Škoda Free-Trade Success

fabiaNeed a little bit of good recession-related news? Maybe even something with “rejoice” in the title? We get that from the mainstream Czech daily Lidové noviny, reporting on recent Škoda auto sales: Germans fall in love with the Fabia, Škoda rejoices. Yes, Škoda’s Fabia (pictured here) was the second-most-sold automobile in the German market in February, 2009, behind only that perennial favorite the VW Golf. At 9,190 units sold, Fabia sales were triple what they had been only the previous month, while sales of the Octavia also improved enough to push that sister Škoda model (more of a luxury auto, I believe) to 19th place on the auto-sales hit-parade of what is of course a very competitive German market. One important result of all of this is that Škoda has cancelled the plans it had to go to a four-day work-week until the end of June; the five-day work-week (meaning five-day pay for personnel) will stay.

Will stay at the Škoda production facilities, that is, most of which are located in the area of Mladá Boleslav in the Czech Republic. Here it is instructive to bring up the main cause to which the Lidové noviny article (credited to the Czech ČTK press-agency) attributes this sales success. Has Škoda come up with a revolutionary new car? Maybe an irresistible ad campaign? None of the above: it’s the incentive plan recently passed by the German government that rewards with €2,500 those who scrap their older car and buy a new one. It just so happens that it’s particularly the Škoda Fabia (together with the VW Golf – and note that Škoda is wholly-owned by VW) that fits the bill of being the sort of practical, economical car that most Germans currently in the market of taking advantage of that bonus for getting a new car are looking for.

So in effect, the German government is giving away public money to ensure continued five-days-a-week pay for auto-workers in the northeastern Czech Republic, right?

Apparently yes. While it is unlikely German officials behind this scheme figured out specifically how Czech workers would benefit from it, they must have realized that much of the benefit from the increased auto-sales it was designed to create would accrue to auto-manufacturers outside of Germany. If anything, they probably figured that Slovakia would reap most of the benefits; even more than the Czech Republic, Slovakia over the past decade has truly turned itself into “Europe’s Detroit,” hosting myriad auto-plants owned by a number of foreign firms and their associated suppliers.

Maybe Škoda’s government-sponsored success is sweetened somewhat for German officials by the fact that the resulting profits accrue to VW. (And VW chalked up record profits last year. Remember also that another aim of the €2,500 bonus program was environmental, i.e. replacing older, dirtier-running cars with newer, cleaner ones.) Also, Škoda has supplied a helping hand of the traditional sort: it has been offering its own “bye-bye-bonus” – as in “bye-bye!” to your old car – of a further 8% discount on its models. (Eating directly into VW profits – what do the Germans think of that?) In general, though, to me this entire phenomenon can be viewed as the counter-example to French President Nicolas Sarkozy, who you might recall proposed offering state financial assistance to ailing French auto companies, but only on condition that they maintain production within France, not at their plants in the Czech Republic. The German government has refrained here from any similar sort of heavy-handed measures, and correctly: if any important world government official still really believes, in his heart-of-hearts, in the virtues of free trade and the evils of protectionism, he knows that it’s best to let people to buy freely from the lowest-cost manufacturers, wherever they may be located. For that’s when economic resources are most-efficiently employed to provide the goods and services people want – and, in turn, those most-efficient workers can turn around and purchase goods and services for which their customers’ countries hold a comparative advantage, and everyone is better-off.

There’s a second lesson here, as well, namely that government initiatives can actually achieve their intended beneficial consequences, even in the midst of this worldwide economic crisis. This would seem particularly relevant in light of a similar “cash-for-clunkers” plan recently proposed in the US by Congresswoman Betty Sutton (D-Ohio). Indeed, the German plan is even a victim of its own success: the Škoda “bye-bye-bonus webpage urges readers “Don’t hesitate too long!” because, as the Lidové noviny article notes, the German bonus fund will likely be exhausted by the beginning of April, having spent €1.5 billion to assist in the purchase of 600,000 new cars.

UPDATE: Sure enough, this article from Die Welt confirms that, after 600,000 new cars have been financed with the new-car bonus fund, that will be it. It’s all very mathematical (as the Germans like to be): €1.5 billion was budgeted, for handing out in €2,500 doses to those who qualify – well, that comes out to 600,000 potential bonus-awards, and that is all that there will be. That’s the news coming out of Bundeskanzlerin Angela Merkel’s office, and it was put out despite what you can understand have already been pleas from various state government officials and other politicians to keep the bonus-program going after that. But the answer is “no,” and the Die Welt article further reports that, as of the date of this posting (Thurs., 19 March 09), 287,000 applications were already in at the relevant office (that’s the Federal Office for Economics and Foreign-Trade Control, German abbreviation BAFA).

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