Time to scrap the scrapping incentives?

By: Dr Peter Wells, Friday, April 24, 2009,

Tags: Incentives, Pricing, Recycling, Sales Data.

AutomotiveWorld.com

There has been much debate about the use of scrapping incentives to stimulate the market for new cars around the world, but the industry has lobbied hard and governments have fallen into line one way or another. Environmentalists have mounted strong critiques, pointing to marginal benefits and the cost of unnecessary waste. Economists have doubted the effectiveness of these measures, both for the industry itself and in terms of stimulating renewed growth. But nobody has yet asked: is it actually good or bad for the industry?

Perhaps this seems a strange question to ask, particularly at this critical juncture for the industry. Then again, the value of high-quality strategic leadership is precisely to take a balanced view to secure the short-term survival of the industry without jeopardising the long-term prospects. In other words, it is times like these that senior management really earn their salaries.

There are, potentially, two aspects in which scrapping schemes are injurious to the automotive industry in general and the leading vehicle manufacturers: customer expectations and governmental-political relations.

First, telling customers that their most expensive purchases after their houses are scrap after only eight or nine years is a terrible message that completely belies the huge strides in quality and product longevity that the industry has collectively made. It is scant compensation that a greater proportion of the average car can be recycled than used to be case. This message tells customers that cars really are a throwaway commodity, and undermines all that vehicle manufacturers have expensively wrought in terms of brand identity and core brand values. Customers take to incentives very easily, but they are addictive. It is much harder to withdraw subsidies later.

Second, getting the government to subsidise new car purchases is equally dangerous to the industry, but in a different way. Nobody has really asked what happens if these ‘short-term’ measures are outlasted by the recession, while the industry has been all too willing to blame international economic events for troubles that were often evident long before mid-2008. So, the industry has seized the chance to get help from government, but in so doing it has thrown away the claim to be the product of free-market capitalism. In the past, the industry could claim that it generated wealth and jobs for society, even if the products did tend to generate a host of environmental problems and social costs. Now, the calculations are different and governments are likely to take a much stronger line with the automotive industry in achieving wider social goals.

At the most apocalyptic level, this almost universal wave of scrapping incentives could presage the end of the great car economy. The industry has not responded fast enough, and has not been able to put its own house in order. Scrapping incentives are being touted as providing relief in the face of an unprecedented crisis. Maybe, but they cannot be allowed to stand in the way of fundamental reform of the industry. Scrapping incentives must not be seen as a means of buying time until ‘business as usual’ can return: those days are gone. Only if senior management are able to design new business models for the industry and align capacity with a true level of underlying demand can scrapping incentives be of benefit.

Dr Peter Wells is a Reader at Cardiff Business School, where he is a Co-Director of the Centre for Automotive Industry Research and leads the automotive industry research programme within BRASS, also in Cardiff University. Dr Wells is also a director of AutomotiveWorld.com's sister website AWPresenter.com. He can be contacted on wellspe@cardiff.ac.uk.

The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.

Published on Friday, April 24, 2009