Join our community of smart investors

Car-makers hail scrappage scheme

SECTORS: And there could be more good news in the pipeline as used car values rise

The car scrappage scheme in the UK has proved popular with the major car retailers, who have reported a surge in orders for small and mid-sized cars. But, as the debate grows over whether the scheme should be extended, developments elsewhere in the car market could point towards a recovery.

This week, both Lookers and Pendragon reported an uptick in sales directly related to the car scrappage scheme. In total, around 83,000 cars have so far deen delivered under the scheme, out of the total orders of more than 150,000. According to industry observers, the biggest winner in the UK has so far been Ford - its range of small and compact hatchbacks is proving popular with newly frugal drivers - while a premium brand like Land Rover has seen sales fall by some 50 per cent. Pendragon's chief executive, Trevor Finn, argued for an extension of the scheme, which is due to finish once 300,000 cars have been sold: "The Exchequer receives about £1,000 per car back in VAT, roughly the government's contribution to the scheme, so any extension would be largely self-financing."

While an extension to the scheme would clearly be beneficial for retailers, a recovery in the new car market might not be so far off anyway if positive trends continue in the used car sector. All the retailers have noted month-on-month rises in the value of used cars for the past eight months, bringing them back into line with prices before the start of the recession. This is largely down to supply and demand, as fewer part-exchange deals, along with drivers hanging on to cars for longer, has forced up prices.

This has had a knock-on effect for the price of spare parts, as older cars naturally require more maintenance, and parts suppliers have had very little trouble in keeping gross profit margins above 30 per cent. At some point, as Mr Finn and others have noted, the price rise will start to make new car prices look good value in comparison; what no one can agree on is when this will happen.