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Scrapping fee could help

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Anyone with a car that’s 10 year old or more, will receive CZK 30,000 toward buying a new one if the old vehicle is scrapped in an environmentally friendly way. This, in a nutshell, is the new law that MPs passed on Wednesday. It’s still uncertain, however, whether or not the law will actually come into effect. No deadline has been set yet.

The upcoming elections could serve as a certain indicator. If the Social Democrats, who came up with the scrapping fee proposal, win the elections, the state will need to find CZK 2.4 billion in its deficit budget and help support the sale of approximately 80,000 new cars costing less than CZK 500,000 each.

If it’s the Civic Democrats who win, it will be the scrapping fee that gets scrapped.

The scrapping fee causes discriminations
The fact remains that the scrapping fee programme is very populist and protectionist. It is protectionist because it does not give other industries the same advantages at a time of economic crisis when this type of programme could be the deciding factor whether or not the company survives.

It is populist because of the goals it will not help accomplish. Taxpayer money often goes to the pockets of foreign car producers. This helps the manufacturer, but it does not help the state that much. Škoda benefited the most from scrapping fee in Germany. It was even able to resume some of the shifts it had done away with.

But protectionism is nothing new in EU countries. Dozens of subsidy programmes are aimed at various groups that then gain advantages not available to others. The most recent example is the Nemovitosti [real estate] programme through which Czech entrepreneurs can get CZK 4 billion from European funds for the building and reconstruction of offices and commercial spaces. But the funds are only available to those who run a business.

A Czech example is the Panel programme through which panel house owners can get subsidies to better insulate their buildings. But this money is not available, for example, to cottage owners.

Subsidies help people keep their jobs
But the scrapping fee is helping carmakers survive the crisis. This was the case in Germany and in the United States.

Scrapping fees can also help on small markets, such as in the Czech Republic, where some 140,000 cars are sold each year. For Škoda, which has approximately a 30% market share, having a 30% share in all the scrapping fees would mean additional sales of 24,000 cars. If these were Fabias, the company could maintain its top production pace of 1,200 cars a day for the next 120 days. The company is now considering decreasing its daily production by 200 cars because the demand in Germany, driven up by scrapping fees, is starting to dry up.

But this is all just speculation because no one knows how many cars would be sold without the scrapping fee. And its not just Fabias that would fit within the CZK 500,000 limit. Other Škoda cars like Octavia, Roomster and Yeti could benefit as well.
More discounts are necessary
It’s not even clear if Škoda would be able to maintain its share in the scrapping fees and thus prop up its production and keep all its positions filled.

The scrapping bonuses are intended for people who would otherwise not buy a car or would buy a used one. In order for the the CZK 30,000 subsidy to be enough of a stimulus, the car being bought must be inexpensive. The cheapest Škoda is the CZK 230,000 Fabia. But in the Czech Republic there are at least 10 car types being sold for under CZK 200,000, including Chevrolet Spark and Dacia Logan.

Additional discounts introduced by carmakers could help make the scrapping fee more effective. But this would bring down the profits of carmakers close to zero, and the scrapping fee would only serve to keep unemployment at bay during the recession.

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