Scrappage schemes could cause massive sales slump next year, says expert

By David Twomey | August 11th, 2009

The downside to the scrappage schemes that have been used by governments in Europe and the United States to bolster new car sales during the economic down turn, is slowly dawning on the automotive industry.

While the schemes, particularly in Europe, have driven vehicle sales up in a declining market, it is now obvious that many of these sales have been “pulled forward”.

In other words they are sales that would have been made in the coming year, but buyers, quite reasonably, have brought their purchase forward to take advantage of the cash incentives being offered by governments and car companies.

As a result one market research company is now suggesting that western Europe’s new-car sales could fall by 11 per cent in 2010 compared with a two per cent decline this year, once the scrapping schemes run out.

Car sales next year could fall as low as 11.8 million units, a level last seen in the early 1990s, from a forecast 13.29 million units this year, says J.D. Power Automotive Forecasting.

The steep 2010 decline would be “payback” after sales have been artificially stimulated by government-backed schemes in major markets such as Germany, France and Italy, the UK-based forecaster said.

In those countries car buyers are being offered thousands of euros in cash bonuses to trade in old cars, which must then be scrapped, for new models.

“Next year there will be a greater contraction in sales because there will still be a weak economy, but the incentives that have artificially fed the market will largely be gone,” Jonathon Poskitt, manager of European sales forecasts at J.D. Power Automotive Forecasting, is reported as having told the Automotive News Europe website.

“France, Italy and Spain have a history of incentive renewals and a continuation of these schemes is certainly possible, but it will be the German market that will make a difference.

“We don’t expect the German scrappage scheme to be renewed,” Mr Poskitt said.

A 2500-euro scrappage bonus introduced in Germany in February has helped to boost German new-car sales by 26.6 per cent to 2.4 million units in the first seven months, compared with a year earlier.

The booming German market has helped limit the year-on-year decline in western Europe’s car sales to 7.8 per cent, 8.2 million units, in the first seven months.

Tom

Wow, this has been what I’ve been saying since the whole scrappage scheme started. People who just traded in their old car for a new one aren’t going to buy a new car within the next several years. All that you have done is borrowed sales from the next few years, at considerable cost.

Having said that, it has softened the collapse and gives manufacturers more time to downsize production. But we aren’t going to roar back to 2007 level sales anytime soon, and the scrappage schemes have pushes those sale figures out further.
http://skyline The Salesman

Here come the doom Sayers. So are we assuming in 2010 no new buyers were going to come onto the market? Please, what a load of rubbish. Yes I agree it has brought the market forward but there are always more drivers coming onto the roads every year, are they not going to buy new cars? I predict they will see a massive burst as the buyers who were not convinced by the scrappage scheme, were unemployed at the time or just were waiting until the dust settled on the global credit crunch flood the showrooms.
Tom

Did I say there would be no new car buyers in 2010 TS? No. Did the J.D Power report say that. No. All I said is that the stimulated demand this year will come directly out of the demand over the next SEVERAL years. You can’t deny that someone who just scrapped their car and got a new one will not buy another new car in the next few years. That early sale cost their respective governments a lot of money, a sale that most likely would have occurred anyway a few years from now at no cost to its respective government.
http://skyline The Salesman

Um, i was refering to the article. See the title Tom.
Reckless1

The naysayers forget one essential thing as well – the cars that are traded in a “scrappage” scheme are scrapped. Normally these cars are traded and purchased again by other people, so they stay on the roads.

Yes, incentives prop up todays market, but not as badly as might be thought. The scrapped ones are replaced by new ones, and the demand increase caused by growth therefore has to be satisfied from new cars.
Jonathan

Tom, the scrappage scheme would have also attracted those people who would have never bought a new car to actually go and buy one. These people would be in addition to those who brought forward their purchases. So therefore, the scheme was not a waste of money like you say.
realcars

Only prob is that governments are left with massive debt as a result of these subsidies that the rest of us will be shackled to for years to come.

Just sell our debt to China. That should fix it.LOL.
Andrew M

Im actually in the Minority group by the looks of it, because Im with Tom.
The bulk of sales generated from these sort of schemes would have to affect tommorrows sales to some extent.

Lets take the Aussie incentive of the Tax break for starters.
This is only for Businesses, so lets take the stance that all businesses buy new when they turn their cars over

Lets say that business sales attribute 500,000 sales per year, every year. Lets also say that the average turnover rate of a business vehicle is 4 years.

2009 = 500,000 sales
2010 = 500,000 sales
2011 = 500,000 sales
2012 = 500,000 sales

Over that 4 year time line there is only ever going to be 2 million sales MAX
Now, you would have to be silly if you dont think that those due for turnover in 2010 and possibly 2011 will look at the incentive and decide whether or not to bring their sales forward. Chances half of them will because with a $40,000 vehicle purchase this could mean a $10,000 boost to their sky rocket!!!!! That would be nearing equivalent to the depreciation advantage from their current vehicle for the 3rd and 4th year combined.
Now why wouldnt those with 2yr old vehicles and up consider this??

