Car-scrapping bonus scheme soon to wrap up

THE FRENZY over Slovakia’s car-scrapping bonus is subsiding and only a few thousand bonuses remain unclaimed by those who must purchase a new car by the end of the year. Since the launch of the scheme, which the government introduced in March to help the ailing Slovak car industry and to partially renew Slovakia’s fleet of old cars, opinions on the real effects of the programme have been mixed.

Prime Minister Robert Fico has admitted that Slovakia’s bonus programme, initiated along with 11 other EU countries, has had a negligible impact on the country’s extensive automotive industry, but he also perceives Slovakia’s participation as a stance in solidarity with other countries with strong automotive industries which first launched the idea. The government also sees the programme as a way to renew customer’s trust and, last but not least, as a way to improve the quality of Slovakia’s fleet of cars, heavily littered as it is with old and sometimes dangerous cars.

“The measures taken in the EU against the impacts of the economic crisis respect the importance of the automotive industry, which in terms of employment, investment in research and development and sales turnover, as well as interconnections with other sectors represents one of the pillars of the current European economy,” the Slovak Economy Ministry wrote in a report on the outcomes of the car-scrapping bonus during the first seven months of 2009. “Supportive measures for the automotive industry are concentrating on providing loans to carmakers and suppliers and on support for the sales of cars to customers through subsidies.”

Europe produced 18 million vehicles annually before the economic downturn, accounting for about one-third of the world’s production. The automotive sector is Europe’s largest industrial employer and is a leading contributor to foreign trade surpluses since automobile exports significantly exceed imports for the entire EU, the report said.

In Slovakia, the automotive industry filled a gap in industrial production which started after the winding down of production of armaments and other heavy industry over the past two decades. According to the Economy Ministry, the automotive industry is now the biggest single sector of the Slovak economy.

10% of purchased cars were made in Slovakia

New car buyers using the scrapping bonus purchased or ordered 36,661 vehicles by the end of July, meaning that 7,539 bonuses still remain to be used to purchase a new car by the end of the year. In total, the Slovak cabinet allocated €55.3 million to support the purchase of 44,200 new vehicles.

The Renault Thalia and Škoda Fabia have been the most popular cars sold within the bonus programme thus far. The average price of vehicles purchased under the programme was around €10,500, far below the €25,000 price limit set by the government.

Of the cars purchased or ordered so far, almost 10 percent were produced in Slovakia. The cee’d model, assembled by Kia Motors Slovakia in Teplička nad Váhom, was the most popular model with 1,284 units sold, the Economy Ministry stated in its analysis.

The Peugeot 207, manufactured in the Trnava-based PSA assembly plant, followed with 814 units. Buyers using the bonus scheme also bought 400 Kia cee’d SW cars, 128 Citroën C3 Picasso cars and 28 Kia Sportage cars. The ministry expects the proportion will continue until the end of the year and that about 10 percent of cars purchased using the bonus will have been produced in Slovakia.

The Economy Ministry calculated that the bonus scheme will bring a net increase of more than €12.3 million to the state budget when VAT and registration fees as well as additional state income from additional costs of car users and services of importers and maintenance organisations are taken into consideration.

“The analysis has confirmed the assumption that the scrapping bonus project will not have a negative impact on the state budget in 2009,” reads the analysis. “But it is likely that in 2010 and 2011 a gap in VAT collections will occur as a consequence of the fact that interested car buyers bought a car already in 2009. Concretely, when 26 percent of respondents in a survey [conducted for the ministry] said that they would have bought cars in 2010, this means a transfer of the VAT collection from 2010 to 2009 amounting to €22.6 million.”

The ministry lists several other synergic effects of the car-scrapping bonus over and above the support to the production of cars and their components: a positive impact on employment; a contribution to road safety; a reduction of environmental pollution; making new vehicles more available for Slovaks; and a positive signal for foreign investors in Slovakia’s automotive industry.

“With regards to the fact that cars manufactured in Slovakia are global brands, it is necessary to assess the support to sales within the whole Europe,” concludes the ministry’s analysis.

But while the Slovak Economy Ministry as well as the Automotive Industry Association of the Slovak Republic (ZAP) see the car-scrapping bonus as a tool to propel the automotive industry and to positively influence other segments of Slovakia’s economy, some economic experts are not as enthusiastic.

“The car-scrapping bonus has increased the sale of passenger cars in Slovakia, but part of this increase is not a direct effect of the bonus,” Dávid Dereník, macroeconomic analyst at UniCredit Bank Slovakia told The Slovak Spectator. “In fact, the bonus started up competition among carmakers, which have been offering sound discounts for cars up to now and thus many households decided to purchase a new car without using the scheme. It is possible that this competition would have started also without introduction of the bonus due to minimal demand for cars.”

