Last week, Volkswagen, the German car brand, announced it would be paying up to 10,000 EUR per (old) car (of any brand) owners would trade in for a brand-new Volkswagen in Germany. Just a few days later, Opel (previously owned by General Motors but currently owned by PSA, the French brand which also produces the Peugeot and Citroën cars) followed suit, promising car owners a premium of up to 7,000 EUR if they trade in their old car for a new Opel whilst Renault didn’t want to be left behind and announced its own ‘subsidy scheme’ to attract new customers.
Of course, these type of transactions aren’t new at all and getting a decent price for an old car has been pretty common in most European countries as the value for the old car offered by the large brands is usually a bit higher than the market value.
Whilst some people interpreted the Volkswagen-Opel-Renault deal as some sort of ‘marketing strategy’ to pretend they are ‘going green’ (the highest premium was awarded to customers buying low emission vehicles) after ‘Dieselgate’, we feel something else might be going on behind the scenes and the brands aren't just trying to be nice to the average German car owner.
Not only does this ‘incentive program’ remind us of the US government’s ‘cash for clunkers’ program which was aimed at boosting the car sales to save the failing car industry.
Whilst the total amount of vehicle registrations in Germany seems to relatively steady (and even showing some positive momentum), it’s also not inconceivable the demand for new cars will fall off a cliff. Last year, the total amount of vehicle registrations was approximately 45.5 cars per 1,000 residents. Assuming a household consists of 4 people (on average), and 1 in 2 households owns 2 cars, approximately 1 in 5 households purchased a new car either as a ‘first’ car or second car.
This means that the replacement rate is approximately 1 in 7 (1 new car every 8 years). And guess what? 2017 is exactly the 8th year after the Global Financial Crisis, when the car sales picked up again. Whilst an 8 year old car is still in a great shape to drive around (for the average user), large car manufacturers have now reached the point where the replacement ratio might cause headaches. After all, why would you sell a car after 8 years if there’s no objective reason why it wouldn’t be able to run for a few more years.
Of course, not all cars produced in Germany are meant for the German market, but let’s have a look at the half-year results of Volkswagen. Whereas the company sold 5.2M cars in H1 last year versus a production rate of 5.27 million cars (for a surplus of 70,000 cars), the surplus result actually accelerated in H1 2017. Yes, the total amount of cars sold increased by 1.4%, but as the total amount of cars produced increased by 3.1% to 5.43 million, the surplus actually increased to 163,000 produced but unsold cars, an increase of 136%.
Source: Volkswagen half-year report
And Volkswagen isn’t alone. A quick glance at the half-year results of Renault shows us the total amount of cars sold increased by approximately 10%, but the production rate increased by a stunning 18%, resulting in an ‘overproduction’ as well.
It’s starting to look the demand for new cars simply isn’t there in Europe, despite the lower-than-ever interest rates making car financings almost free. And this could be a very first indication of an additional economic hurdle which will have to be taken, as an oversupply of goods rarely bodes well for an economy.