Now lets say 150,000 sales come forward from 2011 and 250,000 from 2010, what happens come 2010 and 2011
2012 and 2013 sure arent gonna bring their sales forward with out incentive.

Its just robbing peter to pay paul for mine.
The scrappage scheme is a little deeper to get into how that will affect things, but the principle is the same.
For mine the only buyers to act will be thise that would have had intent to buy at some time, the incentive just tells them that now is the time

Now lets not turn this into a “you have no idea” segment, if you have something constructive to add Im all ears.
http://carAdvice The Salesman

Andrew M,

I understand your point referring to the investment allowance. But, your figures are based on several assumptions.
One being that no new business will start over the next few years. For example the Australian government have several new incentives with home/domestic solar and home insulation, this alone will create thousands of new business, what will they drive?
Another would be housing/building industry. For example in Queensland alone it is estimated we will need one million new homes by the end of 2010, 70,000 on the Sunshine Coast Alone. Who is going to build those?
First Tom

Jon, yes I agree, the scrappage program would have led to people who would normally have bought a newer second hand car buying a new car instead. However, those second hand cars that without the scrappage program people would have bought, are now still for sale. And the average joe only has the capacity to support one or two cars. He/she can’t buy a new car until he/she sells their previous one. The net result is a glut in the used car market, driving down prices, meaning the average joe now has less money to buy a new car over the next few years. In the end, the average joe who’s car was worthless enough to take up the scrappage program is the prime customer of the used car market. The used car market in turn props up the new car market buy reducing the total cost of upgrading to a new car. Buy removing customers from the used car market, you’ve created a production/consumption disparity, driving down used car prices. This in turn will drive down the new car market which will be felt most keenly in a few years time when recent new car owners start to upgrade and find the used car market saturated, slashing their resale values.
Jonathan

Tom, I understand your point, and in a perfect world that is what should happen. However, working as an analyst in the automotive industry for a leasing company, it is my job to look at residual values… from what I’ve seen there is now a lack of used cars in the market driving up prices. This is occuring all over the developed world. The usual seasonality effect of values going down in the winter months is actually not happening this year. These events are unprecedented.
Maneesh

In the USA, their scrappage scheme has fuel efficiency requirements, ie, the new car must be of a certain fuel efficiency and a lot of people there have traded in their Utes and 4WDs for proper cars like Honda Civic.

So it is obviously a good thing! But I am not sure if schemes in Europe have fuel efficiency requirements or not.
DesignEng©™

And in the US it has cost taxpayers $3 BILLION.

And the new car only has to be more efficient than the old one, and SUV’s or pickups only need to be 2 mpg better. So lots of new SUV’s and pickups ARE included in the scheme.
Will

This is a potential scenario that is market specific; for example Volkswagen may sell limited numbers of Skodas in Germany in 2011, but will still sell more Skodas in China with normal growth trends that will not be effected by cash for clunkers. A good medium term business plan should be able to factor such trends in.
Andrew M

T/S,
And your assumptions are based that no business wil go out of business.
Over the last 12 months many business have also folded so I figure that argument cancels itself out.

Also anyone starting up a new business would be looking for a new vehicle with or without an incentive to buy a car right??

Sure there will be more insulation businesses starting up for eg, but what about the tank sales people that cant move numbers now that the Tank rebates have finished.

Also as the population grows, so too does the number of businesses, and with that grows car sales to both business and private.
These are all sales that would eventually find their way to market with out an incentive to buy.
All I can honestly see such a scheme doing is mostly bringing forward sales that were gonna come out to play anyway
http://carAdvice The Salesman

Andrew M,

What if the investment allowance was incentive enough to just bring forward the customers who were going to buy anyway?
And perhaps were only waiting for the dust to settle on the so called credit crunch?
Don’t forget that Australia was on track to top 1 million new car sales for the second year in a row before the credit crunch.
Those buyers I assume are still out there, looking for an incentive to move forward with the sale.
That incentive might just be an assurance their job is secure, or, interest rates will hold. (or perhaps a cash insentive)

Their is no evidence to my knowledge that we have brought the market forward and robbed Peter to pay Paul.

Every month car dealers and manufactures spend millions of dollars on marketing campaigns. The objective is to sell as many cars as possible. Each month they want more sales than the last. It could be argued they are bringing the market forward too.
And that’s how I would view the investment allowance or scrappage scheme, a marketing tool to encourage people to buy products now.
Andrew M

T/S, so you agree that a certain element of stimulated sales will come from those brought forward, so how do you not see that the sales that were planned to happen tommorrow will now not happen??

Sure sales were heading higher and higher every year, but IMO this credit crisis had to happen as things were getting out of hand.
This credit thingy just landed reality into the laps of most people who thought they were financially invincible.
This is a scare/wake up call for consumers.

Things cant keep booming at the rate they were forever.