State Subsidies

Kick-Starting Germany's E-Car Market

Angela Merkel, Germany's chancellor, connects an electric charging cable to a VW E-Golf automobile, produced by Volkswagen AG, following the German-Chinese signing ceremony at Volkswagen AG's headquarters in Wolfsburg, Germany, on Monday, April 24, 2012. Volkswagen AG , EuropeÕs biggest carmaker, plans to open a new assembly plant in western China in 2015 to strengthen its position in the manufacturerÕs largest market. Photographer: Michele Tantussi/Bloomberg *** Local Caption *** Angela Merkel
Chancellor Angela Merkel wants to crank up Germany's electric car market, but it might take another decade before the market takes off globally.
  • Why it matters

    Why it matters

    Germany’s carmakers Volkswagen, BMW and Mercedes-maker Daimler could lose market share to Toyota, Tesla and others if they fail to successfully sell electrically-powered cars.

  • Facts

    Facts

    • The German government fears the country’s car industry might not be a key supplier in 10 or 20 years if it fails to successfully sell electric cars.
    • Under the plan announced on Wednesday, consumers would receive €4,000 for fully electric cars and €3,000 for hybrids, with total subsidies capped at €1.2 billion.
    • Germany has pledged to put 1 million electric cars on the roads by 2020, but at the start of 2016, only 25,502 fully electric cars and 130, 365 hybrids were registered.
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    Audio

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Germany plans to hand out €4,000 or $4,520, to buyers of fully electric cars and €3,000 to buyers of plug-in hybrid cars to boost demand and protect the country’s car industry from losing market share, amid growing competition from rivals such as Toyota, Tesla and China’s BYD.

“We are currently experiencing a revolution in the automobile industry,” said Germany’s Transport Minister Alexander Dobrindt. “It is not predictable whether today’s top companies will also be the world’s top companies in 10 years’ time or whether these will completely different ones.” Currently VW is the world’s largest carmaker, marginally ahead of Toyota, while Mercedes and BMW are the world’s top luxury carmakers.

Economics minister Sigmar Gabriel said the subsidies program, which totals €1.6 billion and includes €600 million from BMW, Daimler and Volkswagen, was an “active industry policy” aimed at keeping jobs in Germany and rebuilding the country’s electrical chemicals industry to manufacture batteries.

“The aim is also to strengthen Germany as an industrial nation in this sector.”

Sigmar Gabriel, Vice Chancellor

“We once were the country of industrial manufacturing, the country of electric chemicals. This moved away to South East Asia in the 1970s, but now it has gained a whole new importance. The aim is also to strengthen Germany as an industrial nation in this sector,” Mr. Gabriel said.

He was also keen to underline the beneficial effect on employment. “We cannot ignore the significance of Germany’s car industry to economic developments, welfare and social security,” Mr. Gabriel said.

The car industry is undergoing a dramatic transformation, he added, saying the autos built in 30 years’ time will differ substantially from those of today. “That’s why businesses, unions and politicians need to have the joint target to develop these cars in our home market, Mr. Gabriel said.

Google is experimenting with self-driving cars, while Silicon Valley-based Tesla Motors is building a lithium-ion battery factory in Nevada, which is scheduled for completion in 2017. Currently, Asian companies such as Panasonic, LG and AESC dominate the market for lithium-ion batteries.

The idea of subsidies for the car industry is also a sensitive issue at present, in the wake of Volkswagen’s diesel emissions manipulation scandal, which has affected 11 million cars worldwide, alongside revelations about irregularities in emissions affecting other German carmakers.

Mr. Gabriel, who is also Germany’s deputy chancellor, also said the subsidies program would develop the country’s e-car market. In 2009, Chancellor Angela Merkel set a target of putting 1 million electric cars on the road by 2020. But at the start of 2016, only 25,502 fully electric cars and 130,365 hybrids were registered in Germany, according to the Federal Motor Transport Authority. The country has a total of 45.1 million registered cars, excluding vans, trucks and buses.

