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Automakers Call for Continuation of Incentive Programs

Well this should come as a surprise to absolutely no one, but the world’s automakers are calling for a continuation of the various government-sponsored schemes implemented earlier in the year to boost auto sales. The plans – called everything from “Cash for Clunkers” to a “scrappage rebate” – have already cost governments in the U.S., Europe, and the U.K. nearly $11 billion. This is in addition to the billions already provided in direct aid to keep manufacturers afloat.

Incentive Program Costs

Germany €5 billion / $7.36 billion
United States $3 billion
United Kingdom £300 million / $496 million

As some critics warned from the outset, these schemes will undoubtedly boost sales in the short-term, but will do little to ensure the overall survivability of the auto manufacturers. In fact, it was just this sort of short-term thinking and reliance on subsidies and other incentives to create an artificial demand for their products, that many industry insiders blame for contributing to the downfall of America’s (former) Big Three automakers. After all, it does not take an accountant to figure out that offering rebates and other deals that push profits into negative territory is simply not a sustainable business model.

I am not questioning the fact that these programs helped sell cars as sales figures did jump dramatically – but it would be folly to think for even a moment that the next quarter will see similar sales levels. In fact, the results will likely be worse because of the programs as many potential buyers simply moved their plans ahead in order to take advantage of the rebates. The reality is that the programs did little to drive new sales – it merely convinced people already committed to purchasing a new vehicle to simply buy a few months earlier.

None of this is lost on the auto manufacturers – they know they face a bleak reality and are now appealing to their respective governments to reinstate the programs. In Germany alone, nearly two million new cars were bought during the program which ended earlier this month at a total cost of 5 billion euros ($7.5 billion USD). No wonder auto manufacturers want to see the programs resurrected.

“We’ve been very happy and very grateful that governments, particularly Germany and the UK, have put scrappage schemes into place,” noted John Fleming of Ford Europe. “But we’re worried that it’s going to stop very abruptly so what we’d like to see is it extended for a period of time”.

No doubt. And how long would that be? A month? A Year? Forever? Let’s face it, when it comes to subsidies, there is always a price to pay when the incentive is finally abolished.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Scott Boyd

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