The European Union’s auto industry is hoping an EU summit this week, set for March 19-20, will yield a coordinated plan for scrappage grants to boost vehicle demand – but the meeting is unlikely to anoint a grand spending plan to save the sector.
The scrappage scheme rewards car buyers for trading in cars at least 9-years old for new, more fuel-efficient models.
The EU, which is made up of 27 member states, has a complex set of institutions. So it comes as no surprise governmental response to the financial threat OEMs face, resulting from a global slump in demand for new cars, has been anything but simple.
However, time is of the essence, with plummeting sales leaving OEMs and their suppliers fighting for survival, forcing many to slow production and cut jobs.
Given these constraints, the role of the one wealthy EU institution with real freedom to spend freely on the sector – the European Investment Bank – has become of key importance in offering the auto industry some relief.
The public bank operates autonomously, drawing strength from funding its operations through borrowing on the capital markets, rather than tapping EU funds.
However, because it is a creation of the EU’s founding treaties and its board of governors consists of the finance ministers of EU member states, the EIB does have to follow political instruction.
As a result, the bank has been wheeled into action to help the auto sector. On March 12, its directors approved a total €3 billion ($3.9 billion) in loans to German, Italian, French and Swedish vehicle manufacturers.
The recipients includeAG, AG, Auto Group, PSA Peugeot Citroen, Renault SA, Volvo Car Corp., plus truck makers Scania AB and Volvo Truck AB. The EIB says in a statement most of the money is aimed at improving fuel efficiency and reducing carbon-dioxide emissions.
The EIB board will meet April 7 to consider more funding applications, with another meeting to follow in May – with possible approvals being secured for another €2.8 billion ($3.6 billion) in industry loans.
Taking into account some December lending and more expected at the board’s June session, EIB auto-sector lending could exceed €7 billion ($9 billion) by mid-year.
The financial help comes none too soon, as European new-car registrations fell 18.3% in February to 968,159 units, according to the industry association ACEA. The figure includes both the EU and the European Free Trade Assn. countries.
Among the hardest hit, Romania’s new-car registrations reportedly plunged 66.5%, Spain slid 48.8%, Italy 24.4% and Hungary 46.4%. Germany was among the few countries that saw growth thanks to vehicle-tax reform and a scrapping bonus offered by the government.
“We expect it would have an easing effect on the immediate situation,” EIB spokeswoman Gill Tudor says of the bank loans.
Because the EIB only can fund-specific development projects, its current lending primarily is being drawn from the European Clean Transport Facility (ECTF). The program is designed to support investment in reducing vehicle CO2 emissions through research, development and innovation, plus the production of cleaner and more fuel-efficient cars, trucks and other transport vehicles.
The key issue is that auto makers are being forced to pump investment into these areas by ever-tightening EU environmental legislation. So with the EICTF stepping into finance this compulsory long-term work, European auto makers in a roundabout way are getting some needed relief.
“This will help (the auto makers) fulfill requirements to meet strengthened emissions legislation,” Tudor says. “In making (the money) available, it helps them do what they are legally obliged to do anyway.”
However, she stresses, “We’re not there to help companies with short-term budget problems. We’re there to fund good projects.”
A spokeswoman for Britain’s Society of Motor Manufacturers and Traders agrees the bank’s funding is a mixed blessing. “The EIB will help free up cash, but there are still underlying problems,” she says. “This doesn’t help with increasing demand or cash flow. It will make a difference, but in the long term.”
What the industry needs right now is government assistance “to boost demand for buying vehicles.”
Indeed, the EIB money will not even meet all the costs of the mandatory environmental investments, as the bank funds only about half the costs of a project. “(Auto makers) cannot even use this money to pay workers,” the spokeswoman says.
Industry observers say they expect attention to shift to such concerns at the EU summit this week. Germany’s experience with its new scrapping scheme could prove an inspiration. The country’s new-car registrations rose 21.5% in February, compared with year-ago.
The EU Council of Ministers for Competitiveness earlier this month asked the European Commission to “present possible options” to encourage EU new-car sales in a coordinated manner, including vehicle recycling and recovery, as soon as possible.
That means the summit could be asked to anoint a scrappage a scheme. If it does, then a short-term boost to EU auto demand is all but assured. The question then becomes whether the bonus program will be enough to see auto makers through to a time when private financing is more readily available.