Germany's 'cash-for-clunkers' scheme fuels sales of foreign-made cars

Ever since the government launched the program in January, more Germans are bypassing the BMW and Mercedes dealers in favor of using their subsidies on Skodas, Hyundais and other fuel-efficient rides.

June 16, 2009|Henry Chu

MLADA BOLESLAV, CZECH REPUBLIC — Gloom permeates the U.S. auto industry, but happier days are here again for workers at the Skoda factory in the western Czech Republic. Orders are up, their assembly lines are humming once more, and they owe it all to the government.

Just not their own.

Their gratitude goes instead to their next-door neighbor. Late last year, when the global recession started to take hold, Germany decided to encourage its people to junk old cars in return for money to buy new ones in an effort to boost the country's ailing carmakers, help the environment and stimulate the economy, Europe's largest.

Since its launch in January, the scheme has been a major success -- though not quite in the way the German government intended. Auto sales have surged, but rather than spending their subsidies at the nearest BMW or Mercedes dealership, more Germans are using the bonus to buy foreign cars such as Skoda's compact, fuel-efficient Fabia.

"Since the end of March, we are in full production -- five days a week, on three shifts," Skoda spokesman Jaroslav Cerny said at the automaker's headquarters here.

As Congress ponders a similar "cash for clunkers" program in the U.S., the experience of Germany and other European nations shows that such schemes can have unintended consequences, particularly regarding who benefits most.

In Berlin, officials say they are pleased with the enthusiastic response to the program, which offers a voucher worth $3,500 to anyone willing to trade in a car at least 9 years old for a new set of wheels. More than 1 million would-be car buyers have applied for the handout, prompting the government not only to extend the program to the end of the year but also to increase its budget to $7 billion from $2.1 billion.

Registrations of new cars in Germany jumped 40% last month compared with the same period last year. In Britain, where a cash-for-clunkers scheme has only just kicked in, car sales were down 25%.

Although car dealers across Germany are thrilled to have their showrooms buzzing with customers again, manufacturers of German cars are a little less excited.

As of the end of March, only 24% of the bonus money had been spent on German-made automobiles, mostly by Volkswagen and Opel. Most buyers took their taxpayer-funded vouchers to dealers for Hyundais, Renaults and other foreign brands.

Such "leakage," as economists call it -- when a government's efforts to stimulate demand benefit firms in other countries -- is unavoidable in today's world of globalized markets and consumer choice.

"We live in open economies, and whatever type of fiscal stimulus package that you adopt, you will always have those leakage effects," said Henrik Enderlein, a professor of political economy at the Hertie School of Governance in Berlin. "It's inevitable."

And Skoda is eagerly lapping up its share of the leakage.

Just six months ago, things looked grim for the Czech Republic's premier automaker. With orders plummeting, the company shut down its three plants for 14 days late last year. Production dropped by half. All but 700 of the firm's 4,000 contract workers, most of them immigrants, were issued pink slips. And when the new year dawned, Skoda's regular workforce of 25,000 was put on a four-day week.

Uncertainty was the order of the day.

"Nobody knew what would follow, how the situation would evolve," said Jiri Mosna, 61, who started working at Skoda 42 years ago, when it was a state-owned enterprise and Czechoslovakia was part of Soviet-dominated Eastern Europe.

As economies tanked around the world, Mosna said, "we were really worried about what would happen."

That's because 91% of Skoda's cars last year were destined for export to countries including China, Austria, Britain and Poland. Germany is the company's biggest market, twice as large as its domestic market.

So workers here in Mlada Boleslav, about an hour's drive from Prague, cheered when the German government launched its cash-for-clunkers scheme.

To try to meet the surging demand -- which is still not as high as before the downturn -- Skoda rehired 500 contract employees and resumed a five-day workweek. But there's now a three-month lag from order to delivery, compared with the previous wait of about four to six weeks, spokesman Cerny said.

Smaller, more fuel-efficient cars such as Skoda's Fabia and Octavia models have emerged as the big winners from the incentive scheme. Luxury automakers, with whose models a customer's $3,500 voucher doesn't go as far, continue to flounder. Germany's Porsche reportedly flirted with bankruptcy in March.

"They all bought the small cars and not the large ones," Enderlein said. "In my view, that's not sufficient to get the car industry on track."

And the question remains as to what will happen once the schemes end. Critics say the incentives have merely hastened people's planned purchases of a new car rather than creating new demand, and that any gains are short-term ones.

"It's a drop on a hot stone," Enderlein said, using a German expression akin to "a drop in the bucket."

"I'm very doubtful the car industry is going to recover quickly," he said.

Here at the Skoda plant, amid the hiss of machinery and clink of metal, Jiri Vaclavik, a team leader on the assembly line, is glad to be back at work full time. Skoda's fortunes are particularly important to his household, because his wife works here also, as a welder, though at the moment she is on maternity leave.

Vaclavik, 39, knows that the bump in orders may prove fleeting.

"Nobody knows what the future holds," he said.


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