in the German media throughout Opel as a result of the bidding contest to find a new owner, a contest which was eventually won by Magna last weekend (see Germany: 1 June 2009: Magna Reaches Agreement with GM and German Government for Control of Opel). Considering the uncertainty the company was facing throughout the month, that Opel's sales actually increased by 57.1% to 39,250 units was impressive. It suggests there is still a high degree of brand loyalty and consumer regard for Opel in Germany despite the company's troubled recent past. However, Opel and Magna must hope that the deal to take over the brand must be completed quickly in order to retain customer confidence. Ford was the third best-selling company with 30,876 units, a 48.3% y/y increase as the new Fiesta continued to drive sales. Renault and Dacia was the fifth biggest company, behind BMW, with sales rising by a very strong 117% as sales of the Slovenian-manufactured Twingo and the Dacia Sandero continued to show the positive effect of the scrapping incentive on the lower segments of the vehicle market.

However, as has previously been the case under the scrapping incentive, the Big Three German premium carmakers, BMW, Mercedes-Benz and Audi once more failed to derive much benefit. All three suffered marginal y/y sales declines as the scrapping incentive continued to benefit the lower end of the German market the most. BMW and Mini sales came in at 27,103 units, which equated to a decline of 6.7% y/y, while Mercedes-Benz posted sales 25,255 units equating to a 2.4% decline on last May's total. This compared to Audi's tally of 21,254 units, a decline of 5.4% y/y.

Outlook and Implications

There is no doubt that the scrapping incentive has had a formidable effect in stimulating demand in the German retail automotive market. The increase in passenger car sales of 22.8% y/y has effectively added over a quarter of million units to the year to date (YTD) total in comparison to last year. The overall increase in May of 39.7% was a particularly strong result, especially given the calendar effect that saw May 2008 feature one more working day than the equivalent month in 2009. Once more, foreign passenger car brands manufacturing small cars have been among the big winners in terms of benefiting from the scrapping incentive. Renault, Dacia and Fiat were the biggest growing brands in terms of sales volume during the month, posting an increase of 117% and 101.9%, although Fiat could not repeat March's extraordinary result it was the third best-selling brand overall in Germany.

However. also as per usual under the scrapping incentive, the Big Three German premium brands—Mercedes-Benz, BMW, and Audi—have all suffered as a result, despite the large overall rise in the market. The extension of the incentive scheme heightens the danger that the market will suffer from a significant "pull-forward" effect as there will be an ever-diminishing pool of consumers with a nine-year-old car willing to make use of the incentive to purchase a new model. The potential for market distortion remains high. The sheer amount of money pumped into stimulating the market could crudely equate to 2 million units, with the German government committing to extend the amount spent on the scrapping incentive to 5 million euro (see Germany: 8 April 2009: Germany to Invest Another 3.5 bil. Euro in Scrapping Incentive). The longer-term impact on domestic sales and manufacturers is unclear, particularly as consumers appear to favour smaller, cheaper foreign brands. The potential for a politically led backlash from the big German premium brands appears high in this important election year.