Government scrappage schemes in Europe – especially Germany – have helped to lift car demand this year. But they are sometimes criticised for merely pulling forward sales that would have happened anyway, rather than creating an incremental addition to sales. But how true is that? Dave Leggett asked Pete Kelly at JD Power Automotive Forecasting for his expert opinion.

JD Power analyst Pete Kelly suggests that without scrappage incentives, 2009 would have been a lot worse for the industry in Europe.

“The important thing to understand is that without incentives in 2009, car sales could have been as low as 11m units in Western Europe, yet they could hit 13.3m units or more as a result of incentives,” he says.

Does that mean that following the market boost, a similarly sized symmetrical market contraction is inevitable? Kelly doesn't think so.

“The view that this year's incentive boost of more than 2m units must be paid for by a similarly sized negative impact after incentives are over is simply incorrect. Payback is likely to be only in the range of 400,000 units in 2010 and this means that sales, over the duration of the incentive distortion, have been increased by over 1.6m units net.”

He says that JD Power's research backs up the historical evidence from similar earlier  schemes operated in Europe. Their analysts have looked extensively at models of car demand to establish where markets would be without incentives and compare their actual evolution with those projections.

“In all historical cases, the overall payback is nowhere near as large as the boost to the market while the incentives were in operation,” Kelly maintains.

“The bulk of the transactions are with customers who are not traditional new car buyers – these are incremental sales.”

There are still critics who maintain that governments should not intervene and that markets should be left alone. But others counter that scrappage schemes like Germany's have provided some much-needed breathing space for the automotive industry in Europe this year.

Kelly puts it in context: “In the worst economic crisis for generations, that has probably meant the difference between life and death for many automotive companies, not just the car manufacturers but also firms in the huge supply industry.” 

With scrappage incentives now ending, a market contraction in Europe is coming in 2010, but that mainly reflects the absence of the schemes and return to a more 'normal' market that reflects real economic conditions.

JD Power's analysis suggests that there is not a big negative payback effect – though there will obviously be some from people who have indeed simply pulled forward their purchases from future time periods to take advantage of a subsidy.

However, the vast majority of purchases under scrappage incentives are made by people who otherwise would not have done so (such buyers typically on an extended cycle to eventually replace their car - at least  a decade or so old remember, to qualify for scrappage - with a younger used car).   

Dave Leggett

See also: EUROPE: W. Europe car sales up 16.5% in October [includes audio]