Free Cash No Fix With Spanish Auto Demand Stuck in 1980s

Photographer: David Ramos/Bloomberg

The lack of a stable domestic market could undermine labor reforms focused on halting rising joblessness by securing Spain’s status as Europe’s largest auto producer after Germany. Close

The lack of a stable domestic market could undermine labor reforms focused on halting... Read More

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Photographer: David Ramos/Bloomberg

The lack of a stable domestic market could undermine labor reforms focused on halting rising joblessness by securing Spain’s status as Europe’s largest auto producer after Germany.

Not even free government cash can coax many crisis-scarred Spaniards into buying a car.

Demand for new vehicles in Spain dropped 13 percent last year despite a government program offering discounts of 2,000 euros ($2,590) on a new car for drivers willing to part with their old wheels. After 75 million euros in payments and another 150 million euros added in February -- all matched by manufacturers -- deliveries have continued to decline.

“The incentives are good but too small,” said Luis Puerta, a 61-year-old retired steelworker from Toledo who’s sticking with his 20-year-old Seat for fear of losing his pension. “I am very cautious and think twice before spending.”

The sales drop highlights the struggle Prime Minister Mariano Rajoy faces in trying to boost the economy. Spain is in the sixth year of a slump that has pushed unemployment to a record 26 percent. Gross domestic product, which remains 6.4 percent below its 2008 peak, will contract by 1.4 percent this year, the European Commission forecast last month.

Introduced last year to spur demand, the incentives were modeled after the cash-for-clunkers program that lifted U.S. auto sales in 2009. Sales instead fell 9.8 percent to 58,373 cars last month, making the Spanish market just slightly larger than that of Belgium, a country with one quarter as many people.

Scrappage Support

About 700,000 vehicles were sold in Spain last year, less than half the 2005 peak, according to LMC Automotive. While the market researcher says the cash program may stem the decline this year, the effect won’t last.

“Once the scrappage incentive support ends, we expect the market to again head the wrong way,” falling to 650,000 vehicles in 2014, said Jonathon Poskitt, an analyst with LMC in Oxford, England. When growth returns, “it will take years before Spanish registrations look healthy by historical standards.”

As austerity bites, consumers are focused on more existential issues than a shiny new car in the driveway. The auto market last year hit its lowest level since 1986, when Spain entered the European Economic Community and embarked on two decades of prosperity as a credit boom lured Spaniards to borrow money for homes and autos.

“The shopping spree went on for too long,” said Pedro Nueno, a professor at IESE Business School in Barcelona. “People now prefer to wait until economic uncertainty fades.”

Property Bubble

The car market is an extension of the real estate bubble that has hobbled the country. The property crash left Spanish lenders with more than 180 billion euros of soured real estate loans. The government has proposed a battery of measures to reduce the burden of defaults and foreclosures amid protests and suicides linked to home seizures.

For the auto industry, any help is welcome. Incentives in Spain are positive both for the industry and for the government as taxes from additional sales offset their cost, Renault SA (RNO) Chief Executive Officer Carlos Ghosn told reporters last week.

“There are times when you’re lacking oxygen, and oxygen has more value now than later on,” Ghosn said. “Look at what central banks are doing today: they’re swamping markets with liquidity.”

Across Europe, car sales dropped 9.3 percent in the first two months of 2013 as the slump spread to Germany, the ACEA trade group reported yesterday. The region’s auto market hit a 17-year low in 2012 and is headed for a sixth straight annual decline.

Spain’s car dealers are feeling the full brunt of the downturn. Almost 15 percent have closed since 2007, leaving 50,000 people -- 28 percent of the dealers’ workforce -- without jobs, according to the country’s dealers association.

Unaffordable Luxury

At the Renault showroom in Torre-Pacheco near the southern Mediterranean coast, sales have plunged to a handful of vehicles a month from more than one a day in 2007, said Raquel Galindo, an accountant there. Current demand is chiefly for the cheapest model, the 7,900-euro Dacia Sandero.

“It’s not only that we sell fewer cars, but we feel the squeeze in pricing,” Galindo said. “People just look for bargains, so the first question we now ask when they come in is how much they want to spend.”

The auto industry is key for the Spanish economy both in terms of job creation and in tax revenue from car sales, toll roads, parking and gasoline. To spur investment, Rajoy has passed reforms making it easier for companies to cut wages and reorganize staff. That has spurred carmakers Ford Motor Co. (F), PSA Peugeot Citroen and Renault to boost production in Spain.

That doesn’t mean Spaniards will buy them. Luis Miguel Calvo, a clerk at a self-storage company in the northern city of Burgos, said his wife will start taking the bus after she lost her job as an assistant at a law firm.

“We can’t afford an idle car in the garage anymore,” said Calvo, 43, who’s looking to sell the Ford Fiesta he bought less than three years ago for about 14,000 euros. “A car is a bit of a waste of money and a luxury that’s hard to justify in the current crisis.”

To contact the reporter on this story: Manuel Baigorri in Madrid at mbaigorri@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net

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