Wednesday, March 11, 2009

Ford really does have a better idea

In Germany, new car sales are up by 21.5% in the month of February. In fact, it is the best February for sales in a decade. At the same time new car sales in Ontario are down by over 50%.

The difference is that, in addition to the carmaker’s generous incentives, the German government introduced its own incentive package, offering 2,500 Euros towards the purchase of a new car for anyone trading in one that is more than 9 years old.

Ford Motor Company of Canada suggested that the Ontario government launch a similar program. It has also been recommended (not by Ford) that the federal and provincial governments suspend their sales taxes on new car purchases for a time. This should apply only to cars and trucks made in Canada.

I remember back in the 1980s when the Japanese motorcycle companies invaded the “big bike” market in the U.S. and Harley-Davidson, the only surviving American motorcycle company, was on the verge of bankruptcy. President Reagan imposed a 100% import luxury tax on big motorcycles and this gave breathing room for Harley to reinvent itself and come roaring back, literally and metaphorically, to financial health.

Now a tariff is the opposite of a government incentive, but the point of Ford’s suggestion and the example of Reagan is that the government has tools at its disposal that it can wield very effectively to assist industry. It doesn’t require injecting massive amounts of money into the bank accounts of the companies that pissed their money away in the first place. And it certainly doesn’t require the government to supervise an industry the way the public would expect it to do to safeguard the loans.

If it is a credit problem, then the government could provide the lenders with credit guarantees for purchasers of new cars. These government tools are not forever. They would only be employed until there was some sign the industries were out of the danger zone.

I drive an 8 year-old vehicle made in Ontario. It has more than 335,000 kilometers on the odometer. The body is beginning to show some small signs of rust, but the engine and transmission are running just fine. I am expecting it to last to at least 500,000 km without major trouble. However, if the governments suspended the sales taxes, the manufacturers continued the attractive sales incentives I have noticed when passing dealerships, and there was a generous scrappage fee, I would trade it in tomorrow for a new one.

I am looking at a replacement vehicle in the $30,000 range. With sales taxes that car would cost me approximately $34,000. The manufacturers are currently offering discounts of $3,000. If a scrappage fee were introduced at say, $3,500, and the sales taxes were suspended, the cost of the vehicle is less than $24,000. That is a $10,000+ saving, tax included, on a car that was originally priced at $30,000.

It would very hard not to bite on that one.

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