Automotive World - Will there be life after the car scrappage scheme?

Will there be life after the car scrappage scheme?

By: David Raistrick, Deloitte, Friday, August 28, 2009, AutomotiveWorld.com

The UK automotive industry has undoubtedly been buoyed by recent news including the positive car registration figures and encouraging production figures that we saw in July. However, the industry still faces a challenging environment and should not be tempted into believing that we are definitely past the worst.

These optimistic figures reflect the growing confidence in the UK automotive sector, as well as the positive impact that the scrappage scheme has had. Scrappage has made a material difference to the industry, illustrated by the most recent UK new car registration figures which showed growth for the first time since April 2008. Scrappage accounted for more than 20% of new car registrations in July and at last count, more than 155,000 units can be attributed to the scheme since it was implemented in May.

There have been many winners from the scrappage scheme - consumers, the industry, the environment, as well as the Government. Given how the scheme has been set up, the Government is able to fully recover the costs through VAT making it cost neutral - adding to its appeal.

We have now passed the halfway mark for scrappage which has come around quickly given its success. Realistically the scheme could end as early as October. I am concerned that there is a danger that the industry could suffer another sudden downturn when the scheme ends. The last thing the industry needs is for demand for new cars to fall back below pre-scrappage levels. Many other industry bodies and most retailers share this concern with me, hence the recent calls for the UK Government to extend the scheme.

The UK has followed the lead of other European countries, such as France, Italy and Germany in implementing this stimulus programme for the automotive sector. Currently these countries are worried about how they will suffer when their schemes run out. The UK also should share these concerns, as we should be striving for a long lasting recovery.

Additional concerns have also been voiced regarding the increase in VAT that will come into effect from the end of the year. The combination of this rise, with the end of scrappage, could stunt the recovery of the industry that we are all hoping for.

If as many believe, the UK is now starting to come out of recession, an extension to the scheme, for say a defined maximum period of a further 12 months, would allow the industry to prosper until such a point as the economy is back to where it was previously. Along the way we protect the automotive industry which employs many hundreds of thousands across component suppliers, manufacturers, distributors and retailers and also raise additional tax revenues for the country.

David Raistrick is UK Manufacturing Leader (automotive) at Deloitte. For more information please click here.

Published on Friday, August 28, 2009