The World From Berlin: 'Down with the Scrapping Bonus!'

A government program designed to get Germans out of their old cars and into brand new ones was supposed to help buyers and manufacturers alike. But the "scrapping bonus" may backfire.

Government payments are encouraging Germans to scrap their old cars and buy new ones.
DPA

Government payments are encouraging Germans to scrap their old cars and buy new ones.

Germany's auto industry has been buoyed recently by a government program designed to get drivers into new cars. The so-called "scrapping bonus" gives buyers €2,500 ($3,300) towards a new car in exchange for junking their old model, provided it's been on the road for at least nine years. The program's popularity among car buyers and car companies encouraged politicians to extend the program's timeline through the end of the year and boost funding from €1.5 billion to €5 billion.

The bonus is a stimulus measure, meant to kick-start business for German automakers during the economic downturn. But German commentators on all sides of the political spectrum have raised concerns about the wisdom of expanding what some call an election-year gift to the car industry.

The Financial Times Deutschland writes:

"It would be wrong to assume that the auto subsidy hasn't had its desired effect. The demand for new cars has grown in the middle of a recession. A few manufacturers have managed to avoid furloughing workers thanks to the boom in orders."

"At the same time, there are dangerous side effects of the so-called scrapping bonus. It's no accident that on the same day some firms in the car industry were toasting the extension of the bonus, others were announcing concerns. The blessings of the subsidy have done no good for some companies -- from Karmann, which announced it was going bankrupt, to Daimler, which announced its worst-case scenario, layoffs due to the dire economic situation."

Left-wing daily Die Tageszeitung writes:

"The scrapping bonus is a success story -- for the auto manufacturers and their suppliers, for auto dealers and also for banks. They're the ones who are profiting from this indirect subsidy of a key German industry. To get access to the money, though, piggy banks are being smashed, bank accounts plundered and debts accumulated. The sweet promise of the bonus is tempting many Germans to dip into their retirement savings early or make deals with loan sharks."

"This year Opel posted its best first quarter in a decade. The inventory is gone, and the threat of bankruptcy staved off -- for now. The rush to cash in on the bonus has even slowed the collapse of premium brands: Porsche and BMW are stagnating, which can be considered a success in the current crisis. And Daimler, despite setbacks, is doing better than expected."

"So -- long live the scrapping bonus? No! Down with the scrapping bonus! Used car dealers have lots full of cars built between 2002 and 2007 that are practically impossible to sell, especially premium cars. At the same time, it's almost impossible to find used cars worth less than €2,500 -- they're all being compacted at the nation's junkyards."

Business daily Handelsblatt writes:

"Much more explosive is the effect on pricing structures. Because the bonus encourages buying small cars and imports, German manufacturers have to respond with heavy rebates. The VW Golf, for example, comes with a €2,500 environmental rebate. Audi, BMW and Mercedes are all offering similar deals. At the highest levels, rebates plus the scrapping bonus can cut the price of a car by 48.5 percent."

"The scrapping bonus has set in motion a downward spiral that's killing the German auto industry's profit margins. Someone who buys a Golf at a 30 percent discount today is unlikely to be happy with 5 percent off the next car they buy. And the used car market is suffering badly too. Used company cars can only be sold off at heavy discounts, leading auto makers to raise their rates on leased cars -- doubling the damage, in effect."

"It's also been clear from the start that the employment effect of the bonus has little meaning. Around 75 percent of cars made in Germany are exported, and only about 40 percent of personal vehicles sold by German car companies go to private customers. As a result, the bonus only affects about 10 percent of Germany's production capacity. The theoretical employment effect is very limited. Since most small cars -- with the exception of the Opel Corsa and the Ford Fiesta -- are built abroad and the bonus is reducing demand for premium cars, the gains for Ford and Opel don't cancel out the losses for Audi, Mercedes and BMW."

And center-left Süddeutsche Zeitung writes:

"It's mostly foreign companies and VW that are profiting from the bonus. Other companies are going without, and losing market share. Prices on the used-car market are falling. Other industries are suffering, because the buying power of customers is being shifted towards cars. … It's tough luck for those who pay their taxes and drive a newer car."

-- Andrew Curry, 12:30 CET

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