Increase in car sales attributed to the cash-for-bangers scheme

Korean manufacturers see biggest boost from subsidies

New car registrations dropped by "only" 15.7 per cent last month, the smallest decline for nearly a year, thanks to the Government's cash-for-bangers incentive scheme.

But the lion's share of the subsidies are going to Korean manufacturers, rather than the British manufacturers they were designed to help.

In June, 176,000 cars rolled out of British showrooms, nearly 33,000 fewer than in the same month of 2008, the Society of Motor Manufacturers and Traders (SMMT) said yesterday. Over the year so far, demand is down by 25.9 per cent. But June's drop is the first that has come in above minus 18 per cent since last July, and is a significant improvement from the 24 per cent-plus declines for every month this year except for February.

The improvement coincides with the first full month after the introduction of the scrappage scheme which offers a £2000 subsidy for a buyer scrapping a vehicle that is at at least 10 years old.

Paul Everitt, the chief executive of the SMMT, said: "We are now beginning to see the positive impact of the scrappage scheme translate into new vehicle registrations. We expect the pace of improvement to increase in the coming months, but we can already see the industry making steady progress on the long road to recovery."

Nearly 30,000 vehicles have been registered under the scrappage scheme since it started on 18 May and it accounted for 9.7 per cent of the new car registrations in June. Unsurprisingly, small cars are the biggest winners. The small car segment recorded a growth rate of 145 per cent last month, while so-called "superminis" – which includes bestsellers such as the Volkswagen Polo or Ford Fiesta – took a record 37.2 per cent share of the overall market.

But details on the first full month of scrappage also give support to critics of the scheme, who claim that, given the UK manufacturing base, the majority of the subsidies will end up abroad.

Among British car makers, Mini has sold 382 scrappage-funded vehicles since the scheme started, Vauxhall 842, and Jaguar Land Rover 66. A proportion of the 2,036 Nissans and 1,342 Hondas sold under the programme will also have been built here.

But Korean car makers have experienced the biggest jump. Not only were Hyundai and Kia the top-selling mass market marques last month but their proportion of scrappage sales – 15.7 per cent and 9.4 per cent respectively – are far ahead of their usual market shares.

A second concern is that subsidised car-buying diverts spending from elsewhere, as rising unemployment, reduced earnings growth and tight credit conditions continue to erode consumer confidence.

Howard Archer, the UK chief economist at IHS Global Insight, said: "There is a significant danger that increased spending by consumers on vehicles will come at the expense of spending on other big-ticket items at least."

There were signs that scrappage schemes in France and Germany, which were introduced earlier than in the UK, were already having such an effect, Mr Archer said.

In May, French spending on cars was up by 2.4 per cent month-on-month and by 1.5 per cent year-on-year.

Meanwhile, retail sector spending dropped by 0.8 per cent and 3.5 per cent respectively, and overall spending on manufactured goods dropped by 0.2 per cent on a monthly basis and 1.6 per cent on a yearly basis.