IHS Global Insight Perspective | |
Significance | The British government looks increasingly likely to forge ahead with a vehicle scrapping incentive scheme which will give buyers scrapping a car of nine years or older a £2,000 subsidy. |
Implications | However, unlike in other European countries where scrapping incentives have been successfully introduced, government sources are claiming that one option being looked at is manufacturers contributing half the scrapping incentive. There are also some doubts from within the U.K. government about the efficacy of the scheme. |
Outlook | While it is likely that the British government will introduce a scrapping allowance, there is also much more chance of such an incentive backfiring in comparison to other countries as a result of foreign ownership of the U.K. car manufacturing industry and the parlous state of the U.K.'s public finances. |
The British government is looking increasingly likely to follow the example of the other "big five" European passenger car markets, Germany, France, Italy and Spain by introducing a scrapping incentive in an attempt to stimulate buying activity in a market that shrank by 30.0% year-on-year (y/y) in March (see United Kingdom: 6 April 2009: U.K. Car Sales Slide 30% Y/Y in March; Association Repeats Calls For Scrapping Incentive). However, unlike the other countries mentioned, the U.K. government is reportedly looking at the idea of asking the OEMs to part-subsidise the planned £2,000 (US$2,943) scrapping incentive, which will be given to buyers scrapping a car that is more than none years old and replacing it with a more efficient new, or nearly new car. According to a Financial Times (FT) report, the government is concerned that it will end up part-subsidising discounts that are already on offer in dealerships. The government is therefore considering a scheme where the government and manufacturers each put up £1,000 on average per car, according to government sources. The rationale for industry funding is to prevent taxpayer subsidies simply replacing discounts already being offered by manufacturers. The industry's response to this idea has predictably been less than enthusiastic with the head of the U.K. industry body, the Society of Motor Manufacturers and Traders (SMMT) Paul Everitt saying, "If it's a question of whatever the government puts in, the industry has to put in, effectively the government is saying: 'You're bleeding, but you have to buy your own bandages. For them to agree something that's a damp squib in the marketplace would be a disaster for the industry [and for] the government. A scrappage scheme should help us revive the industry, not help us sink it."
In reality it would appear that the U.K. retail car industry would simply refuse to agree to any scrapping scheme administered in these terms as it is likely that it would prefer to have the choice of administering any £1,000 incentive or discount in any way it saw fit. Everitt went on to say that his members were industry was willing to give an undertaking not to reduce the overall level of incentives in the marketplace. He went on to add that a fixed discount of a £1,000 industry payment would force some dealers to sell certain models at a loss. There had been reports in the British press over the weekend that there had been disagreements between the Chancellor, Alistair Darling, and Business Secretary Lord Peter Mandelson over the implementation of the scrapping scheme, with the former reportedly concerned about the cost of the scheme and giving the automotive industry preferential treatment. However, government sources say that any differences have been resolved and that the government is now looking to push ahead with the scheme, with junior ministers and officials having been ordered to work through the fine detail of the U.K. scheme.
Outlook and Implications
There has already been resistance to the introduction of a vehicle scrapping scheme from sources outside the U.K. Treasury, which is facing increasing scrutiny over the parlous state of the U.K. public finances. Chancellor Alistair Darling is reportedly concerned at spending £160 million on the scheme at a time when the government's finances are being stretched by a series of other economic stimulus packages. He is also worried about supporting one struggling industry over another, and that many of the new cars that will be bought will not have been built in the United Kingdom, with around 85% of new passenger cars being sold in the United Kingdom being manufactured outside the country. Despite the inherent logic in these concerns, with a general election looming it appears that Lord Mandelson has faced down any opposition from the Chancellor as the Labour government attempts to react to the financial crisis and help the beleaguered U.K. automotive industry.
There is no doubt that the U.K. government has been keeping a weather eye on developments in the other major European passenger car markets that have already seen some significant effects as a result of their respective stimulus packages. For example the German market experienced a headline-grabbing 39.9% increase in sales in March (see Germany: 3 April 2009: Scrapping Incentive Boosts German Passenger Car Sales by 39.9% in March) as a result of the 2,500-euro scrapping incentive for cars of more than nine years old. However, there are huge structural differences between the German and U.K. economies. The German economy has a large domestic motor industry that has in some cases benefited significantly from the incentive, although admittedly the big winners have been foreign carmakers such as Fiat and Hyundai, and the big three premium German carmakers BMW, Mercedes-Benz and Audi have received little or no benefit from the incentive. In addition Germany has much lower levels of personal unsecured debt and mortgage debt and had not experienced the related, and unsustainable, housing bubble that the United Kingdom has just seen burst. As a result German consumers are much better placed to act on the scrapping incentive and take advantage of what is undoubtedly a very attractive deal, something that canny German consumers always have an eye for. So there is no guarantee that any U.K. scrapping incentive will have anything like the effect it has had in Germany.
As we have also seen in Germany, it is the smaller vehicle segments that have benefited from the scrapping incentive. This will not necessarily help U.K. manufacturers such as JLR (Jaguar Land Rover), while many models manufactured in the United Kingdom are mid- and upper-range models unlikely to benefit substantially from the scrapping incentive (Nissan Qashqai, Toyota Avensis, Honda Civic, Mini etc), although some, such as the new Honda Jazz which will start production in Swindon in May are likely to benefit. Some estimates put the amount of new cars that would benefit from the scrapping scheme coming from overseas sources at around 95% as a result of the model mix included in U.K. production. The U.K. government is therefore likely to face accusations of favouring the automotive industry from other trade bodies. The green benefits of the scheme, which have been enthusiastically pushed by the government, have also been criticised, as there is nothing in principal stopping a consumer from scrapping an older car and buying a highly polluting large sport utility vehicle (SUV). Indeed, if the government did introduce such legislation it would prevent one of the companies it would like to help most from benefiting, Land Rover. There is no doubt that the U.K. government faces criticism for its confused response to the effects of the financial crisis on the automotive industry, including its focus on promoting electric cars (see United Kingdom: 9 April 2009: U.K. Government Planning Electric Car Incentive in Budget—Report) but one area of undoubted benefit will be the beleaguered traders and dealerships and the industry's associated logistics businesses, that will no doubt welcome any initiative to get automotive sales moving again in the United Kingdom.