Thomas White Global Investing
Germany
Germany Stamp
September 11, 2009
A Postcard from Europe
Germany: Steers Cash for Clunkers Program to the Junkyard

Cash for Clunkers program

Germany’s hugely popular Cash for Clunkers program pushed auto sales up this year, but analysts forecast the next few quarters will be subdued.

Germany was one of the pioneers. With its vital automotive sector sputtering in the wake of the global recession, the German government launched “Abwrackprämie” or the Cash for Clunkers program at the beginning of the year, a move that the U.S. eventually replicated. Abwrackprämie was a huge hit, and it pushed car sales in Germany for seven consecutive months since its launch. Now, not unlike its jalopies, the program has been scrapped.

Other countries, including the U.S. have offered similar programs, but Germany towered over them all with the sheer size of its package. Each participant in the program was allowed a € 2,500 ($3,600) government rebate to buy a new car in exchange for a clunker at least nine years old. In all, the government spent $7 billion to rescue its automotive industry, albeit temporarily. That is almost twice the size of the package that the U.S. offered, for a market that is much smaller. Obviously, a lot of money has been spent – but how do the Euros stack up?

Germany’s Federal Office of Economics and Export Control estimates that around two million old cars have been exchanged. Registrations of new cars surged 28% in August from a year ago to 275,200 vehicles, as buyers hurried to benefit from the rebate before the program ran out of funds. Critics of the program, on the other hand, use this data to point out that car production and exports have in fact fallen for the 11th straight month, and so far, the program appears to have benefitted large automakers only.

Crucially, there was one important flaw in the German program – while the U.S. mandated the ‘clunkers’ to be destroyed, there was simply no such directive in Germany. Old cars made their way to junkyards and car cemeteries – where many were stolen by enterprising car thieves who resold the cars in Eastern Europe and elsewhere. Ridding the planet of these gas guzzlers and doing the world a good deed simply did not work in the German program.

Supporters of the program say that Abwrackprämie helped Germany avoid a long-term recession by registering a modest growth of 0.3% in the second quarter. And, it pushed the normally thrifty German to let go of some of his hard-earned Euros, driving up consumer spending. Yet, the fact remains that unless global demand picks up, Germany’s predominantly export-oriented automotive sector might find the going harder next year. In fact, analysts from Roland Berger Strategy Consultants predict a steep fall in demand beginning this year itself, and extending into 2010. This will result in job losses of as much as 90,000. Retailers too have complained that the scheme dragged their sales down, as customers preferred to postpone other major purchases in order to buy a new car. No doubt, the program helped struggling auto manufacturers to stay afloat, but it also masked underlying problems plaguing the industry in Germany. Simply put, overcapacity resulted in bloated inventories at dealerships. Now, with Germany’s labor costs among the highest in the global automotive industry, recession or not, more and more companies will find it economically more feasible to shift production to lower cost destinations in Eastern Europe or Asia.

Ultimately, for the Euros to add up, Germany is banking on global demand returning to pre-2007 levels. But, with most major economies just barely limping out of a recession, Deutschland may well have to wait a long time to celebrate. In the meantime, some car thieves are enjoying an entirely different Cash for Clunkers program of their own.

 

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