Car scrapping scheme is keeping German buyers happy

Destruction seems to be the new trend in Europe. The plight of major American manufacturers such as General Motors and Chrysler has overshadowed that of their European counterparts, which are also experiencing a very bumpy ride. Bankruptcies, plant closures and layoffs have prompted governments to act to save an industry that employs 12 million people in Europe. In January this year, the German government introduced a scheme to rejuvenate its flagging car market. Every vehicle owner who agrees to scrap their car older than nine years is entitled to a premium of ?2,500 (Dh12,800) towards a new one. It was hoped that this would boost the market and increase the number of fuel-efficient vehicles on the road.

Although the latter point has been widely debated, the former has proven to be correct. Year-on-year sales in March showed a 40 per cent increase - the market's highest level since 1992. A similar scheme in France resulted in a significant 8.1 per cent rise in registrations over the same period. The German government originally allocated ?1.5 billion (Dh7.7 billion) to its Umweltpraemie (Environmental premium) scheme. In March, the scheme was extended until the end of 2009 because of demand.

Car scrapping schemes have been introduced in other European countries, including Portugal, Austria and the UK. The turnaround in Germany has been impressive, although not everybody is happy about it. Volkswagen boss Martin Winterkorn is a prominent supporter of the scheme, although there is concern, particularly amongst luxury car manufacturers, that it favours small cars. Daimler's chairman Dieter Zetsche is less enthusiastic, claiming that governments should make structural changes to the economy in an anti-cyclical way rather than try to change consumer behaviour.

"Governments should focus on fixing the banking system, or offer loan guarantees, thus freeing up lending to car buyers and the corporate sector, rather than meddle directly with initiatives such as the German scrapping scheme," he said. "Short-term 'fires', although sometimes beneficial in the short term, simply store up problems for the future, in that they typically lead to another dip," Zetsche claims.

But in spite of the benefits, critics have been quick to dismiss it as a gift to foreign car makers. Official statistics have shown that up to two-thirds of the new cars sold since the introduction of the scrappage scheme were built outside Germany. Used car dealerships in Germany have been experiencing a significant reduction in sales since the programme began, and parts suppliers and private workshops, which rely heavily on repairing older cars, are also being hit hard.

Even environmentalists are up in arms. Many insist that the bonus is being distributed with a complete disregard for carbon dioxide emissions, meaning that a motorist who scraps a 10-year-old hatchback and buys a new Porsche Cayenne Turbo would still receive the full payment guaranteed by the scheme. "The German car industry must build lighter and more efficient cars if they wish to remain competitive," says Wolfgang Lohbeck, Greenpeace's traffic expert, "and the government should only promote such vehicles."

It may be argued that any government scheme will have its critics, but the economic benefits are already becoming apparent. However, the rapid rise in car sales in Germany, partly caused by fears that the scheme would be ended early, is expected to slow down throughout the year. Matthias Wissmann, President of the German Association of the Automotive Industry (VDA), explains: "Consumers' concern that the environmental bonus might be terminated early seems to have caused a run for cars in March. However, the planned extension of the programme until the end of the year will probably lead to a less hectic situation in the coming months. The environmental bonus and the restructuring of the motor vehicle tax have obviously played a big role in stabilising the German market, especially with regard to small cars and compacts."

April figures supplied by the VDA suggest that those European countries which have implemented sales incentives in the form of environmental bonuses have continued to outperform those which have not. In general though, in spite of a 12 per cent decline in European passenger car sales in April, the downwards trend seems to be slowing. There are plans to introduce a similar scheme to help the stricken US auto industry, in particular Ford, GM and Chrysler. As it looks now, the law would reward those who buy a new car or truck that gets better fuel economy than the one traded in, with up to $4,500 in government vouchers. But judging from Germany's scheme, the question is, will it help US car makers or hinder them? [e-mail]