“Cash for Clunkers” Program is On – At Least Through Tuesday
By Chris Haak
The US government’s so-called “Cash for Clunkers” program (more formally known as CARS, which is an acronym for Car Allowance Rebate System) that provides up to a $4,500 rebate on the trade-in (and subsequent scrappage) of an older, gas-guzzlnig car upon the purchase of a new, more fuel efficient model has done very well. Over the past couple of weeks, we’ve chronicled the ins and outs of the program as well as the initial results – including the confusion that exploded at the end of last week.
The latest word on the program is that the US House of Representatives has approved an additional $2 billion, to be taken out of the already-allocated pool of money that had been set aside for retooling factories to build fuel-efficient new cars. President Obama would almost certainly sign the expansion of the program into law, but the US Senate first has to approve it. The Senate is still in session this week, but after that, is on recess until after the Labor Day holiday in early September.
The Wall Street Journal reported on Sunday that many senators wanted to first be sure that the program was showing its intended results, including reducing vehicle emissions. To that end, the best hope that supporters of the program might have for proving their case is to get sales data directly from the manufacturers, who are incredibly efficient in the way they handle month-end sales analysis and reporting. Rarely do the previous month’s sales figures come out more than two or three days into the new month, and with the Department of Transportation’s processing of rebates so far behind the curve (to the point where the DOT really has no clue how many transactions have occurred under the program), it seems like the manufacturers would be in the best position to provide supporting documentation needed.
For example, Ford’s chief sales analyst, George Pipas, told the WSJ that the most traded-in vehicle was the Ford Explorer – probably the poster child for the 1990s SUV boom, when it sold in excess of 400,000 units annually for many years – and the most-purchased vehicle was the Ford Focus, which is Ford’s fuel economy leader among non-hybrids.
Even absent the confusion about whether the program is on or off – and what its short-term future holds (a lot of which depends on whether the Senate gives the program more money) – and the program’s numerous administrative snafus, there are two larger problems brewing that no amount of legislation will be able to cure.
The first of the additional problems is that inventories of eligible vehicles have already been depleted. The Detroit Three in particular have tried hard over the past few months to slash production to meet the demand curve, but when demand suddenly spikes from a program like this, production will take months to catch up. For example, if Ford sells out of Focuses (Foci?), new ones are weeks away from dealerships, so buyers with legitimate concerns about the program’s longevity may roll on to the Hyundai dealer to buy an Accent or Elantra instead, just to be sure that they still get the $4,500 incentive from Uncle Sam. Inventory concerns have led Chrysler to pull back on its promotion that doubled the government’s incentives on new vehicles. Put simply, the demand is strong enough without the additional incentive, and with inventories in a depleted state, it wasn’t money well spent to encourage people to buy cars that were selling strongly regardless. Ford’s decision a few months ago to boost production is looking pretty wise right now.
The second additional problem is the question of whether the program is just pulling car sales forward. If so, it means that buyers who weren’t originally planning on buying a new car right now decided to pull the trigger early because of the incentive, but a future sale is then lost. The “employee pricing for everyone” incentive wars of summer/fall 2005 artificially stimulated demand to the point that 2006 monthly sales comparisons against the employee pricing period were inevitably 40% or more behind the previous year’s pace. This is a legitimate concern, but the economy needs stimulus right now, and the vehicle sales will help the OEMs, suppliers, dealers, local and state governments (with additional tax collections), the scrap yards, and more today. Hopefully the economy will be on a more solid footing 12-24 months from now and a hangover won’t be as much of an issue as it’s being made out to be today. Meanwhile, perhaps those parties touched by this stimulus program will have more confidence in the economy (not to mention a little more cash in hand) and will be able to come out of their financial bunkers and get the US economy moving again.
We’ll probably have at least two or three more news items this week on Cash for Clunkers, so stay tuned for the latest news and analysis on this major industry news item. And if you don’t own a clunker or do own one but lack the funds to buy a new car, we apologize in advance for the amount of digital ink spilled on the subject so far and still to come.
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