Incentives influence market choices.

This statement should be unexceptional, hardly newsworthy. But an onslaught of end-of-the-year news reports in France suggests otherwise.

More than 2.2 new passenger cars will be sold in France in 2009. This figure is up from a recent average of 2.0-2.1 million vehicles. It ties sales in 2001 (2.25 million), and approaches sales in 1990 (2.3 million).

Sales are up for all French automakers, with double-digit jumps in December sales compared to same-period sales in 2008.

Incentives have everything to do with this.

France has a cash for clunkers program: for cars more than 10 years old, and provided that the beneficiary buy a new car by 31 December 2009 (it being understood that the new vehicle can be delivered later, in 2010), the beneficiary will receive € 1,000. About 570,000 people are expected to benefit from the program in 2009. Starting 1 January 2010, the amount of the payment will fall to € 700.

France also has a sliding-scale, ecological bonus-malus program: cars that emit little CO2 are entitled to a bonus (usually from 200 to 1,000 euros); those that emit more than 130g CO2/km are subject to an eco-tax. CO2 emissions are a proxy for fuel efficiency, so the measure also favors fuel-efficient cars. Although originally presented as tax-neutral, car buyers have strongly favored smaller, fuel-efficient vehicles.

Finally, car-makers have added additional “bonuses” or price cuts that match or multiply the state-run programs.

With all these incentives, I’m not surprised that new-car sales in France have risen in 2009. But some questions remain:

  • What will be the effect of the €300 drop in payments effective 1 January 2010? In France, cash for clunkers isn’t an all or nothing proposition; the payment amount will drop gradually. The ecological bonus-malus system will be fine-tuned but will stay in place. Few new cars sell for less than € 6,000, so the €300 drop represents a price change of less than 5%: for a small car selling for € 9,000, the dip represents 3%. Is this amount really enough to drive consumer choices?
  • What price effect have the state-run programs had on new-car spending? Do consumers decide, beforehand, to spend a predetermined amount (for example, € 15,000), then bargain for the most car they can get at that price? In which case, have automakers been able to move buyers towards marginally more expensive vehicles (for example, a € 16,500 car), or vehicles with more options (for example, a special interior treatment priced at € 1,000)?
  • Why do so many consumers wait until the end of the bonus period before they buy a car? One could just as easily expect an uptick in sales towards the beginning of the year, when bonuses are paid; or in the autumn, when new-model cars come out. Are consumers saving up? Have they considered the new car as a Christmas present?
  • How many consumers behave opportunistically? Under the French plan, a beneficiary must hold title to an old vehicle for at least six months before she benefits from the program. Have families arranged for the 85-year-old grandmother to transfer her old car to her 25-year-old granddaughter, in order to help the granddaughter to buy a new vehicle? More fancifully, have families been trying to insure out-of-commission clunkers sitting on cinder blocks in a garage?
  • What do plans to help the automotive sector reveal or hide about consumer spending generally? Is consumer spending up, or is it down; and how much do changes in automotive spending account for the broader change in consumer spending? For instance, when consumers buy a new car, do they cut their beer and pretzel budget? Or is the purchase of a new car a marker of renewed or buoyant consumer confidence (with beer and pretzel sales remaining strong)? If consumers are making trade-offs when they buy a new automobile, what purchases do they cut back?