Uncle Sam Slams the Brakes Before the Fuel Runs Out.
Who will be left searching for a chair when the music stops?
When Edmunds.com predicted that the additional $2 Billion in funding would last only until August 20th, or perhaps a couple of days more, I thought it would last a bit longer. I was wrong. Data analysts at Edmunds once again hit it on the head. Now, although the President and Secretary LaHood have said that dealers will be reimbursed for the "clunker" cash, only a fraction of the money put on the road by dealers has been paid. Edmunds predicts that it will be sometime in October before dealers are paid out in full. The numbers are in and the month long program accounted for almost 700,000 new car sales and cost about $2.88 billion.
The scramble was on as the millions and millions of advertising dollars calling out to Cash for Clunkers customers needed to realize a return by Monday at 8 P.M. To illustrate the advertising losses, GM and Ford are still running National Ads calling out to the Government's "Cash for Clunkers" program days after it ended. As with the announcement and implementation of this program, it has ended with the same urgency and unanswered questions with which it began. The "wind-down" the government said they wanted, was another fire drill on Monday. "Clunker" customers were coming into showrooms and laying claim to the last pieces of qualifying inventory on dealer lots. Negotiating new car prices went right out the window and MSRP was the daily special.
Now it's time to take a look at where we've come from
and focus on where we can and should be going.
Factories Go Back On-Line to Replenish Inventories
As the assembly lines' lights are turned back on, it's time for dealers and the factories to put their marketing hats back on and glean the nuggets from the past month and keep the momentum going. Perhaps the Smiths will notice the Jones' new car in their driveway and Mr. Jones will brag of his great deal and gas mileage. Maybe cousin Joe will talk about his new car practically paying for itself with what he saves in gas over Thanksgiving dinner. But word of mouth won't be enough. Dealers need to proactively communicate with their factories and continue to promote the excitement and sensibility of buying a new, more fuel efficient vehicle.
Show me the used car factory or a used car that didn't start out as a new car. Used car prices won't drop until we take in trades and sell NEW.
Chrysler and Hyundai Canada are already running factory backed "Clunker" programs. Some dealer groups are as well. If the average "Clunker" was worth $2,000 anyway and people are paying more for the new car, you're not far off. Local dealers are already advertising continuation programs, offering the $3,500 - $4,500 for any trade and are no longer held to selling "qualifying" new cars.
Do The Math
I looked at my 2001 Jeep Grand Cherokee at 16 MPG for sample "Clunker" deals. Take a look. It's worth around $4,000 as a straight trade anyway. You can structure the specials for your store along those same lines. Assume I drive 15,000 miles a year and that current annual fuel costs are $2.60 per gallon. That will require me to purchase 937.5 gallons of gas or $2,437.50 My cost is $203/month.
Now let's see what happens when I 'downsize' to a 2009 Jeep Patriot that gets 25 MPG. I'm now only buying 600 gallons of gas a year for $1,560. My cost is now $130/month. I just saved myself $73/month on gas.
True market Value (TMV) Cost of New Vehicle = $17,200
Less Customer Cash from Chrysler = - $3,500
Less $3,500 Clunker Cash = - $3,500
Final Cost = $10,200
Monthly Finance Cost (everything State Tax and DMV) = $195
Monthly Fuel Savings = - $73
ACTUAL EFFECTIVE MONTHLY COST = $121
If I sell the Jeep Grand Cherokee Patriot after the loan retires in 60 months for $7,312
IT COST ME NOTHING TO DO!!!
As gas prices continue to rise, the numbers only look better. If, as many "Clunker" customers were doing, I cut a check for the balance, I'm close to ahead of the game from day one.
What I have not calculated, however, is the difference in costs of continuing repairing and replacing consumables of a "Clunker" opposed to a new car with a factory warranty. I can tell you first hand, it's not as cheap as you might think. Train staff to speak to driving a newer, safer, more fuel efficient car with a fresh factory warranty as opposed to keeping a "Clunker" on the road. Sales tax write offs, Hybrid Tax credits, new model introductions, keep the new car message going!
Edmunds.com site traffic and lead submissions exploded from the early days of the program, proving again that information and shopping is overwhelmingly an online process for customers. Be sure to get your message presented properly online!
John Giamalvo, Director, Strategic Marketing
Edmunds data has shown an immediate and painful drop-off in purchase intent already, even as OEMs increase production to replenish dying inventories. Edmunds site activity showed an 11 percent fallout in engaged shoppers compared with June and a 50 percent drop from the peak of Cash for Clunkers, foreshadowing a sales lull in the next 90 days. As foot traffic wanes and dealer lots are restocked with incoming 2010 lineups, maintaining margin will also be difficult. Dealers now face the challenge of keeping the momentum alive, otherwise the hangover affect of the Cash for Clunkers party could lead to a dismal fall selling season.
Jessica Caldwell, Director, Pricing & Industry Analysis
The Consumer Perspective
The response from consumers was immediate. In the first three hours of our "Cash for Clunkers" page, we got 16,000 hits. That's a lot of buyers. And it was only the beginning of the traffic that flooded our site looking for information about this government program.
Once Cash for Clunkers went into effect we saw a similar response: car lots which had previously been empty were suddenly invaded by car buyers. Many of these tire kickers turned into buyers. When I last checked over 700,000 people had bought new cars through the program spending nearly $2.877 billion of the money. If each car was an average of $25,000, that's an awful lot of money pumped into the economy. Assembly lines started up again, workers were called back to jobs.
I imagine that dealers reading this piece so far might have a different reaction. Their memories are likely to be long hours dealing with confused and sometimes frustrated buyers. Crashed government websites. And slow, slow repayment periods.
I won't pretend for a second that the program was completely successful or easy to use. But when the deals are completed I think it will be seen that Cash for Clunkers created the perception that the economy was recovering. What did we see every night on the news? Car lots and dealerships filled with shoppers ready to spend money.
What I liked about the program was that it asked consumers to bet on America. This wasn't a welfare program or a straight out gift to the American people. It was a deal that went like this: we'll give you some money if you use your money to buy a new car.
We put up a notice on our car buying blog "Edmunds Daily" soliciting grievances. We got one reply. It was from a guy who wanted to use Cash for Clunkers to buy a new car. He found out he didn't qualify for the federal rebate but he went ahead and bought the car anyway. His only comment? His new car is getting 33 mpg.
Phil Reed, Sr. Consumer Advice Editor