GolfMatchThe Volkswagen Golf Match one of the models likely to fare well despite European sales slowdown.
Despite mass-market manufacturers’ recent calls to governments and the EU for the renewal of such schemes, we think the potential for public support is lower than during the past recession because of tighter sovereign budgets. We also believe that the sector remains on course for a sustained period of sales decline or stagnation in Europe, which could turn into a sharp drop in the worst-case scenario of a euro break-up.
Scrappage schemes give buyers a discount on a new car when they scrap an old one, having an immediate positive effect on sales. However, these schemes have little to no effect on creating new sales. Instead, they encourage buyers to bring forward purchases they would have made later, creating a sudden drop in sales, revenue and profitability when the incentives stop. In addition, these fixed incentives distort the market by favouring sales of cheaper, lower-margin cars as customers typically seek to maximise the effect of the subsidy. This leads to an unfavourable sales mix for car makers and addicts consumers to discounts.
The fact that new scrappage schemes would come in France, for example, just less than two years after the previous schemes expired means they would probably also be less effective at boosting sales because so many vehicles have already been replaced.
Governments have other options to provide support to a critical industry. These include tax incentives and cheap loans to fund research and development. These alternatives would not necessarily have the same negative longer-term impact as a scrappage scheme, but direct financial state support could mean carmakers’ hands are tied in the future if they need to restructure or lay off staff.
Another indirect way to support car manufacturers may be to not interfere with their restructuring plans. In particular, we believe that governments will not be able to indefinitely prevent plant closures or more discreet actions such as production line reductions. The recent announcement by GM’s Opel that it is formally considering closing its Bochum plant in Germany in 2016 is a good illustration of this trend.
Among Fitch-rated carmakers, we expect the slowdown in sales in Europe to hit Peugeot (‘BB+’/Stable) hardest, followed by Fiat (‘BB’/Negative) and Renault (‘BB+’/Stable). We believe that German manufacturers BMW, Daimler (‘A-’/Stable) and Volkswagen (‘A-’/Positive) are better positioned and would be less affected by a further slowdown or stagnating sales in Europe.