The reality of cash for clunkers
Looking at things objectively, the government providing consumers with money to purchase a new vehicle is absolutely absurd. Of course, as someone who works in the auto industry I am hardly objective so I say bring it on ;).
The Senate passed the cash for trash auto stimulus bill yesterday. All that has to happen for it to become reality is for Obama to sign it and I don't see him not doing to. At one point I thought that such a program would be extremely stimulative for new vehicle sales in the U.S., but now that I know exactly how it works I doubt it.
Here's how the program works. From July through November of this year consumers who trade in a used car that gets less than 18 MPG and purchase a new one that gets better than 22 MPG will get a voucher from Uncle Sam for $3,500. If their new vehicle gets 10 MPG better than their old one, the voucher increases to $4,500. For light trucks, the $3,500 voucher is for consumers who get a new vehicle that gets 2 MPG better and the $4,500 voucher at 5 MPG better.
In reality this bill is a stupid waste of taxpayer money. You're going to give people who improve the gas mileage of their SUVs by a lousy 2 MPG $3,500 bucks. Are you kidding me? What difference will that make in the environment or our dependence upon foreign oil. Talk about a drop in the bucket. This is a drop in the freaking ocean. I'm sure that the fact that this program should help GM and Chrysler, two companies that the government now owns huge chunks of, recover has a lot to do with why it passed.
But really, how stimulative will this program be for auto sales? It's not like consumers are getting these $3,500 and $4,500 vouchers on top of a trade-in allowance that the dealer is giving them for their used vehicle. The trade-in for any consumer who takes advantage of this new program must be destroyed (I wonder if there is any public companies that do that...that might be a good investment angle). That means that the used vehicle being traded in has to be pretty crappy because it cannot be worth more than $3,500 to $4,500.
Think of the demographics of people who own really cheap used vehicles. You're not talking about Donald Trump here. People who have used vehicles that are in good shape, but get bad mileage like Suburbans, etc... aren't going to be taking advantage of this program. It's going to be people with legit clunkers. Many of the used vehicles that are cheaper than $3,500 are small vehicles that get good gas mileage. The cheap, bad gas mileage used cars that are out there are real pieces of junk in many cases. If someone is driving a real piece of junk, it's not because they are millionaires who are chomping at the bit to buy a brand new car. Probably in the vase majority off cases, the people with these clunkers are driving them because they cannot afford something new. Even with Uncle Sam providing them with a larger trade-in allowance than they normally would qualify for, how many of these people are going to want a new vehicle? Even if they do, chances are that many of them don't have cash to pay for a brand new vehicle with, so they would have to finance it. That's probably not an option for people who have low incomes or bad credit in today's tighter credit markets.
So there's my $0.02 on the cash for clunkers program. I'm sure that it will stimulate some additional demand for new vehicles, but I don't see it as being some sort of massive driver of sales. Even so, I stand by my earlier statement that light vehicle sales in the U.S. have bottomed and that they will not drop below 9.5 million to 10 million units in 2009 and that sales will be better than that in 2010. Consumers could get up to $4,500 toward new car