Car subsidies: What works, what fails

To jump-start disastrous auto sales, subsidy programs were launched throughout the world. Some worked. Some failed miserably.

Out of the many programs, let’s look at three representative ones: The German program, the Chinese program, and the American program.

Typically for Germany, they took someone else’s idea, perfected it, and it became a roaring success. The idea to give government money to people who retire their old cars had been developed in France. The French program was a failure years ago. It was resuscitated in late 2008. It became a minor success: According to official ACEA numbers, January to June sales in France rose a benign 0.2 percent. June sales in France were 7 percent above June 2008.

The German program was launched in January 2009. The Germans put more money on the table than their French neighbors: In France, a retired car is worth 1000 Euro with a new purchase. In Germany, it is 2500 Euro. This hit the proverbial sweet spot: According to the same ACEA numbers, January to June sales in Germany rose 26 percent. June sales in Germany were 40.5 percent above June 2008. (ACEA is on vacation. According to official statistics of the German Kraftfahrt-Bundesamt, July sales rose 29.5 percent.)

The German program was originally funded with 1.5 billion Euro. Two months after its launch, it was clear that the so-called “Abwrackprämien” program would run out of money quickly. In March 2009, funding was increased to 5 billion Euro, good for 2 million cars. As this is being typed, more than 1.8 million applications for the subsidy have been submitted, there is enough funding left for 155,000 cars. This is in a market that sells 3 million cars in a good year. Obviously, this program is a huge success. And it is money well spent. At a VAT tax rate of 19 percent, the program is practically self funding. If someone buys a car worth more than 13000 Euro, the government comes out ahead. The German program will wind down once the funds are exhausted. However, a follow-up program is already being discussed.

The Chinese program is a mix of tax subsidies, a “cars to the countryside” program, with a "replace old with new" program added.

China halved the purchase tax on cars with engines of 1.6 liters and smaller, while raising the tax on bigger displacement cars. Compared with other countries, the “clunker” money in China is relatively small. Subsidies range from 3,000 yuan to 6,000 yuan. China’s fleet is relatively young, therefore, the program has limited impact. In the cars to the countryside program, farmers buying light trucks and minivans get a 10 percent discount, with a subsidy ceiling of 5,000 yuan.

While frugal compared to what other countries spend, the tax reduction and cars to the countryside are credited as the catalyst of amazing growth for Chinese auto sales. In July, China registered the biggest gain since January 2006, with passenger vehicles up 70.5 percent, and overall vehicle sales up 64 percent. In a wise decision, China decided to continue the "replace old car with new" program and "vehicles going to countryside" project beyond the end of this year. The purchase tax cut is likely to end by December 31, however, “some adjustments in related policies” can be expected. China has turned into the world’s largest auto market, the United States resoundingly lost this coveted title this year.

America belatedly started their own cash for clunkers program in July. Just 55 days later, the program is being terminated on Monday, August 24, “by close of business.”. America may have lost the title of the world’s largest auto market. But they definitely hold the record for the shortest and most confused car stimulus program in modern history. Originally funded with just $1 billion, the program was such a success that funding needed to be raised to $3 billion. According to a US government news release, the program helped fund “more than 457,000 dealer transactions worth $1.9 billion in rebates.” (Remember: Germany, a country with one quarter of America’s population funded 1.9 million cars so far.) The short-lived US program is an administrative disaster. A Department Of Transportation document states that the DOT has only approved $140 million so far out of the $1.9 billion in applications.

The government document illustrates the state of confusion. In the first paragraph, it states that the program “helped tens of thousands of consumers purchase new more fuel efficient vehicles.” Further down, it says that “more than 450,000 transactions have been submitted by dealers, representing a total of about $1.9 billion.”

Why was the program stopped when there is still a billion dollars in funding in the budget?

The DOT figures that from Thursday through Monday evening, “the program will be able to continue to accept new submissions … consistent with the statutory authority of the program.” Translation: Until the money will run out. That would be another 260000 cars in one week-end. Not quite likely.

The best guess is that the program was such an overwhelming success that the Department Of Transportation was overwhelmed and had to pull the emergency brake. The Wall Street Journal says that “the program has proven to be an administrative fiasco, as the central planners at Transportation vastly underestimated how many people would apply.” The WSJ comes to the damning conclusion that “the feds can't even give away money very well.”

If one country should have reason to continue its stimulus program, then it is America. Despite the cash-for-clunker success, US July sales were still down by 12.2 percent in July 2009, compared with July 2008. With the program ended, August sales will most likely still be robust, while September sales are expected to be a disaster.

While the US government is stingy when it comes to stimulating flagging sales, it surely is generous in propping up car companies that suffer from sagging sales.

According to theWashington Times, GM has so far received $68.7 billion in government funds. Moribund Chrysler is said to have been given $17 billion by the government, in an attempt to make it pretty enough so that Fiat would take the company as a gift. Both companies were taken bankrupt, which cut a wide swath of destruction through suppliers, bondholders and other creditors at a cost of many billions more. Experts put the total cost at more than $100 billion.

The three programs in Germany, China, and the US all worked, sometimes beyond the wildest expectations. The US program became a victim of its own success. It was underfunded and was stopped before it could make a real impact. If the US would have taken the more than $100 billion the GM and Chrysler disaster has cost so far, and would have given it to consumers as a stimulus, that money could have generated sales of more than 20 million cars, more than the US ever sold in a year.

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About the author: Bertel Schmitt, Gasgoo's columnist, is CEO of Hong Kong based parts sourcing company Sinamotive. Before founding Sinamotive, with the assistance of U.S. venture capital, Mr. Schmitt was a marketing consultant to Volkswagen AG.