Economy

Apr 9, 2009

German carmakers headed for the scrapheap

A German government subsidy for consumers to trade in their cars for new models seemingly isn't enough to spare domestic carmakers from financial pain.

Glenn Dyer — <em>Crikey</em> business and media commentator

Glenn Dyer

Crikey business and media commentator

The financially conservative German Government has extended its "car scrapping" subsidy to 5 billion euros -- more than three times the original allocated sum of 1.5 billion -- with the authorities knocked over by the rush of people trading in their near-new cars for new cars. The new sum is actually 10% of the 50 billion euro stimulus package announced at the start of 2009 by the Government, which has resisted external pressure to spend more to help the economy. But it has decided to spend more supporting domestic car buyers and production -- a move that has destroyed German used car prices and sales and undermined the scrap metal industry in Europe because of the surge in car bodies awaiting processing. Still, the scheme has been unable to save one German auto icon -- the Karmann sports car maker has gone bust and is insolvent. Karmann is a car parts maker and contract manufacturer (of cars) said revenue had plunged from 1.2 billion euros last year to around 450 million this year. Even though it had little debt, no one wanted to inject funds to keep it going. Its last contract manufacturing job is the Mercedes CLK convertible and that ends next month. The company employs 8,000 people around the world and more than 3,000 in Germany. Because Karmann was mostly a supplier and built other company's products, the car-scrapping bonus scheme didn't help and a number of other smaller suppliers who have also gone bust in the slump. The scheme has caught the German Government by surprise and boosted car sales in the country. The scheme was due to expire at the end of May, but has now been extended until the end of 2009, if the new sum allocated isn't exhausted by then, which is very likely. It was introduced under the government’s 50 billion euro fiscal stimulus package adopted in January. The scheme pays a 2,500 euro subsidy to buyers of new cars in exchange for scrapping their old vehicles and has seen people registering more than 1.2 million applications to date. That's double the originally estimated 600,000. It boosted first quarter car sales in Germany with new car registrations up 40% to 401,000 in March alone and 868,000 in the first three months of the year. They are the highest car registrations for a month and a quarter since 1992 when east and west Germany unified. Sales had risen 21% in February and look like being up another 40% this month. The car industry expects the year's sales to top 2008's 3.09 million. That's been a big help for the industry, but it is not enough to save it from some crippling damage. Exports continue to plunge, hurting Volkswagen, BMW and Mercedes especially. In March car exports from Germany fell by a quarter and they were down 38% for the March quarter as a whole. Total car production was off 20% after falling by a third over the quarter. The scrapping bonus will effectively boost domestic demand by enough to replace the lost exports to the rest of Europe, the UK, Australia and the US and Asian markets by the likes of BMW, Mercedes etc. Russia has been a major destination for Germany's big makers of luxury cars. So the news of a sharp fall in sales underlines the damage being done in Germany. New car sales in Russia fell 47% in March (compared with March 2008), much worse than the 38% fall in February. Meanwhile, Daimler's annual meeting in Germany overnight was told that the company would suffer large losses this year from its car and truck businesses. There were protests from staff as wage cuts and short hours imposed by the company to save money. The company said it expected a "considerable" drop in revenue in all of its automotive businesses this year and pushed back its expectations of when the industry might turn around into the second half. It also repeated that it would post a significant loss in the first quarter. "In the first quarter of 2009, Daimler drastically intensified the actions introduced last autumn to reduce the costs of business travel, consultancy fees and general overheads. Wage rises have been limited to the portion specified by the collective bargaining agreement, while executives have had to accept substantial salary reductions of nearly 30%." Daimler said it is "is preparing for a distinct decline in business volumes this year. Revenue is likely to be significantly lower than in the prior year in all automotive divisions and further substantial burdens on Group earnings are anticipated. "The Group will publish its financial results for the first quarter of 2009 on April 28, 2009, whereby a significant loss is anticipated for the first quarter. Daimler expects a gradual improvement in the earnings situation as the year progresses." German retailers have complained the bonus scheme is shifting consumer spending patterns rather than creating demand. Higher February car sales coincided with falling turnover at consumer electronics stores. One retailer said the bonus was “sucking out spending” from the retail sector.

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