The Cash for Clunkers Nightmare Continues

New Jersey dealers are finding the cash for clunkers program continuing to fall short of the ability to reimburse dealers for the rebates. Some are owed tens of thousands of dollars and have yet to see a dime.

Some are even pulling out of the program until they see the money from the government.

The program, originally $1 billion, was increased to $3 billion after the government appeared to run through the $1 billion allotment. Never mind that the spending of the money in and of itself was or was not a sign of the program's success.

Consider that the dealers who were trying to access the system to provide the needed data in order to get the reimbursement from the government faced a total nightmare as the computer system repeatedly crashed and failed to work and handle the data traffic.

The Car Allowance Rebate System (CARS) has been such a bureaucratic nightmare for new car dealers that paperwork sitting on desks waiting to be processed could exhaust the $3 billion program weeks before it was supposed to end.

"I talk to dealers around New Jersey who tell me that they might have only entered half of the deals they have so far because there are so many issues that have cropped up," said James Appleton, executive director of the New Jersey Coalition of Automotive Retailers.

"I think the program is pretty close to being out of money," he said.

CARS transactions are also likely to surge now the National Highway Traffic Safety Administration, which administers the program, has opened it to vehicles ordered from manufacturer rather than just those purchased from dealer inventory. The change was announced by NHTSA this week in response to dealers' complaints the program has been so successful they were running out of inventory.

CARS provides rebates of either $3,500 or $4,500 when buyers trade in older gas-guzzling cars and trucks for more fuel efficient new models. Dealers are reimbursed the full amount.

But from the start, the program has been beset by administrative woes. Four of every five applications have been rejected, some for minor oversights in submitting the paperwork.

So far, dealers have been reimbursed for just 2 percent of the approved deals. But even those dealers complain the payments they receive from the government electronically do not indicate which particular transaction the reimbursement is for.

"The bad news is you have to wait to be paid," Appleton said. "The worse news is you won't know what you're being paid for."

Dealers needed to reduce inventories at this point because the new model year was coming out. It was also needed because of continued consolidation of dealerships due to the GM and Chrysler bankruptcies and the overall slowdown in the economy.

What isn't a given is that this program gave the auto industry a boost. I suspect that the program merely shifted when sales would occur so that July and August would see more robust sales, that would drop off later in the year, when they would normally pick up.

Further, what exactly does this mean to the consumer? They still have to pay for these new cars. They have to have good credit, and if they don't will have to pay higher interest rates.

This is all too reminiscent of the real estate market bubble and concurrent credit market collapse. Government distortion of the markets meant that the ensuing crash was far more severe than had the government chosen not to demand that those with insufficient credit be provided access to home mortgages.

The NY Times has a FAQ that applies primarily to those people looking for cars under the program, not the dealers, who face a nightmare of red tape and delays. For the buyer, they've got to find vehicles that meet the qualifications under the program and have to work with eligible dealerships. Buyers can't use the cash for clunkers program to buy a used car, even if it means that they'd otherwise qualify for the program.

That also means that used car dealers and charities are taking it on the chin. Charities in particular are getting hard hit because they would otherwise be getting a piece of the action on the used car market to turn around and fund their charitable programs. Instead, they are seeing nothing.

Nonprofit groups that raise money by accepting donations of older vehicles have been among the program's unintended losers. Vehicle Donation to Any Charity, a Point Richmond firm that works with 4,500 nonprofits nationwide, recently said its intake of old cars has dropped 20 percent since the program went into effect.

Used car dealers have been particularly irate about the subsidy, saying it has driven buyers to new car lots at a time when their business was already suffering from tight credit and a shortage of used cars.

"Before the clunkers, business had been off at least 30 percent from last year, and after the clunkers started it fell another 20 percent," said Sevki Abbasoglu, owner of the Auto Exchange used car lot in Alamo.

"This is completely unjust," said Terry Degmetich, a used car dealer in Roseville and president of the Independent Automobile Dealers Association of California.

The program was defended by Paul Taylor, chief economist with the National Automobile Dealers Association, which represents new car sellers.

"The government is getting what it wanted," Taylor said. "It's a stimulus program that gets immediate traction."

Taylor noted that Ford, Toyota, Chrysler and General Motors have all added production to replenish depleted inventories. Locally, New United Motor Manufacturing Inc., the Fremont auto plant whose future is in doubt, has said demand created by the clunkers program would keep the factory busy through October.

Keep in mind, however, that GM, Chrysler, and other automakers shut down production lines for months because of oversupply in their inventories. They had to do so or else the supply would rise above the already historic levels. The inventory levels are now returning to industry norms, so the resumed production is a function of getting the new model year vehicles on the dealer lots as much as it is about the cash for clunkers program.

And the so-called stampede for sales under the program may end with a whimper.

J.D. Power & Associates (which, like BusinessWeek, is owned by The McGraw-Hill Companies (MHP)) thinks that most of the cars purchased through the program were simply sales that would have happened this year but were pulled ahead a few months. The company believes as few as 20% of the cars bought in the program are really new sales to the market. That means as many as 80% of the cars would have been sold this year anyway, says Gary Dilts, president of J.D. Power's auto industry group. That means that there will likely be payback with some slower sales months after the program expires.