June 28, 2009 in Business

Cash for Clunkers looks a bit clunky

Shawn Langlois MarketWatch
 

SAN FRANCISCO – President Barack Obama will likely have his heart in the right place when he signs the so-called Cash for Clunkers bill into law this summer, but it remains to be seen if the government-backed program can hit its mark.

The administration’s goal is to replace some of the road’s belching hunks of metal with more fuel-efficient new cars and trucks, while stimulating sales in an industry that sorely needs a boost.

Noble it may be, but simple it’s not. Critics contend the program, officially known as the Consumer Assistance to Recycle and Save Act, has too many restrictions and is far too complex for the average car buyer, despite the success of similar efforts in Europe.

“Most shoppers simply won’t even qualify for the program,” said Edmunds.com Chief Executive Jeremy Anwyl. “For the others, it probably won’t make much sense anyway. I would definitely caution customers to curb their enthusiasm.”

Essentially, the government will offer vouchers of up to $4,500 toward the purchase of a new car or truck for the consumer who brings in a qualifying car to be crushed – provided the old car was built after 1984 and gets less than 18 miles per gallon. The new car also has to achieve at least 4 mpg more than the old one, which has to have been insured and operated by the buyer for one year. Oh, and the replacement vehicle’s value can’t exceed $45,000.

There’s more: Different rules apply for SUVs and trucks, and it doesn’t help at all if the old car or truck is worth more than the voucher. The buyer would lose money.

Nevertheless, once Obama signs the bill, as expected, the National Highway Traffic Safety Administration will put together a plan to put it in motion. The government has already approved $1 billion to fund the program, which will run until either the budget has been depleted or until Nov. 1, whichever comes first.

Anwyl said Congress has been too rosy with its projections as to how many additional cars will be sold. After all, the deal probably appeals primarily to affluent families with maybe a seldom-used, cheaper car that they might want to upgrade, he explained.

The folks who drive a car worth $2,000 or $3,000 probably aren’t eager to take on monthly payments for the smell of fresh leather, while those with means usually don’t drive beater cars as their primary mode of transportation. So considering the narrow demographic and the troubled state of the U.S. consumer, Anwyl said he expects the program to have trouble moving even 250,000 vehicles. That’s just not much of a boost for an industry that is in desperate need of adding at least 5 million new-vehicle sales a year to get back to the sustainable, profitable level it once enjoyed.

Although the actual positive impact of Cash for Clunkers from a sales perspective might be relatively minimal, it will provide another tailwind that’s hard to measure, according to Ford Motor Co.’s (F) top sales analyst, George Pipas. “The secondary level of benefit could result in a sales rate and level of interest that are much higher than what you’d predict from just looking at the details,” he said. “These kinds of incentive programs often motivate customers to get off the couch, where they’ve been stuck for past 18 months.”


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