All over the Car Blogging community, there hasn’t been a topic quite like the Cash for Clunkers program that was extended this past week. There have been heavy debates as to the merit of this program, and why anyone will trade a perfectly good vehicle, only to have it destroyed. Well, it’s time to put this all into perspective, as I am going to take the unpopular side of explaining why this program has become somewhat successful, and why everyone who is against it should just calm down.
Continue reading after the jump!
The mission of the CARS Program is to stimulate the purchasing of more fuel efficient cars and trucks, and to help people dispose of their “gas guzzler” that, up until this week, had very little trade in value toward the purchase of a new vehicle. A little history lesson: Do you all remember the spring/summer of 2008, when gasoline approached $4.50 per gallon (and that was self serve regular)? Sales of the highly profitable Trucks, and Truck Based SUV’s virtually stopped, along with anything V8 powered. All of these products were primarily manufactured here in the US, by the big 2.5. This was the start of the very short slide into Bankruptcy for both GM and Chrysler. Ford escaped (pun intended) this fate by mortgaging everything it had, including intellectual property like designs, logos, naming rights, along with the manufacturing plants and office buildings it owned outright.
But, a funny thing also happened, the residual values of all those large trucks, cars, and SUV’s also took a substantial nosedive. So what, you’re saying under your breath, what does decreased residuals have to do with any of this? Two things; First, if the vehicles were leased, those companies that held these contracts were about to take a big hit when they’re returned at the end of the term, leaving their balance sheet tattered. Second, if they were financed using traditional financing methods (60, 72, or 84 month terms) there was no way for the current owner to get out from under them, as they are now “upside down”, meaning they owe more on the car than it’s worth. Many of these makes took at least a 50% reduction (and sometimes much greater) in their values. The first affected the Financing companies (GMAC, Citigroup, BOA, Cerberus, and Others), and one very key insurance giant, AIG. The second affected the average, everyday, strapped consumer, and they had to keep the vehicle for as long as they could, while their warranty expires, further dampening sales.
Before the fuel bubble, car and truck sales were cruising along at an annual yearly rate of about 15 to 16 million units a year, just in the US. When the fuel bubble burst, forecasters were predicting of an annual sales rate of only 7 to 8 million units, or at least a 50% drop. Because of this drop, factories were shutting down, dealerships were closing, and related businesses that feed off the industry also collapsed. It’s the cycle of life, but were we prepared as a nation to sacrifice the lifestyle we have enjoyed over the past decade, to let this natural progression rectify itself?
We probably could have endured the hardships of a collapsing auto industry, but we were also in the midst of the worst economic financeapocolypse since the great depression of the 1930’s. Because of some financial shenanigans in the mortgage, brokerage, and insurance industries (none of which will be debated here), there were seemingly strong, blue chip companies, that either went bankrupt, or were begging for capital from the government just to operate. Names like Merrill Lynch, Lehman Brothers, and Morgan Stanley were sold off, or closed down. Banks that were once on solid ground like Wachovia, Washington Mutual, and Bear Sterns were all acquired by larger companies. And home values, once the rock of financial strength, began to decline, and sharply in some areas. And it was not like the US was alone in this particular mess, as the rest of the world experienced the same sort of fiscal flu.
(Above) This is Brian, and he traded in this Land Cruiser for a Volkswagen Rabbit under the CARS Program
Against this backdrop, the Automobile Companies, all over the world mind you, were trying to get sales going, by hook, or by crook. The cash for clunkers program was started in Europe, and it was proving to be a success. Parts of Asia started it, and again, it started to show a glimmer of hope. So, if it worked in parts of Europe and Asia, why not try it here in the US, to try and jump start auto sales, with the enticement of having the ability to trade less fuel efficient vehicles for ones that promised better fuel economy. There was also a provision for the commercial truck buyer to upgrade their equipment as well, but it is less publicized than the consumer side of the program. It looks like the CARS program is a success, well beyond anyone expectations, but it has also proven controversial, and that’s were I come in to make some sense of it all.
