What Would Be Better Instead Of The Scrapping Subsidy

With the corona virus crisis, the ghost of the scrapping bonus is once again haunting Germany. Remember: this was a state subsidy introduced in Germany after the financial crisis in 2008 to boost sales in the automotive industry. A total of 5 billion euros had been spent on it, with each vehicle being sponsored with 2,500 euros. The benefits themselves were contradictory. Although it helped automotive companies to bridge the time until the global economy started up again, scrap prices fell and an unnecessary number of vehicles were taken out of circulation that had not yet reached the end of their service life, which had a negative effect on the climate contribution. The actual environmental benefit was not noticeable, except for the noise reduction by new cars.

Financial Reserves

The financial reserves of German car manufacturers in March were not so bad according to German weekly Wirtschaftswoche. Thus VW had 17.8 billion euros in reserves in March, Daimler 9 billion plus a credit line of another 12 billion that comes on top of 11 billion in existing credit; and BMW has more than 18 billion in free cash flow plus another billion in credit. The question, of course, is how quickly these will fall and how long it will take before demand returns to satisfactory levels. VW needed 3.5 billion from December to March and expects to consume 2 billion a week during the crisis.

A Bad Lover

With sales slumping by two-thirds for April, the automobile bosses are once again knocking on the door of the German government to demand a scrappage premium, or as it is now called, “purchase premium”. In view of the events since 2009, the behaviour of the car industry up to now, and the limited use of the scrapping subsidy for many of the targets set, this mistake should not be repeated. The change of name to “Purchase Subsidy” already suggests that it would be better to put an end to the illusion that we are somehow trying to sell more environmentally friendly vehicles – keyword: electric cars. There are not enough of these in the repertoire.

We must not forget that in the meantime the diesel scandal and the price agreements had been uncovered. Through fraud and collusion, in which all German manufacturers were involved, they caused material and immaterial damage to Germany and the world (e.g. the reputation of Germany and German industry in the world), which we should not simply wipe off the table.

Don’t forget that VW has had to pay more than 29 billion euros in fines and damages to date. Daimler and BMW have also been sentenced to billions of euros in fines. Four years after the diesel scandal was uncovered, VW is still negotiating for compensation payments to the misled car buyers.

These amounts, which one had to pay in penalties and compensation, would also come quite handy in a time like this, where one needs money. VW could count 29 billion euros among its current cash reserves of 17.8. That’s enough to plunge through the crisis a few weeks longer. At this point, one should also take another look at the conduct of share buybacks in recent years. These, too, are primarily aimed at increasing the share price in the short term and driving up the bonuses of the management board members, but they also lead to a reduction in cash reserves, which are invested in innovation, for example, or could help in a crisis.

For these reasons, we should probably consider whether we want to support the car manufacturers again with the same method. We will not help a lover or business partner who has cheated us again without first making sure. Or we can use a different method because we now know that the old method did not have the desired effect.

Infrastructure Instead Of A Consumption Subsidy

We should take a cue from California. After the diesel scandal, California forced VW to invest two billion dollars in the Electrify America program and to set up charging stations (with CCS, CHAdeMO and J1772 connections) for electric cars at almost one thousand locations across the USA and make them accessible to all electric cars, not just VW’s.

What if the car manufacturers were to receive a few billions in taxes that could be used exclusively for a charging infrastructure for electric cars? Investments in infrastructure always generate long-lasting added value, as has been the case with road construction, telecommunications or energy in the past. An Electrify Germany (if I may suggest) would then drive the sale of electric cars rather than internal combustion vehicles. Skeptical buyers with range anxiety would be relieved of this concern with a nationwide fast-charging network. At the same time, the bonus could also be used to promote charging stations in private households and to facilitate installation. And one could certainly find another set of eligible measures that could indirectly boost the sale of environmentally friendly means of transport and make this initiative more powerful.

A direct promotion of the production of electric cars would simply leave the manufacturers the money to further develop their burners and – after the crisis – to reduce the investments in electric cars again.

And as was seen in California, VW also profited from the fine. The presentation of the Audi e-tron in San Francisco thus advertised that this car can of course make use of this charging infrastructure. This “penalty” turned into a competitive advantage, which VW also recognized.

So, instead of a purchase subsidy, let’s rather have an Electrify Germany-initiative. The future will thank us for it.

This article was also published in German.