Richard Ďurana, director of the Institute of Economic and Social Studies (INESS), an economic think tank, believes that the bonus has had only a minimal impact on the domestic car industry and that the measure has diverted funds from other industrial branches.

“The car-scrapping bonus had only a minimal impact on the local automotive industry; it had a positive impact in particular on car sellers, who were behind its implementation,” Ďurana told The Slovak Spectator in an earlier interview. “However, it is impossible to speak about a positive impact on the whole of Slovak industry. The support to one selected industrial branch has diverted funds from other branches which were hit by this measure because customers delivered their savings to car sellers. Moreover, politicians, by introducing this bonus, motivated people in a time of crisis to spend their savings and even to go into debt.”

Dereník agrees that the Slovak bonus more so supported the car industry outside the country since Slovakia manufactures quite a large number of SUVs which were disqualified from the bonus scheme because of their high prices.

A bit of history

Slovakia, along with Germany, France, the United States and several other countries, introduced a government-supported bonus to reduce the price of a new car for those who delivered their more than 10-year-old cars for scrapping to licensed companies.

In two waves, the Slovak government allocated a total of €55.3 million and secured the scrapping of 44,200 cars – almost 17 percent of the passenger cars in Slovakia older than 10 years.

Prime Minister Fico’s government launched the first wave of the scrapping bonus in early March. The basic bonus paid by the state was €1,000 and if the new car dealer reduced its sale price by an additional €500, the state increased its contribution to €1,500. The car-scrapping bonus could generate a total discount of €2,000 for buyers of new cars. The bonus covered only new cars with a regular sales price of less than €25,000 and the scrapped car had to be more than 10 years old and had to have been registered in Slovakia before December 31, 2008.

It took the Slovak public only 13 working days to deliver 22,100 old cars to the authorised scrapping yards and qualify for all the available bonus money. After this huge popularity, the government launched a second wave in April. The conditions for car buyers remained the same but new car dealers had to contribute more: €1,000 for each new car for the buyer to get the €1,000 state bonus.

The second wave was as popular as the first and the allocated state funds were used up after only five working days, ending on April 14. Owners of old cars could not qualify for the bonus after April 14 but those who had completed scrapping their clunker before then are eligible to use the bonus before the end of 2009. When a car owner brought a qualifying old vehicle to an authorised car-scrapping yard an official document was issued which can be submitted to the new car dealer, which in turn receives the bonus from the state.

Prices down, cash dominates

During the first half of 2009 a total of 41,298 new passenger cars were registered in Slovakia, according to data compiled by the Automotive Industry Association of the Slovak Republic (ZAP) and buyers most often paid for them in cash.

Leasing companies financed 15,544 passenger cars with an aggregate purchase price of €174.5 million, according to Marián Horváth, the head of the committee for statistics and media at the Association of Leasing Companies of Slovakia (ALS).

The overall ratio of the value of new car purchases between private individuals and business entities was balanced but ratio of the actual number of cars purchased by individuals compared to businesses was 2:1.

“This means that the price of new passenger cars purchased by private individuals was one-half the price of cars purchased by businesses,” Horváth told The Slovak Spectator. “When compared with the first half of 2008 the value of purchases decreased by one-third but from the viewpoint of the number of units sold, the drop amounted to only 10 percent.”

Because of the support offered via the car-scrapping bonus, Horváth expects car sales in 2009 to be at a sound level through the end of the year.

“But in general, the sale of cheaper cars will dominate and buyers will be primarily private individuals,” he said. “A small portion of them will finance their new cars, using the leasing companies’ loan products.”

But in taking a longer-term view of the new car market, Horváth thinks that the bonus scheme only accelerated the sale of passenger cars into 2009 rather than in coming years.

“Thus we expect that sales will be muffled during upcoming periods of time, especially in 2010 and 2011, by the identical rate in which sales of new passenger cars by private individuals rose in this year “ he said. “Without additional car-scrapping bonus schemes, 2010 will be characterised by purchase and financing of new passenger cars especially by business entities. This means that the average price of a new car will increase compared with the current year, but on the other hand, the total number of cars sold will decrease.”

A third wave?

Economy Minister Ľubomír Jahnátek has dimmed hopes for a new wave of tCedric Pourcher du Chene he scrapping bonus, at least for now. Jahnátek said after a cabinet session on August 19 that a third car-scrapping bonus would not be as effective as the first two waves at this time.

“I do not see any significant sense in a third scrapping bonus wave,” he said, as cited by the SITA newswire. He added that he thought it would be useless because several car dealers have gone ahead with versions of the scrapping bonus at their own expense.

Horváth thinks that dangling the idea of a future wave of the scrapping bonus has an opposite effect from what the cabinet wants to achieve through such a measure.

“Those people who currently are pondering whether to purchase a new car, who might theoretically qualify for a next scrapping bonus wave, are likely to put off such a purchase for an uncertain period of time and muffle their current consumption.”