Industry SectorsIndustrials/TransportCar Scrappage Schemes Would Offer Temporary Boost, but Long-term Drain, Says Fitch

Car Scrappage Schemes Would Offer Temporary Boost, but Long-term Drain, Says Fitch

Fitch Ratings says the reintroduction of European car scrappage
schemes would provide a short-term boost to sales, but may be damaging in the
long run as they could distort the market’s underlying trends and car makers’
product mix and future sales.

The
ratings agency believes that despite mass-market manufacturers’ recent calls to
governments and the EU for the renewal of such schemes, the potential for
public support is lower than during the past recession because of tighter
sovereign budgets. It adds that the sector remains on course for a sustained
period of sales decline or stagnation in Europe, which could turn into a sharp
drop in the worst-case scenario of a euro break-up.

Fitch
says that 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. This leads to an unfavourable sales mix for car makers and addicts
consumers to discounts.

The
fact that new scrappage schemes would come in France, for example, just less
than two years after the previous schemes expired means they would probably
also be less effective at boosting sales because so many vehicles have already
been replaced.

Governments
have other options to provide support to a critical industry. These include tax
incentives and cheap loans to fund research and development. These alternatives
would not necessarily have the same negative longer-term impact as a scrappage
scheme, but direct financial state support could mean carmakers’ hands are tied
in the future if they need to restructure or lay off staff.

Another
indirect way to support car manufacturers may be to not interfere with their
restructuring plans. In particular, Fitch believes that governments will not be
able to indefinitely prevent plant closures or more discreet actions such as
production line reductions. The recent announcement by GM’s Opel that it is formally
considering closing its Bochum plant in Germany in 2016 is a good illustration
of this trend.

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