What cash for clunkers meant for 6 key allied industries in Germany

April 24, 2009

A lesson for the US

On a previous blog post, I responded to a question submitted from Chris Patton of the Mike Patton Auto Group in Georgia. Chris asked for my thoughts on what Cash for Clunkers might mean for the US auto industry, and I gave my best response. Susan, my assistant, reminded me that Ivo Kaussen, a professional German colleague, formerly of Porsche, N.A. was recently relocated back to the motherland. I sent Ivo a note asking for his insights and what follows is an extraordinary expose as to what Cash for Clunkers has meant for every constituent in the German automotive industry. Let’s all thank Ivo for taking the time to enlighten us on this side of the pond.

Here are my observations and thoughts on the topic:

From the German experience, two questions are crucial:
1. What are the conditions so that a Cash-for-Clunkers program is successful?
2. If it’s successful, are the consequences desired? And particularly, who is benefiting from the program and who is put at a disadvantage.

ad 1.)
In Germany, the federal government offered a 2500€ subsidy for all 8+ year-old cars that were the property of the buyer for at least 6 months.
+ In conjunction with the advertising and incentive programs by the manufacturers (e.g. “We double the government subsidy”) the program has been extremely successful. Within a matter of 4 months, 1.25 million subsidies have been filed for. This equates to roughly 40% of the German new car sales within a year. For the US that would mean 3.6 million new “Cash-for-Clunkers” units even with a 9-million-per year running rate for new car sales.

ad 2.)
Government: positive
For the government, the fiscal implications were not too bad. Due to the high federal value added tax of 19%, most of the subsidy was earned in return (average sales price of 10000€ equates to 1900€ in value added tax income).
Of course, the question that needs to be asked here is to which degree these new car sales are due to a pull-forward effect and how many are on-top sales. What creates a strong point for the hypothesis of on-top sales is the fact that in Germany people with 8+ year-old cars that are worth less than 2500€ typically don’t start buying new cars. One factor that has to be considered specific to Germany though is that the lease business is much weaker and that $99 or $179 per month leases are not common.
In any case, the government succeeded in its main objective: increase the economic activity with a rather minimal bottom line cost.

Car Manufacturers: in total, positive
Overall, car manufacturers benefited tremendously from the program as it helped them clean out excess new car inventories. VW is sold out of Polos, Golfs/Jettas/Passats and the like, Opel had to plan extra shifts in its plant for the subcompact Corsa and Ford also had a very good utilization of its factories that build the subcompacts Ka and Fiesta as well as the Focus. Toyota and Honda showed double digit year-over-year increases in its sales numbers as did European manufacturers of small cars, e.g. Peugeot(+34.5%) and Skoda (+55.2%). The ones who benefited most from the program are the manufacturers of “cheap” cars, i.e. Dacia that sells its Logan 5000 € +126.7%), Hyundai (+149.2%), Lada (+154%), Suzuki (+110.3%) and Fiat (+100.6%), . The ones who have a tough time converting the “Cash-for-Clunkers” program are the premium manufacturers (Audi, BMW,Mercedes) as well as the manufacturers of less economical cars (Chrysler, Dodge, Jeep, Saab, Lexus, Ssangyong, Cadillac, Volvo, Range Rover, Jaguar).

Their only chance to participate is to offer significant incentives on their entry-level cars (i.e. Audi A3, BMW 1-series with a 4-cylinder engine, MB A- and B-class). What needs to be mentioned as well is that the manufacturers belonging to the second group are going to suffer from the program effects in the long run: the rush towards new, small cars has undermined the demand for pre-owned premium cars, increasing the depreciation of these cars even further.

Car Dealers: in total, positive
Dealers with the “right” brands have seen an unparalleled sales boom where salespeople were able to start distributing cars again rather than selling them. The “screaming” success of these Dealers is contrasted by the lack of business in the premium brand dealerships which have a tough time selling both new and used cars. If your margins have been traditionally been higher in the pre-owned business than in new car sales, then your profitability is clearly going to suffer.

Used Car lots: negative
These Dealerships are suffering from an acute lack of traffic that now seems to go to the franchise Dealers who offer brands with small cars. The lack of sales is compounded by the rapid depreciation of their inventory, so that they find themselves upside down on many units.
The Used Car lots who have specialized themselves on low-end cars costing 3000€ or less now find themselves in a situation where the supply of cheap units now directly goes to the junkyard as part of the “Cash-for-Clunkers” program.

Junkyards: very positive
No comment necessary

Independent repair shops:
These facilities are also feeling the negative impact of the program since their customer base, i.e. people with older cars that need frequent repairs, shrinks rapidly. Due to the warranty period and better reliability of newer cars their prospect of regaining the business they’re losing now is rather small.

Overall, the impact of the Cash-for-Clunkers program in Germany is a big surprise for everyone. Not only that – it seems to lift the mood of the average citizen since a lot of people have now upgraded to a new car that they would have never bought under normal circumstances. Dealers and manufacturers are making sales they would have never made in the current economic environment, but there are definite losers as well as described above.

If I had to predict the impact of a comparable program in the US, the best we could hope for is to spur the sale of more economical, entry-level cars. The manufacturers who offer these cars are … the Koreans and Japanese in particular. The “Sick Three” would perhaps sell the remaining inventory of their entry-level cars. They might also be able to get rid of a share of their ridiculously discounted cars, trucks and vans that are less desired in the marketplace but which would be offered at a “no-brainer” price point.

So what appears to be difficult is to channel the additional economic activity to domestic businesses. But if the objective is just to spur economic activity, this might be the way to go. By the way, this approach can be extended to other types of products as well, e.g. computers, TV’s, domestic appliances, furniture etc. If you want to prevent a flow of this money to foreign manufacturers, then it should be applied to construction and services like restaurants. Of course, in the latter example the whole “clunkers” concept becomes a little bit distasteful…

What I personally like about a “Cash-for-Clunkers” type of program is that if you accept that the government has to increase the economic activity to prevent an even deeper crisis, now it’s not the government spending taxpayers’ money for bridges to nowhere. It’s the taxpayers who are willing to spend a part of their own money as well who decide what they want to spend it for. It is sad that we have to consider such a program to sustain economic activity, but it might be worth a try in an attempt to avoid an even deeper downturn.

Well, I tried a brief answer, but it wasn’t one…this is quite an involved subject with many parameters and implications. I hope that my contribution helps, though…feel free to edit it for better readability and I have nothing against being mentioned by name.