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Are Cash Incentives for New Cars the Answer?
By Performance Guru | July 31, 2009
The American Government is taking its lead from countries in Europe and implementing a ‘cash for clunkers’ incentive in an attempt to persuade consumers back into the flagging car market. The scheme will offer an incentive of up to $4,500 to owners of old cars getting 18 miles per gallon (mpg) or less if they upgrade to a vehicle that gets at least four mpg more, so people could trade in a gas-guzzling 4×4 and buy a Honda, Nissan or other smaller more efficient car in its place. The idea is that the chance of getting money back on purchasing a more efficient car will show potential customers that it makes good financial sense, but is it really viable for the industry in the long term?
The UK implemented a similar scheme in May, giving buyers £2000 towards buying a brand new car in exchange for scrapping ones over 10 years old. So far there have been over 35,000 orders for new vehicles on the scrappage scheme, not enough to reinflate the car industry but certainly enough to make a difference. The question is how long these results can continue, when progressively less and less car owners will still be eligible and the finances set aside for the project start to run out. Recent predictions by a chief executive at French automakers Renault suggest that the time of crisis will continue for few years yet, and that the numbers of people wanting to buy a Renault were unlikely to return to normal levels any time soon. So although government cash incentives are managing to persuade buyers in the short term, it would be a huge blow to manufacturers if the list of potential buyers is exhausted before the recession is over.
And of course it’s not just the car industry that has been affected by the recession, it’s been a difficult time financially for everyone. Offering consumers the chance to get money back may get them interested but compared to the cost of a new car it doesn’t go very far. It’s not as if you could trade in your old banger and buy a new BMW in its place, and a lot of people just wouldn’t consider making such an expensive purchase when they’re already struggling with debt and the uncertain economic climate. The scrappage schemes are a short term solution but will help to re-establish consumers’ confidence in the industry, as well as encouraging people who may otherwise have bought a second hand car to pay just a little extra for a new one instead.
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