Bottom up: A better way to approach auto bailouts

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There has been much discussion over how best to tackle the issue of bailouts. When it came to the bad mortgages banks held on their books, the government chose mostly -- at least at first -- to aid the banks in a top-down approach. The idea was that if the banks failed, the economy would collapse, so best to start by propping up the institutions. Only recently did the government also decide to help out homeowners.

Similarly, when it came to bailing out the auto industry, loans and guarantees to the manufacturers and their suppliers seemed the most logical way to go. In other parts of the world, however, governments have chosen to take a different path -- a bottom-up approach -- that aims to boost the car market rather than the car makers.

And how's it working? Very well, thank you.

For example, China's government, has been kicking in subsidies of as much as $1,170 for car buyers, which include a cut in retail taxes on small vehicles and 5 billion yuan ($731 million) in subsidies to spur auto sales in rural areas. The tax break, covering more than half the market, helped end three months of falling nationwide sales.

In the process, General Motors (GM)'s China minivan division -- which accounts for half of Detroit's car-market sales in the country -- saw a 32 percent jump in sales in the first two months of the year. In fact, the tax breaks and subsidies have worked so well for GM that the company doubled its 2009 forecast for China growth -- meaning the People's Republic will pass the U.S. as the world's largest auto market. (If you recall, GM's domestic sales have plunged 51 percent.)

In Germany, a 2,500 euros (about $3,200) government-funded scrapping bonus intended to help Opel encourages buyers to swap old cars for new models. Funny thing is, it's been even more beneficial to Opel's rivals. The German car-maker's domestic sales rose 4.2 percent in February, but the German market as a whole was up 21.5 percent, according to the German motor transport authority (KBA). Sales for market-leader VW increased 23.3 percent, while Ford (F), which is No. 3 after Opel, saw its sales rise 58.9 percent. Those figures are even more impressive when you consider that Germany was the only major European country posting sales growth in February. The German government has set aside 1.5 billion euros (about $1.9 billion) for the program.

Of course, if the economy doesn't improve and the programs aren't extended, there could be sudden steep declines in sales in these countries. In the meantime, though, some of the beneficiaries are pushing other nations to take up the baton. Ford Motor Co. of Canada Ltd. CEO David Mondragon told the Canadian government that "the best medicine for the ailing industry is not direct bailout of manufacturers, but stimulus for the entire industry." He urged the government to introduce a "scrappage" program that would provide consumers with a $3,500 payment when they trade in a vehicle at least 11 years old and buy a new one.

Ford of Europe CEO John Fleming also called for the EU to take action, including more scrappage incentives, increased availability of credit, grants, government financial guarantees and state aid to pay workers on short time.

And it seems some in Congress have become fans as well. Just this week, a new House bill was introduced that would provide consumers with between $3,000 and $5,000 in incentives to scrap vehicles at least eight years old and buy fuel-efficient cars and trucks. It could be the start of the sort of turn-around we've long been looking for.
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