The subsidy program could start as early as mid-May, said Finance Minister Wolfgang Schäuble, who had attended a meeting on Tuesday evening together with Ms. Merkel and executives from VW, Daimler and BMW. The program will also make €300 million available to develop the country’s charging network and €100 million to increase the share of electric cars in the government’s fleet to 20 percent.

The subsidies plan, however, met opposition even before it was presented on Wednesday. Ahead of Tuesday’s meeting at the chancellery, the Christian Democrats’ parliamentary leader, Volker Kauder, said his party had “serious reservations” about subsidizing electric cars. “In the end, the German parliament will decide, especially when it comes to budget matters,” he said.

 

Shockingly Low Germanys Electric Car Market-01

 

The plan has also drawn criticism from some members of Ms. Merkel’s coalition partners, the center-left Social Democrats, with the party’s budget expert Johannes Kahrs warning that the free-rider effect would be too great.

Economists have echoed politicians’ opposition to the plan. “It distorts competition when there’s a subsidy for one product in one branch,” said Christoph Spengel, an expert with the Mannheim Center for European Economic Research, or ZEW. He said consumers already planning to purchase an electric car would likely see the government handout as a marginal bonus at best.

One analyst said the subsidies are part of a last-ditch attempt to meet the government’s target of a million electric cars by 2020, since carmakers can still make more money investing in other models. “A purchase subsidy won’t solve the problem, but politicians at least see it as a way to pass the buck to the industry,” said Michael Hüther, an economist with the Cologne Institute for Economic Research.

The new subsidies program also runs counter to Ms. Merkel’s coalition plans announced in 2013, when it was formed. The conservatives and center-left Social Democrats pledged to subject all subsidies to “constant review,” and to finance them by cutting back on other programs.

The government seemed especially keen to rein in tax incentives, whose benefits are difficult to control. That hasn’t stopped Ms. Merkel’s cabinet from floating new initiatives. Development minister Gerd Müller on Tuesday called for tax incentives for small and mid-sized enterprises that invest in emerging economies.

 

The State Is Paying-01

 

The finance ministry sees little reason to support that plan. It has also been a fierce opponent of patent box schemes, or tax breaks given to companies based on patent-based revenue, in what’s become a losing battle for Mr. Schäuble.

Using tax incentives to boost construction and renovation has proven no less controversial – with Germany’s states blocking Berlin’s attempts to allow write-offs for eco-friendly home improvements.

Ms. Merkel’s government knows that it has to get more homeowners to make their homes more environmentally efficient in order to reach its goal of making buildings more or less climate-neutral by 2050. Right now, progress towards making Germany’s homes more energy efficient is only proceeding at a rate of 1 percent every year.

Mr. Schäuble has promised compensation to states worried about losing out on some €1.5 billion in tax revenue, but state politicians have remained steadfast, meaning the federal government is unlikely to get what it wants during the current legislative term.

New construction is also a big priority for politicians in Berlin, who hope further tax breaks will encourage companies to break ground on affordable housing projects, particularly in big cities.

The governing coalition agreed to draft legislation in February that would give investors a tax break of 35 percent of building costs over three years. That relief would apply to construction prices of up to €3,000 per square meter, excluding real estate costs. But critics say that bar is too high, arguing that it will encourage people to build luxury residences, not housing for lower-income Germans.

For now, members of Chancellor Merkel’s conservatives and their coalition partners in the SPD are still wrangling over details of the legislation, and sources close to the parties’ parliamentary groups said a vote planned for Thursday would be postponed.

 

Gilbert Kreijger is an editor with Handelsblatt Global Edition in Berlin, covering companies and markets. Daniel Delhaes reports on politics, transport and airlines from Handelsblatt’s Berlin bureau. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin and is deputy managing editor of Handelsblatt’s Berlin office. Donata Riedel is a finance correspondent at Handelsblatt. Silke Kersting, who reports for Handelsblatt in Berlin, contributed to this article. To contact the authors: kreijger@handelsblatt.com, delhaes@handelsblatt.com, hildebrand@handelsblatt.com, riedel@handelsblatt.com.

 

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