Page last updated at 14:29 GMT, Wednesday, 22 April 2009 15:29 UK

Mixed response to car scrapping scheme

By Jorn Madslien
Business reporter, BBC News

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The view from the UK's largest scrapyard in Newport, Gwent

Chancellor Alistair Darling's plan for a £2,000 discount to anyone who trades in a car older than 10 years has been given a mixed reception.

Manufacturers and dealers have responded with cheer, envisaging that it will replicate the instant success of a similar scheme in Germany.

But others are sceptical, insisting it is not as generous as it seems, and will do little to safeguard UK jobs.

Critics also say it could prompt a fall in second-hand car prices.

And demand for spare parts and repair-work could hit parts makers and garages.

Industry contribution

Leaving aside a £2.3bn loan guarantee scheme aimed at helping manufacturers cut emissions, the scrapping initiative is the government's first concrete effort to prop up the motor industry since the start of a crisis that has seen UK manufacturers more than halve output this year.

Scrapped cars
The scheme will only cost the government 1,000 per car

"A £2,000 incentive from government and manufacturers will help the economy, environment and employment," said Edmund King, president of the AA. "Cleaner, greener and safer cars will replace some of the older gross polluters."

Agrees David Raistrick, UK manufacturing analyst, Deloitte: "It should also give automotive manufacturers greater confidence to increase production levels after the scaling back of production and reduction of working hours seen at plants right across the country."

To qualify for a £2,000 discount on a new car between now and March next year, buyers must scrap one they already own that is at least 10 years old.

But as the companies manufacturing cars in the UK - whose parent firms are all based abroad - have agreed to share the burden by paying half the cost, the government's offer is less generous than it seems.

The government has set aside £300m to pay for its part of the scheme, but it will only cost it £1,000 per car sold, and in the end the scheme could potentially bring in more than that in added VAT revenues.

Inferior scheme?

A similar scheme was recently introduced in Germany.

It will hit used car values
John Lewis, chief executive, BVRLA

It resulted in a 40% rise in car sales last month - in sharp contrast to the UK where sales slumped more than 30% compared with a year earlier - so carmakers and dealers have high hopes that the impact will be similarly dramatic in the UK.

"This could jump-start new car sales, which are at their lowest level for over a decade," says Mr Raistrick.

However, buyers in Germany were not only offered a 2,500 euros ($3.230; £2,243) discount, according to one German motoring journalist. In addition, Germany, dealers often agree to match the government's cash incentive, bringing the total discount to 5,000 euros.

Such generous top-up discounts may be harder to come by in the UK since manufacturers are already paying into the scheme.

In the current buyers' market, where several thousand pounds can be knocked off list prices by anyone who dares to ask, an additional incentive from the government may not be enough to persuade more people to buy a new car.

Negative impact

The German scheme's success has been largely put down to its simplicity.

Lights salvaged from scrapped cars
Spare parts may be salvaged from scrapped cars

Following its introduction earlier this year, it instantly attracted a host of buyers, some 85% of the total, who had never bought a new car before.

But unfortunately, simple solutions often come coupled with a whole host of unintended consequences.

The UK car rental and leasing body, BVRLA, whose members supply 2.5 million company vehicles each year, expects sales gains made by consumers flocking to the showrooms to be wiped out by falling sales to companies, which account for about 60% of the UK car market.

"It will hit used car values, so companies will be reluctant to sell three or four-year-old cars to buy new ones," insists John Lewis, BVRLA's chief executive.

"Ordinary car owners will also be hit, particular those with cars over six or seven years-old, where values will plummet.

"This scheme could completely stifle the recent recovery we have seen in used car prices, wiping up to £6bn off of the value of business fleets across the UK."

Spending patterns

Carmakers insist their industry is one of strategic importance to the UK, particularly at a time when employment and tax revenues from the financial sector are plunging.

The prospect for a scrappage plan endorsed by the Obama administration has the potential to add between 750,000 and one million units to new vehicle sales
Goldman Sachs

They insist the chancellor's initiative is crucial to safeguard the jobs of 800,000 people who work in the sector.

No doubt, the scheme will protect many workers from the axe, but in reality the numbers will be considerably smaller.

Within the UK, those making small cars - Mini, Honda, Toyota, Nissan and Vauxhall - stand to gain from the scheme, whilst makers of large and expensive cars such as Jaguar Land Rover, Bentley or Aston Martin will probably see little impact.

BUDGET 2009

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But less than a quarter of the jobs are with UK manufacturers, and even they export three cars for every one they sell in the UK.

In fact, more than eight in 10 cars sold in the UK are imported, so the government subsidy is more likely to protect jobs elsewhere in Europe, in Korea or in Japan than in the UK.

Though again, the argument is more complex than it first seems. Two in three cars imported to the UK contain at least some parts made in the UK, so every sale should help safeguard a UK job, at least to an extent.

But as the motor industry is not a uniform entity, it may be a case of rescuing jobs in one part of the sector while reducing job security elsewhere.

A large-scale removal of old cars that require repairs and maintenance could also hit garages who service and repair them.

And manufacturers and suppliers of spare parts are concerned that they will not only see a fall in demand but also face competition from parts salvaged from cars that are being scrapped.

No consensus

Unsurprisingly, the main winners will thus be the scheme's main backers, evident from the moves already made in the financial markets where shares in car dealers Lookers, Inchcape and Pendragon have been rising for weeks in anticipation of the chancellor's announcement.

UK car dealers share prices

Manufacturers were also experiencing a headwind, with one bank predicting that the scrappage idea could soon cross the Atlantic.

"The prospect for a scrappage plan endorsed by the Obama administration has the potential to add between 750,000 and one million units to new vehicle sales," according to a Goldman Sachs analysis.

In the UK, the overall impact of the scrappage scheme is considerably trickier to assess.

Some fear that additional spending on cars leads to less spending elsewhere in the economy, on items such as fridges, meals out or holidays.

Others believe the scheme will help boost spending and consumer confidence and contribute to a recovery.

Only one thing is certain; this seemingly simple scheme will be carefully scrutinised in the days and weeks ahead. Do not expect a consensus to emerge.



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