Germany's Auto-Woes Fix: Scrap That Clunker!

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Amid the gruesome news generated by the world's auto industry these days, this bit of information almost reads like a typo: new car registrations in Germany rose 21% year on year in February, the country's Association of the Automotive Industry (VDA) announced on March 3. This, though, was no error. The 278,000 cars put on the road, crowed VDA president Matthias Wissmann, amounted to the highest level of sales in the month of February in a decade.

The reason for the surge: under a German economic stimulus program started in January, car owners who trade in vehicles that are more than nine years old for new, more environmentally friendly models can expect individual rebates of $3,172 from the German government. Buyers also get a break from paying road tax for at least a year. Similar scrapping schemes have been launched in recent months in France, Italy and Spain, while motor manufacturers in Britain are pleading with their government to follow suit. (See the 50 worst cars of all time.)

It's not hard to fathom why. Carmakers are grappling with an extraordinary shortage of credit and customers. Sales in Europe — where the $700 billion auto industry accounts directly or indirectly for 1 in 10 jobs — dropped to a 15-year low last year, with little sign of picking up in 2009. Toyota announced on March 11 that 4,500 workers at its British factories would see their pay and hours slashed 10% for a year starting in April. The German and British governments are still in talks with GM over potential aid for the U.S. automaker's beleaguered European subsidiaries, Opel in Germany and Vauxhall in the U.K. GM says it needs some $4.2 billion to save its businesses in the region. (See pictures of workers at GM.)

Massive bailouts like those being considered for GM and Chrysler in the U.S. aren't currently on the cards for most European and Asian carmakers, which don't face the kind of long-term structural problems dogging Detroit. Instead, policymakers in countries with substantial automotive industries are rolling out programs to ease the short, sharp shock of plunging sales by giving consumers incentives to start buying again. In January, China slashed its sales tax on cars with engines of up to 1.6 liters. The measure, designed to get Chinese to buy smaller, more fuel-efficient vehicles, had an immediate impact. January sales of small cars jumped 19% compared with the previous month, according to the China Association of Automobile Manufacturers. The buying binge meant that, for the first time ever, more cars were sold in China (735,000 vehicles) in a month than were sold in the U.S. (657,000). In January at least, China was the world's largest car market.

Scrapping schemes can have similar effects. The aim is to pump up weak car sales while at the same time taking older, potentially more polluting vehicles off the road. This seems to be working, at least in Germany. The VDA expects registrations for the first quarter of 2009 to trump those seen in the same period last year. But a more modest $1,300 on offer to French motorists who give up their clunkers hasn't been enough to prevent car sales there from sliding 13% last month. Scrapping schemes in Italy and Spain failed to halt even steeper falls.

Even when it works, a scrapping scheme won't guarantee that the money will go to domestic carmakers. In Germany, sales of the Volkswagen Polo and Opel Corsa have been boosted by the government's initiative, but a surge in orders for Italy's Fiat and Renault of France means "two-thirds of the additional sales are imported cars," says Ferdinand Dudenhöffer, an auto-industry expert at the University of Duisburg-Essen. "And most of the German cars which are booming are at least partly produced elsewhere."

That might help explain the British government's hesitation to launch an initiative of its own. Almost 90% of all cars sold in the U.K. are imported, with most of those arriving from Continental Europe. So while 61% of those polled in a survey for Britain's Society of Motor Manufacturers and Traders said they'd likely take up such an offer, a British scrapping scheme "wouldn't be a huge boost to British car factories," says Garel Rhys, president of Cardiff University's Centre for Automotive Industry Research. "In a sense it would be the British taxpayer subsidizing factories in France and Germany."

Critics of scrapping schemes point out that they are like administering a shot of adrenaline to a sick patient — first there's a rally, then there's a collapse. Like others in Europe, Germany's scheme is temporary. Buyer applications equivalent to a third of the program's $1.9 billion budget have already been submitted, with the remainder expected to be filed long before the program's Dec. 31 expiration date. When similar initiatives were launched in France and Italy in the early 1990s, Rhys says, "there was a big sag in the market when the scheme ended." That same prospect has angered some in the industry. Christian Streiff, boss of France's PSA Peugeot Citroën, warned such incentive schemes have an "inverse effect" — they essentially guarantee an implosion in the market once the subsidies stop. (See the best cars from the 2009 Detroit Auto Show.)

What may be of more lasting help to Europe's automakers is the billions of dollars of direct support being pledged by governments. The $3.2 billion in loan guarantees offered by the British government in January, for instance, should boost struggling carmakers' access to much-needed credit to fund areas like research and development. In London on March 11, British carmakers and banks gathered to kick-start the distribution of the loan guarantees. With car registrations forecast to slide 20% in Britain this year, the government will be hoping that it can still save its auto factories, and the jobs that go along with them, from the scrap heap.

— With reporting by Bruce Crumley / Paris, Petra Krischok / Berlin And Austin Ramzy / Beijing

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