With some parties lobbying for an Irish scrappage scheme, MARK NICHOLinvestigates just how well it's working for the British car market
FOR AN incentive that aims to appease both the consumer and the manufacturer, the UK scrappage scheme is surprisingly polarising. When it was made official during April’s 2009 budget it was heralded as win-win-win: the consumer gets a healthy £2,000 discount on a new car in exchange for his 10-year-old banger; said banger is taken off the road in exchange for a nice, low-CO2 car; and the manufacturers get a healthy sales boost and a shiny new set of customers. Result, right?
The UK scheme has hit the halfway point now, with around 150,000 car sales accounting for half the £300 million government pot, prompting car industry body the Society of Motor Manufacturers and Traders (SMMT) to herald the scheme an unbridled success. It claims scrappage has boosted employment and “created a new market” for cars.
“By giving them this incentive you’re encouraging people who would normally be buying used cars to go for a new option,” says the SMMT’s Nikki Rooke.
The theory goes that these people will enter the cycle of buying a new car every three years or so, thus generating a whole new group of buyers later on. A cursory glance at the numbers makes it difficult to argue with the SMMT’s view, with July seeing UK new car sales rising for the first time in 15 months.
Hyundai, perhaps the most vociferous proponent of the scheme, is experiencing extraordinary success thanks largely to scrap-driven sales of the i10 and i20 hatchbacks. The i10, in fact, scraped into the top-10 sales chart for the first time ever last month.
“Everybody’s benefited from it,” says Hyundai UK’s managing director Tony Whitehorn. “Employment has gone up. We have had to double the staff at our import centre. The dealer network has on average increased its staff by about 20 per cent.
“Our dealers aren’t making quite as much money out of a scrappage car as they would out of a normal car . . . but they are selling four times as many cars as they were previously.”
So it’s alright for some, yet the rusty bed of car parts mounting up at scrap yards across the UK isn’t a source of comfort for all makers. Fiat, for one, objected to the scheme from the start because, of course, only half the £2,000 comes from the Government, which claws its £1,000 back comfortably from the VAT of the sale anyway. The other half is from the manufacturer. That situation, as Fiat’s Andrew Sproston puts it, “decimates your economics”.
The vast majority of vehicles sold under the scheme are city cars like the Fiat 500. “Quite clearly a lot of manufacturers do not have a £1,000 margin in these small cars. We’ve never discounted the 500,” he says, “and we are forced to discount it. The normal retail buyers are pretty much out of the marketplace because they’re not getting the same sort of benefits as those with a 10-year-old car.”
And what happens when the £300 million pot dries up? For some of Fiat’s dealers, for example, a huge chunk of the cars they’re selling are sold under the scheme. It follows that when the money runs out there’ll be a glut of dealers with very little to do. In other words, scrappage creates an artificial spike. And what goes up . . .
Tom Kirchmaier of the London School of Economics believes the scheme will ultimately have a negative impact on the economy for that very reason: “There was a good economic argument at the end of last year because the economic situation was so dire we wanted to avoid the car companies going broke and the overall economy re-living the great depression.
“I don’t think it makes much sense for Ireland for a number of reasons. The only difference it would make is to the dealers, but then you’re just bringing consumption forward, so that means the dealer will go bust next month, not this month. You prolong the inevitable. In the end all you do is throw good money after bad.”
Fiat, perhaps predictably, isn’t convinced it’s the right thing for Ireland either. “It’s a question of whether people feel confident enough to go and buy the cars anyway,” says Sproston. “Will it give you a short-term spike? Certainly. Is it a long-term solution? I don’t think so.”
No doubt there will be those who are confident enough to buy a car under the scheme, because the apparently exceptional deals offered by scrappage will be enough to tempt customers into the dealerships with their bangers in tow.
Unfortunately, the idea that the same people will stay on the treadmill of changing cars every few years – the view of the SMMT – is wide of the mark, says Daniel Harrison of Parker’s price guide. “If these people have owned cars that are more than 10 years old to start with, why were they holding onto those cars for so long? The people who are changing their cars are doing so because they think they’re getting a once in a lifetime deal – even though that’s not the case.
“You can get £2,000 off most things, so by the time you’ve sold your own car you’re usually better off buying something either through a broker or pre-reg than going through the scrappage scheme,” he says. And there’s the issue of cheeky dealers bumping up the interest on finance payments for cars bought with scrappage too – in some cases resulting in the buyer getting a worse deal than if they’d kept their old car.
Yet, the Society of the Irish Motor Industry (SIMI) has been calling for a scheme since December to abate Ireland’s car sales freefall, citing the success of the scheme in the 1990s as partial justification, as well as the environmental benefits of taking bangers off the roads for new, cleaner cars.
Scrappage for Ireland might, and probably will, stimulate car sales in the short term, but we’re going to need something much more far-reaching to solve the long-term problems in the industry.