Car sales rise 30 per cent in January but extension of scrappage masks decline

British motor trade faces tough year ahead once state subsidies are exhausted

Some 33,000 more cars may have rolled out of Britain's showrooms last month than in January 2009 – but this year threatens to be extremely tough for the battered automotive industry.

A total of 145,479 cars were sold last month, a 30 per cent year-on-year rise, according to figures from the Society of Motor Manufacturers and Traders (SMMT), published yesterday.

But although the sharp increase managed to push sales above the shocking figure recorded in January 2009, the monthly total was still nearly 17,000 vehicles short of the level seen in January 2008.

Yesterday the Government extended its "scrappage" incentive to ensure all that the allocated funding was used up. The scheme, under which buyers of new vehicles are eligible for a £2,000 discount if they trade in a model that is 10 years old or more, was expected to conclude at the end of this month.

But with £70m still unspent from the Government's half of the fund – enough for another 70,000 vehicles – the scheme will now run to 31 March or until the money runs out, whichever is sooner.

Scrappage-induced buying is still running at about 8,000 vehicles per week – a healthy pace albeit below the 12,000 per week peak when it was first introduced. The Business Secretary, Lord Mandelson, insisted yesterday: "Against the background of the economic downturn, the scrappage scheme has proved a great success."

The big question facing the motor industry is what will happen when the scrappage money runs out. Germany, for example, saw an immediate and dramatic impact when its scheme was closed in December, Unit sales dropped by more than a quarter in January, plummeting to their lowest level for 20 years. Given that Britain has seen a 20 to 30 per cent sales boost from scrappage – the majority of which experts believe to be purchases that would not otherwise have been made – the UK market has some way to fall.

Opinions differ as to how long the crunch will take to bite, and some manufacturers are already trying to offer their own alternatives, such as Toyota's "swappage" promotion, to shore up sales. But few doubt that the second half of the year will be hard going. The SMMT's is predicting just 1.8 million sales in 2010 – 7 per cent fewer than last year's 1.97 million and a far cry from the 2.15 million in the boom year of 2008.

"We are not operating in an easy environment," said Paul Everitt, chief executive of the SMMT. "The balance is whether the first six months will see a sufficient strengthening in the economy to sustain an increased level of demand in the second half of the year."

The good news is that there is minimal overlap between car production and sales in the UK. Scrappage was originally billed as a boost for manufacturers, but more than three-quarters of vehicles built here are exported. The Koreans are by far the biggest winners from scrappage, with Hyundai, Kia and Ssangyong between them selling 61,000 cars under the scheme – nearly a fifth of the total (see graphic).

So the grim retail outlook does not necessarily augur a return to the squeals of pain from British factories that characterised 2009. There is little scrappage-related benefit to be lost and, if demand in the UK dips, it is the importers that will suffer the most. Although British dealerships will also feel the pinch, their higher margins come from used car sales and servicing, so the effect is unlikely to be crippling.

Less comforting is the fact that British car plants have done well from scrappage schemes overseas, and these are also coming to an end. Low interest rates, the weak pound and a growing appetite for prestige marques such as Jaguar that contribute the most to the economy are all in Britain's favour. But the economic recovery is too fragile to be a certainty.

Mr Everitt said: "The trend in manufacturing is upwards, particularly as we see improvements in the bigger markets such as China, the US and mainland Europe. But the global industry is a tough and uncompromising place and we will see both good and bad news on jobs over the next year."

Such concern are justified, given that the debates about factory closures and the beneficiaries of scrappage masked a bigger issue that the industry still has to face. Although Britain's car-makers made significant capacity cuts last year, the industry in Europe as a whole largely ducked much-needed restructuring thanks to a stream of government interventions to protect jobs.

"The car industry's perennial problem is to balance supply and demand, rather than over-producing and trying to stimulate artificial and unsustainable demand," said Mike Steventon, an automotive expert at KPMG. "On a pan-European basis there is still excess capacity that needs to be dealt with. The question is where that will happen."