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Cash for clunkers v2.0

Cash for clunkers v2.0

June 18,2020
4 mins read
Malcolm McPartlin
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“History doesn’t repeat itself but it often rhymes” – Mark Twain

Does anyone remember the cash for clunkers scheme?  If you weren’t around at the time, this was the collective nickname for car scrappage schemes employed by a number of countries to stimulate growth in the aftermath of the global financial crisis.  Eleven years later – history isn’t repeating, but does it have a sustainable rhyme?

 

Cash for clunkers v1.0

Post-GFC, no fewer than 18 countries launched car scrappage schemes that provided incentives to replace old vehicles with modern ones.  These schemes had the intention of stimulating the economy by a Keynesian style demand boost, providing financial support to an ailing auto industry, whilst lowering vehicle emissions to benefit the environment. 

 

Were these schemes effective?

While certainly popular with consumers, their economic effectiveness remains debatable.  The US Car Allowance Rebate System dubbed CARS (pun intended!) blew the $1bn allocated budget within week one of an expected multi month period.  It ultimately cost the US tax payer $3bn to subsidise 677k vehicle purchases.  A paper by the National Bureau of Economic Research (NBER) subsequently claimed CARS actually damaged the economy.  The majority of participants in the scheme would have bought a car without any incentive and the environmental restrictions meant people were buying much cheaper cars.  Smaller, more efficient foreign cars took domestic market share and dealerships suffered as their inventory of used cars was materially devalued overnight. NBER concluded the US auto industry would have been better off without the scheme.  To some, that is a narrow assessment. Ultimately, even if CARS pulled car sales forward by just nine months, it helped to kick start consumer spending (with money saved on cheaper cars spent elsewhere), saved jobs and prevented the auto industry from collapsing.

 

Were the schemes good for the environment? 

The debate around this topic is two-fold.  A less polluting car fleet on the road is clearly a good thing, but the emissions generated from premature fleet retirement, and those created by the production of new vehicles may have more than offset that benefit.  A study by University of Michigan concluded that taking all of these external factors into account, CARS did have a clear net positive impact on the environment. It reduced net emissions by an estimated 4.4 million metric tons of CO2, equivalent to 0.4% of US annual light duty vehicle fleet emissions.

 

Cash for clunkers v2.0

Fast forward to present day. As governments look to restart economic growth in the aftermath of the Covid lockdown, reincarnations of cash-for-clunkers are springing up. In Europe, Germany and France have both launched car purchase incentive schemes. In China, various regional schemes are underway, and the US authorities are expected to launch a major package in the coming months, along with other countries. However, this time round, these schemes have the potential to make a much greater environmental impact by accelerating Electrical Vehicle (EV) adoption.  Germany is leading the charge, designing a scheme that appears to exclusively favour EVs, with the purchase subsidy for one doubling from €3000 to €6000.  Notably, both internal combustion engine (ICE) and even hybrid-powered cars are excluded from the scheme. German authorities also intend to review (read raise) tax excise for ICE cars, further incentivising the electric transition.

 

A demand shift for Electrical Vehicles?

While the regulatory incentives appear aligned to stimulate a transition to cleaner personal transport, frustratingly, most auto manufacturers today would struggle to meet a material uplift in EV demand. Auto manufacturers have limited EV models available and limited spare production capacity.  Further complicating the picture, there are acute production constraints in EV battery manufacturing.  Perhaps we should view cash for clunkers v2.0 as gently progressing, but not supercharging the ICE to EV transition.

 

What are the investment implications?

However, one thing is clear – these subsidies along with other initiatives to invest in EV infrastructure are signs that the regulatory authorities are becoming serious about the EV future – so far auto OEMs have resisted the transition, but the wind is changing. Auto OEMs today may be underprepared, but they have sensed which way the demand is moving to. VW plan on launching at least 70 EV models by the mid-2020’s, and the rest of the European OEMs are also ramping up their plans to launch their own electric vehicles in coming years.  Meanwhile in the US we have the disrupters Tesla and Nikola forging ahead and in China there are a number of EV upstarts.  As long term investors we care less about a near term boost to auto volumes and more about how our long term thesis is evolving.  Cash for clunkers v2.0 is a clear confirmation of a trend we believe will continue to accelerate in coming years, positively impacting the environment and positively contributing to alpha generation on behalf of our clients.

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Malcolm McPartlin

Investment Manager, UK Equities

Malcolm McPartlin is an investment manager in the UK Equities team, with responsibility for co-managing our UK equity market neutral strategy.

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