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Vehicle Scrappage: Look Out for the Double-Dip Ahead?

13 July 2009

While government-sponsored scrappage programs may be mitigating the worst impacts of the automotive downturn in the short term, they may cause another sales downturn further in the future, causing a potential double-dip downturn for the global car market, according to iSuppli Corp.

Although iSuppli is forecasting global auto production will decline to 52 million units in 2009, down 25 percent from 2008, some commentators are talking about the green shoots of recovery appearing in the market, due to vehicle scrappage and incentive programs that are now being rolled out in many countries. Such programs offer discounts on the purchase of new vehicles to replace cars a decade in age or older.

However, these scrappage programs are likely to have a negative impact as they will simply bring forward— and some would say distort—the natural buying cycle, creating a double-dip. This will be particularly apparent when scrappage schemes themselves are “scrapped,” leaving a dearth of buyers at that stage in the buying cycle.

Scrappage programs also are having a disproportionately negative effect on Tier-1 automotive infotainment system suppliers, as many countries have built-in green incentives with the maximum benefits given to those consumers who purchase lower-emission and, hence, lighter and cheaper vehicles. On the whole, these vehicles tend to be bought from the mid- and entry-level classes, which typically sport fewer added features. The result is fewer sales of feature-rich vehicles offering a smaller number of the media, navigation and infotainment features provided by the top auto electronics suppliers.

Navigating Out of Trouble
However, as the car market stages a recovery starting in 2010, there will be a number of significant market opportunities for Tier-1 infotainment electronics and semiconductors suppliers. These opportunities include the growth of low-cost navigation systems that displace Portable Navigation Devices (PNDs), and the increasing demand for connectivity that will expand the supply chain to other segments of the electronics market.

This new supply chain will move the car well beyond the static environment of hardware and into the sphere of services, which will extend the sales opportunities for vehicle manufacturers and their service providers.

PND suppliers TomTom and Garmin, entering the automotive Tier-1 battle, are taking every different approaches as they look to extend their reach beyond the PND platform.

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