The double-edged sword of EV government incentives

29 July 2020

The automotive industry has taken some big hits as the world fights back against the coronavirus (COVID-19) pandemic. As many European governments take up arms, the automotive industry is handed a double-edged sword. Autovista Group’s chief economist Christof Engelskirchen ponders the pros and cons of efforts by governments to incentivise electric-vehicle (EV) purchases.

High up-front discounts granted on the purchase of new cars, and their negative impact on residual values (RVs), is a phenomenon often observed within the automotive industry. It was a topic covered recently in Autovista Group’s piece on the impact of sales planning on RVs.

Lower RVs do not only represent a direct economic loss for those with vehicles on their balance sheets. They also prevent profitable new-car sales, as they make it almost impossible to offer competitive and sustainable leasing rates.

Many battles on many fronts

While COVID-19 is enormously problematic, the automotive industry is fighting a number of other battles on several fronts. There are new technologies to develop, competitors to keep up with, the shift to zero emissions and depressed margins. The pandemic and its associated lockdowns have only served to intensify these pressures.

What is more, recovery will take some considerable time. Many jobs are at risk and it is sensible for governments to soften the blow by supporting the transition financially. However, incentive programmes that focus solely on stimulating demand for new cars can also be problematic in their own right.

For example, up-front, transparent and long-term incentives send the signal that new cars are often overpriced. The lower transaction prices of new cars then have a knock-on effect on used cars, lowering their transaction prices.

Even though government schemes mostly stimulate alternative powertrain types, the massive support delivers negative spillovers on all used-car prices, even those of internal combustion engine (ICE) vehicles. The higher the stimulus is, the higher the spillover effects become.

Incentives are like a drug, and an exhausted incentive scheme creates a bigger demand gap. Many push the purchase of their vehicle forward because of a scheme, currently observed in France where used-car prices are rising because their purchase is incentivised by the government. The French government’s scrappage scheme has already reached its 200,000-vehicle cap, after just two months.

Different approaches

The existing government incentive schemes in the big European markets and the UK are diverse and show how differently countries are approaching the topic. For example, there is a very strong stimulating effect derived from the very high purchase incentives for BEVs and PHEVs in France and Germany. Acquisition tax benefits are relatively small in France, Germany and Spain. Where there are company-car tax incentives, they are usually very impactful as stimuli, e.g. in Germany and the UK.

For more on how incentive schemes can be both a saving grace in hard times and a complicating long-term factor, read Christof Engelskirchen’s full piece here. It goes on to identify other complications that come about as a result of governments promoting vehicle purchases. There is also a detailed breakdown of the different incentive schemes in France, Germany, Italy, Spain and the UK, and how they impact both EVs and ICE vehicles.