CZECHS CONSIDERING MEASURES TO HELP AUTO INDUSTRY;

UNCLAS SECTION 01 OF 02 PRAGUE 000079 SENSITIVE SIPDIS DEPT FOR EEB/TPP/MTAA BNAFZIGER AND EUR/CE DEPT PLEASE PASS USTR RMALMROSE E.O. 12958: N/A TAGS: ECON EFIN ETRD PREL EZ EUN SUBJECT: CZECHS CONSIDERING MEASURES TO HELP AUTO INDUSTRY; WANT EU WIDE FLEET RENEWAL SUBSIDY REF: A. A) SECSTATE 4753 ¶B. B) FEBRUARY 4 PRAGUE DAILY AND PREVIOUS ¶C. C) PRAGUE 59 AND PREVIOUS (U) This cable is sensitive but unclassified. Please treat accordingly. ¶1. (SBU) Summary. The Czech Republic produced almost a million road vehicles in 2008, making it one of the largest car manufacturers per capita in the world. The Czech government, however, has yet to introduce any measures to assist the car industry during the current economic slow down, although a number of possible measures are under consideration. The National Economic Council, charged with advising the government on its planned recovery program, has recommended VAT refunds for business cars and accelerated depreciation for business vehicles. Minister of Economic and Trade Martin Riman, supported by the opposition (but opposed by others in the Cabinet),is promoting a "fleet renewal" subsidy under which consumers would receive up to 30,000 Crowns (USD 1,500) if they traded in a car older than ten years and bought a new model, Riman has also set up an eight member board to advise him on other possible measures to support the car industry. On February 5, Deputy PM Vondra on behalf of the Czech EU Presidency, asked the European Commission to prepare an immediate proposal "to encourage, in a coordinated manner, a European car fleet renewal in the area of vehicle recovery and recycling." There has been no reports that any possible Czech programs would be limited to locally manufactured vehicles or local content rules would be applied. End summary. ¶2. (U) The Czech economy is dependent on the car industry, which, together with suppliers, accounts for roughly 20 percent of Czech manufacturing. In 2008, the Czech Republic manufactured 947,372 road vehicles, making it reportedly the second largest car manufacturer per capita in the world. Although car production was up 9.5 percent from January to September 2008 over the same period in 2007, it was only up 0.9 percent for the entire year, due to a strong drop in external demand in the fourth quarter. All major car manufacturers in the Czech Republic have now cut production by as much as 25 percent and have implemented a four day work week. Car manufacturers have also laid off many of their non-contract workers. The Automobile Industry Association is predicting that over ten percent of the industry's roughly 130,000 employees will be out of work by the summer. Over 80 percent of the cars manufactured in the Czech Republic are exported. According to press sources, in 2008, Czechs bought 203,647 cars, including imports. ¶3. (SBU) The Czech government has yet to implement any measures to support the car industry, although some possible actions are under consideration. In early January, PM Topolanek created a 10-person National Economic Council to advise the government on an economic recovery program (Refs B and C). According to the press, the Council recommended against any bailouts for individual sectors and suggested the government should focus on ways to promote exports, including making more capital available to two state banks which provide export guarantees and business loans. The Council, however, also proposed accelerating depreciation for computers and business equipment, including cars, and possibly refunding the VAT paid by businesses when purchasing new vehicles. The government is expected to present its recovery plan later this month. Both PM Topolanek and Finance Minister Kalousek have repeatedly stressed the importance of fiscal discipline, leading many to expect only modest measures. ¶4. (U) The main opposition party, CSSD, has presented its own recovery program which includes a car industry proposal to implement a fleet renewal initiative. Under the plan, consumers would receive a government subsidy of 25,000 CZK (roughly USD 1,250) should they scrap their old car and buy a new low-emission vehicle. This week, Industry and Trade Minister Riman came out in favor of this idea, proposing a subsidy of 30,000 CZK but only if the new car costs less than 400,000 CZK (USD 20,000). He admitted, however, that about half the cabinet opposed the idea. Both Finance Minister Kalousek and Labor Minister Necas have publicly dismissed the program, noting that domestic initiatives will do little to help the Czech car industry since the vast majority of vehicles manufactured in the Czech Republic are exported. Also this week, Riman established an eight-member board, independent of the National Economic Council, to advise him on ways the state can support the car industry. PRAGUE 00000079 002 OF 002 ¶5. (U) On February 4, Deputy PM for European Affairs Alexander Vondra told the European Parliament that the Czech EU Presidency would "ask the European Commission to come up immediately with a proposal on how to encourage, in a coordinated, manner, a European car fleet renewal in the area of vehicle recovery and recycling." According to the local press, ten EU countries currently have fleet renewal programs with subsidies ranging from 234 to 3,400 Euros. According to a Czech EU Presidency press statement (available at www.eu2009.cz),DPM Vondra stressed that such schemes can be a positive force in stimulating demand but need to be "coordinated across the EU so as to prevent market distortions and imbalances." The Czechs would like the Commission to present a proposal in time for discussion at the March 5-6 EU Competitiveness Council chaired by Minister Riman. ¶6. (SBU) We have seen nothing in the press suggesting that any of the possible Czech measures would be applied only to vehicles manufactured in the Czech Republic or would involve local content rules. Thompson-Jones