Countermeasures of the German Government during the COVID crisis – what impact for the automotive sector? (Part 2)

In the first part of this blog series, we discussed from an automotive perspective the potential effects of certain Government actions covered in the “Konjunktur- und Krisenbewältigungspaket”.  This blog focuses on the measures of the “Zukunftspaket” which are more long-term orientated and aim at securing Germany’s position as a worldwide technology leader (and exporter) whilst accelerating and transforming the economy to align with digital and ecological requirements.  These areas are very relevant to the German automotive industry and many measures are specifically designed to help transform the sector.  

One of the key measures of relevance to the auto sector – which is controversial – is the scrappage element and so called “innovation subsidy”, aiming at changing the car parc structure towards a more sustainable fleet with more climate and ecologically-friendly cars.  The Government has remarkably increased (in fact doubled) its share to subsidise the purchase of a vehicle with alternative powertrain.  In the case of a BEV (“pure EV”) with a net list price of up to €40,000 the state now provides €6,000 (customers need to apply for it) up until the end of 2021 – this is usually in addition to subsidies provided by the manufacturers.  However, to limit the accumulation of subsidisation, the Bundesregierung is currently evaluating options to only grant federal subsidies if no types of state or municipality subsidies apply.  At the same time, the taxation for company cars will become more attractive (at 0.25% of gross list price for cars of up to €60.000).  Whilst this should also apply to used EVs, the car parc affected by the latter is clearly low.  Whether both subsidy and taxation will have a strong effect on the parc any time soon is questionable.  A more effective way – at least in ICDP’s view (see Executive Briefing ‘CLEAN CARS FOR A POST-COVID MARKET RECOVERY: A SELF-HELP PLAN FOR THE EUROPEAN CAR MARKET’) - would be to seek approval for some relief on emissions targets to drive sales of profitable ICE models as well as PHEV and BEV in return for a self-funded scrappage scheme.  

Additionally, the car tax system will focus more on CO2-emissions.  So, the main taxable base will be CO2/km for new registrations after January 1st 2021, and when over the threshold of 95g CO2/km, there will be a step-by-step increase in tax.  Besides a potential, but probably minor effect on customer behaviour, this threshold has a major impact on OEM production plans which will have to pay fees for exceeding it as an average of their new registered fleet.  Thus, it is clear that the product portfolio is becoming more electrified and also thinned out, the latter mainly affecting high-end models with strong engines, leading to profit-per-unit losses compared to previous years.  This might develop even more extremely as the EU climate targets are currently under discussion and likely to be tightened.  Looking positively, the tax relief on BEV is expected to be extended to the end of 2030.  However, as long as the demand (and the factors influencing it) is not there, the car prices will remain high despite subsidies, and the annual tax really would be “a drop in the ocean” and not a major factor to make one switch car.  

Apart from the acceleration in 5G roll-out, which plays a role e.g. for in-car purchase offers, the Government  has also increased support in R&D activities, aiming at securing interest and capability, to protecting future viability of (automotive) companies, its products and services.  This covers the period from January 1st 2020 (with retrospective effect) until end of 2025 and will be primarily beneficial to OEMs and suppliers.  Battery development is another crucial area on thei radar.  And the subsidy to Varta for cell manufacturing, from the federal state of Baden-Württemberg, indicates the Government’s intention to not leaving the game completely open to Tesla and Asian players. 

Finally, I would like to mention the EV charging infrastructure which has been identified as critical.  Its development will now be accelerated, including plans on a common payment scheme.  This should have been clear for a long time and is only now being addressed, and one can certainly wonder why the changes to date do not correspond to those planned and required. 

Overall, taking the need to reduce fleet emissions together with the subsidies the state provides to the industry but most of all the customers, it might be a time when change towards eco-friendly mobility will inevitably accelerate.  At least the requests for “innovation subsidies” (BEVs, plug-in hybrids and fuel cell models) have substantially increased and reached 257,046 by end of August 2020 which suggests a trend in that direction, although it is quite common that these vehicles will not be delivered until some point next year.  Still, this is a step in the right direction that alternative fuels – apart from issues including model choice, range and charging infrastructure discussions – are generally a product that is being considered…… if at an acceptable price. 

But in the end, alternative engines must find broader customer acceptance, which requires reviewing the whole framework that is supposed to create real and lasting customer demand – not only the elements covered in both Government packages.  Alternative engines cannot simply be imposed on customers – neither can they be on the industry.  This is something the Government and the industry still jointly need to work on to achieve significant and most of all sustainable change that is self-funding.  We are more at the beginning of that journey than we thought. 

Image: https://www.kia-mueller-genthin.de/angebote/innovationspraemie/