Scrappage blow-out costs Germany

THE hugely successful scrappage scheme in Germany is producing some unexpected side effects which may not please German taxpayers.

Not only has the scrappage scheme succeeded far beyond expectations – new-car sales were up 40 per cent in March – and cost billions of euros more than expected, it is also encouraging the purchase of cheap new cars made in Eastern Europe, mainly Romania and the Czech Republic.

The scheme is so generous it means Germans can now buy a new car – a Dacia Logan – effectively for half price.

An expected surge in demand for imported vehicles is believed to be the reason why the Australian government is not interested in a scrappage scheme: it would do little or nothing to help the local manufacturers.

Under the German scheme, car buyers receive a €2500 bonus if they trade in a car at least nine years old when they buy a new car.

It was originally estimated that the scrappage scheme would cost about €1.5 billion in the period to May 31, when it is due to expire. It was part of a €50 billion economic stimulus package.

However, it has been so successful that it could now cost as much as €5 billion. And German voters may not let the government withdraw the scheme as scheduled on May 31.

So far, 1.2 million car buyers have applied for the rebate, and analysts expect that number to grow sharply between now and the end of May.

Left: Hyundai i30 production, Czech Republic.

It is believed German chancellor Angela Merkel and her cabinet will today (Thursday) consider how to rein in the ballooning cost of the scheme without generating widespread voter disenchantment.

Analysts believe that, while Ms Merkel and the German cabinet might extend the scrappage scheme past the expiry date of May 31, it is likely the terms will be changed.

The German scheme is more generous than the French scheme, which offers €1000 and only on cars more than 10 years old.

What will be vexing the Cabinet are reports that the scrappage scheme is depressing turnover in other areas of the German economy and in, in fact, stimulating production of cars in other countries.

As car sales went up in recent months, turnover at consumer electrical stores went down, defeating the overall purpose of the economic stimulus plan.

The German retailers’ association, HDE, is agitated about the scrappage bonus because, it claims, the scheme is “sucking the spending” out of the rest of the economy, according to the Financial Times. It is also changing the structure of the overall car market, as sales of used cars have died because everyone is buying a new car.

But perhaps most galling for Ms Merkel is the news that the scheme is promoting the sale of imported cars in Germany, not locally made models.

In November and December, the Renault-owned Dacia factory in Romania was empty, its entire workforce at home on reduced pay.

Now they are back at work. In 2008, Dacia exported 25,000 cars to Germany. It has already shipped that number in the first three months of 2009.

The Dacia Logan is Europe’s cheapest car and was originally designed for sale in the depressed and under-developed economies in Eastern Europe, such as Romania.

It sells for around €5000 in Germany, and that means, with the German scrappage rebate, German buyers can get a new car for half price.

The Hyundai plant in the Czech Republic shipped 20 cars a month to Germany in January and February, but in March it shipped more than 2000. The company is currently hiring 500 more workers.

Similarly, Volkswagen’s Skoda subsidiary in the Czech Republic has recently lifted production.

In January it was working a four-day week, but exports to Germany doubled in March and the plant is now working a five-day week.

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