Cash-for-Clunkers Programs Ends Today

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Researched by Industrial Info Resources (Sugar Land, Texas)--This year has certainly been the year of the automotive sector in the United States. Billions upon billions of tax dollars were thrown at automobile manufacturers as the federal government attempted to forestall bankruptcies that happened anyway. The supplier network required federal assistance as well. Now that Ford Motor Company (NYSE:F) (Dearborn, Michigan), General Motors (Detroit, Michigan) and Chrysler Group LLC (Auburn Hills, Michigan)--Detroit's "Big Three"--have righted their respective ship, the government has stepped in, under the guise of helping to boost sales figures, with its "cash-for-clunkers" program and added more tax dollars to the kitty. Now the program is scheduled to end its run on Monday, having at least partially fulfilled its purpose.

The program was not intended to run forever and has met its main goal: to provide a much-needed boost to the sagging U.S. automotive industry. At a cost of $3 billion, which the government has been very slow to distribute, the program lasted only about a month. In addition, while the program was well thought out from a sales-boosting perspective, the downstream effects of the program will take a few months to pan out.

The Big Three have begun boosting production to handle the increase in sales that the program generated. Some additional jobs have been created, albeit in Canada. At this point, the real question for the automakers is: Will sales continue to rise, or was this a one-time deal? Odds are that sales will begin to slow again soon after the program ends. The automakers, despite some very inventive and creative price-slashing programs, still will have trouble finding new customers with the financial sector continuing its stranglehold on financing for the majority of potential vehicle purchasers.

Other problems that the program helped cause involve the used car and parts markets. Because the program has taken a large number of used cars out of play, used car dealerships--both the small, independent dealers, as well as the used car departments at major dealerships--are facing significant problems obtaining inventory. As a result, used car sales are now in the tank. While that situation should clear up in coming weeks as the program is discontinued, it has caused some significant problems in the past few weeks.

The cash-for-clunkers program also has almost killed the used parts market. The scrapyards that used to make most of their profits by scrapping cars and selling the engines and drive trains found that the program would no longer allow those items to be recovered, cleaned up and resold. This eliminated 60% of the profit from scrapping a vehicle. In addition, outlets that allowed consumers to pick over scrapped vehicles for specific parts have run out of raw materials and are facing non-existent sales.

Down the road, the government may decide to try a program like this if automotive sales drop again. However, more consideration needs to be given to how a 'clunker' is identified for the program to be of more use. The current method involves the dealership looking up the sticker mileage estimates from a vehicle's original sale and using that as the benchmark to determine if a vehicle had low enough miles per gallon to qualify. While this is the easy way to make this determination, it also eliminated many vehicles that should have been accepted as clunkers.

No one can reach the mpg listed on the sales sticker, because no one can recreate the ideal laboratory conditions the government uses when making the benchmarks. So it was somewhat comical to use those initial figures as determining factors for the trade-ins. Numerous consumers, eager to trade in older vehicles that get 10 to 12 mpg, instead learned that they did not qualify because the car's sticker said it would average 18 mpg when it was purchased 10 years ago. While this was probably the easiest method to get the program off the ground, it immediately eliminated thousands of potential clunkers.

The bottom line is that the program essentially worked for the short period in which it was allowed to operate. Thousands of vehicles that should not be on the roads are now off of them. However, thousands more should have been allowed to take part in the program. When round two arrives, probably at the beginning of 2010, more consideration should be given to how a clunker will be identified, so the program can have a truly greater effect.

After today, things will be back to what has become normal for the U.S. automotive sector. Sales will begin to drop again, since this boost in sales was an artificial one, and the automakers will need to continue with their program of slimming down to fit into the mold of the new automotive sector that has been evolving over the past two years. In the future, we will see a much leaner, meaner automotive sector, something that has been needed for many years. Additional job losses will be coming, as well as additional plant closures as the sector adjusts itself to its new reality. But with the push for electric vehicle development, all eyes will be in that direction. Hopefully, by mid 2010, we will see what the new norm will be in the automotive sector, and the age of the affordable electric vehicle will be here.

Industrial Info Resources (IIR) is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy related markets. For more than 26 years, Industrial Info has provided plant and project opportunity databases, market forecasts, high resolution maps, and daily industry news.