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German Government Announces Auto Industry Financial Support Package

Published: 1/14/2009
The German government has announced a coordinated series of measures as part of its wider economic stimulus plan to guarantee loans and stimulate demand in the German automotive industry.

Global Insight Perspective

 

Significance

The German government has outlined plans to provide a 1.5 billion euro package to support the country's automotive industry with measures including tax relief and loan guarantees.

Implications

In concrete terms the financial assistance package is likely to bring the most relief to GM's German unit Opel, which has been seeking one billion euro of loan guarantees to underpin its 2009 operations, while assistance for the manufacturers' credit divisions is likely to be included in the wider bail-out package.

Outlook

The programme has been prompted by collapsing demand across the global export markets that the German auto industry is active in and as a result of the U.S. auto industry bail-out package that has drawn criticism from German auto industry figures and politicians alike. Once the dust has settled on the current financial crisis, the financial assistance package will help the German carmakers play an even more prominent role in the global industry.

Germany Takes Action to Protect its Auto Industry

As part of a wider economic stimulus package to boost the German economy, the government has announced a financial aid package that will provide 1.5 billion euro (US$1.99 billion) of assistance for the country's automotive industry. The support measures for the industry have been announced by the coalition government comprising the Christian Democratic Union (CDU) party led by Chancellor Angela Merkel and the Social Democrats (SDP). Merkel has commented that the package is party in response to the U.S. government's recently announced financial assistance package that is aimed at helping the plight of two of the ailing Big Three, General Motors (GM) and Chrysler. Speaking to reporters in Berlin, Merkel was quoted as saying, "Of course, we won't be able to just stand by and watch how the American automotive industry is kept alive by billions of dollars." According to a Deutsch Walles report, Merkel went on to add that if Germany and the German carmakers decided that they were at a serious competitive disadvantage as a result of the U.S. bail-out, the two countries would have to have "serious discussions."

In terms of the content of the German bail-out package, a central component will be loan guarantees to GM's German unit Opel that has been seeking around one billion euro of loans underwritten by the German government in order to guarantee its short-term liquidity (see Germany: 18 November 2008: German Government Plans Opel Bail-Out; Chancellor Says Money Must Stay in Germany). Merkel said that the company could get up to 1.6 million euro in loan guarantees in order to safeguard its operations, but Opel will effectively have to ring-fence its operations in order to secure the guarantees and ensure no German public money finds its way into the coffers of its parent. In addition to this major corporate aid package, the German government is also looking to stimulate buying activity by providing incentives for private consumers to buy new cars. As a result the government has waived taxes on new car purchases and offered a 2,500 euro payment to any driver who buys a new, low-emission passenger car and scraps an existing car that is over nine years old. The government has also pledged to introduce its planned new vehicle tax regime based on CO2 emissions as soon as is feasibly possible, with 1 July 2009 being mentioned as a preliminary introduction date. It also pledged to switch from setting vehicle tax based on engine capacity to CO2 emissions as soon as technically feasible, ideally from 1 July 2009.

In addition, the German government has also effectively pledged a 100 million euro credit line which will provide credit guarantees to banks worried about lending to struggling businesses. This component is likely to be used to help the struggling finance units of the major carmakers, including Volkswagen (VW) finance (see Germany: 10 December 2008: VW Requests State Aid for Financial Units; Extends Christmas Break at German Plants), while there is also scope for it to be used to support the country's automotive component suppliers, which have been under immense pressure as a result of the credit squeeze (see Germany: 12 December 2008: VDA Members Consider Bail-Out Fund for Suppliers).

Outlook and Implications

The German auto association, the VDA, has stated that the package will provide a "strong tailwind" for German car sales, although the short-term impact of these measures remains to be seen and is debatable to say the least. The statement that it will move the introduction of the CO2-based car tax forward to July may even have the opposite effect and restrict car sales up until that point as consumers wait to see exactly what car tax band their planned purchase falls into. Uncertainty over the CO2-based car tax plan was cited as the cause of a partial drag on sales in 2007 and the early months of 2008, until the government clarified the initial timetable for the plan. The complaints made by Angela Merkel over the U.S. bail-out may be an attempt to distract European Union (EU) competition commissioners from looking too closely at the details of the bail-out. Nations across the EU are looking at individual support packages for their automotive industries and any differences between these packages are likely to disturb the competitive equilibrium of the European passenger car market. The scrapping incentives for old cars appear to be particularly generous and appear aimed at increasing Germany's development, production and sales of low CO2 emitting passenger cars ahead of the introduction of EU legislation to limit vehicle emissions (see Europe: 18 December 2008: European Parliament Formally Approves New Car CO2 Legislation). On paper, it seems a coordinated attempt at stimulating the market and encouraging the German consumer into newer, high efficiency, lower emitting passenger cars. As a result these incentives are likely to see the German industry emerge from the current crisis even better equipped to expand its market share on the global stage as concerns over vehicle emissions continue to grow and crude oil reserves continue to diminish.
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