Let’s first discuss the normal US Driver, not the car crazed fanatics that populate the car blogs or forums. By and large, they are neither car enthusiasts, nor do they take care of their vehicle the way everyone on this site does. To them, their car is an appliance, a toaster if you will, used to transport them from one place to another, without any thought to it at all. These consumers will remember if the car fails to start properly, even if they haven’t replaced the battery in 5 years. A few of these consumers seem to own a desirable piece of machinery (say a BMW 5 Series for example). However, they still look at it as an appliance. Let’s explore that BMW for example; The average BMW service, at an authorized BMW dealer, may cost thousands of dollars when it comes to a 60,000 mile service interval. Well, along comes CARS, and Mr. (or Mrs.) average American that happens to own a BMW looks at the upcoming service bill, or they may have been experiencing all the little, niggling, infuriating problems that comes with owning a BMW. Along comes the CARS program, and they find that they can get up to $4,500 on a trade, and not have to perform the service. They seem to turn in what looks like a perfectly fine car to the rabid enthusiast, just to be scrapped.
The overwhelming argument made by the enthusiast crowd is that the dealers should have offered at least that much on trade in the first place, and not scrapped the vehicle. Ahhh, lets take a look at the trade in values of some of these fine cars for a moment. You look at the trade in values on Kelly Blue Book, and NADA, and sometimes these books show that it’s worth that much or more. New car dealers have a different set of books, as NADA publishes an edition just for dealers, that the general public doesn’t know about. You also have to realize that the dealer has to make the car “front line ready”, which means some re-conditioning, including mechanical items, brakes, tires, and detailing. On top of that, most dealers have to offer a minimal warranty per state law. Each car is different, but if it’s over 100,000 miles, dealers are not interested in retailing them because of the liability involved.
The wholesale value is the target dealers use when taking a trade, and most of the dealers use a wholesale guide like Galves Auto Price Guide, which typically undercuts NADA by a substantial margin. According to Galves, a 1993 BMW 535I 4 Door, with a stick, and with about 100,000 miles is worth $1,200 at trade in. This number is usually a solid number, which the dealer expects to receive when he takes the car to a dealer auto auction. What are some of the other values that the cars in the videos? Let’s start out with the Jeep Grand Cherokee: A 1998 Limited with a V8: $1,800; A 1999 Volvo S-80 with the Turbo: $3,200; A 1993 Mercedes Benz 500 SEL is worth only $2,600 at trade. And that Mazda B3000 Pickup, even if it had 4 wheel drive? Only $2,300 at trade. Many of the more common cars don’t even have a value past 12 years old, and dealers use a best guess as far as worth, usually from past auctions, or from wholesalers on the prowl for bargains. To each and every one of the trades illustrated in these videos, the value of these cars and trucks is higher now than before the CARS program began.
Most of the cars being traded in are crap anyway. The number one vehicle being traded in on this program is the Ford Explorer, and their worth is virtually nothing since the Firestone Tire fiasco, and the fuel bubble. Other top 10 worthless cars being destroyed include the Jeep Grand Cherokee, the Ford F-150, The Chevrolet S-10 Blazer, and the Ford Windstar. Is anyone really going to shed a tear for any of these relics? By all accounts they are being traded for the Ford Focus, Ford Escape, Dodge Caliber, and Toyota Camry among others. They are far more fuel efficient than the traded vehicles, quite a bit safer, and carry a new vehicle warranty. And that’s all that really matters to the average consumer.
Again, let me reiterate why this program is a success:
1) The Average Consumer is trading in a car that they deem as worthless for up to $4,500.
2) The Dealers have never offered more than this amount in trade…. FOR ANY OF THESE VEHICLES.
3) The Average Consumer buys a more fuel efficient car, that also has more safety and convenience features.
4) The Average Consumer purchases a new vehicle with a new vehicle warranty.
4) Some of the vehicles showcased may have intrinsic value to enthusiasts, but not to the average consumer.
5) Some of the more desirable vehicles featured may have underlying problems, and could be the reason they were traded.
6) The Average American Consumer has neither the skill, nor the desire to learn about their vehicle, and relies upon others to perform maintenance on their car.
One last thought…. If you despise this program because of what it is doing to some of these desirable cars, go and prowl the lots, and buy them off these people, for the price they are going to get from the program. If you despise this program because it’s throwing money away, and is an example of one more giveaway that the government is performing, let me remind you of this little fact: The Tarp Money (you know, the last big government giveaway to the Banks and Brokerage Houses) is being paid back by a few selected banks, generating something like 21% to 25% ROI. We will eventually see a return on the investment made to the Car Companies as well, but we have to jump start sales one way or another. As this is a commentary, let me know what you think. I predict a lot of heated debate.
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