Discerning the Effects of Cash For Clunkers On Auto Sales

There are reports that Chrysler is running into inventory problems and that they're suspending their matching rebate program because of the success of the cash for clunkers program.

That's not entirely true. In fact, I suspect it isn't anywhere near the reality of the situation with Chrysler at all.

Inventory control has been a problem with Chrysler for years, and their efforts this year resulted in multi-month closures of their production facilities so as to reduce the overall inventory of their vehicles on lots to be in line with historical levels - typically 60 days, but in Chrysler's case, they'd be lucky to be within 90.

So, if there are issues with inventories and a lack of vehicles, look first to the policy of factory closures before looking at cash for clunkers. Chrysler has to clear those lots, primarily because the new model years are going to be forthcoming shortly.

Then, there's the issue of the matching rebate offer. Is the new Chrysler really in a position to match those rebates. That's $4,500 a pop that they lose in profit per car sale. How exactly is that good business? Getting it in bulk sales? If they have 10% of the market, then they've sold perhaps 25,000 cars under the program.

According to the latest data, 10 million cars are expected to be sold in the US in 2009. Chrysler would be selling 1 million of that figure. Issuing $4,500 per vehicle with the rebates would mean $112.5 million in lost revenue ($4,500 times the 25,000 cars ostensibly sold under the rebate program - and if anyone can come up with hard numbers for Chrysler sales, I'll update this figure).

Oh, and the Chrysler rebate match rescission isn't exactly an elimination of the program. They're simply going to match the rebate and not give an automatic $4,500 for any car done under the CFC program. So, if the car is supposed to get a $3,500 rebate, the match will be $3,500, not the $4,500 as previously provided.

Then, there's a question as to what Chrysler vehicles are supposed to be in short supply. Which ones are they?

They're the Chrysler Town and Country and the Jeep Wrangler.

Neither of those cars actually is truly miserly on the fuel economy. The Wrangler gets 16 mpg.

The Town and Country? 18 mpg.

What kind of cars need to be submitted under CFC to qualify for the rebate?

Neither of these two cars qualify. Neither gets 22 mpg or better.

In other words, the cars that are in short supply have nothing to do with the CFC program. It has everything to do with the fact that Chrysler shut down its production facilities to try and reduce overall inventory. Now, they're going to have to ramp up production on gas guzzlers, which is where the demand is coming from.

Now, we can't quite figure out what is going on with GM or Ford, as their data isn't out yet, but Chrysler's precarious position isn't improving with their rebate offers, and it's costing the company dearly not having the vehicles that people want on their lots.

UPDATE:
Then there's the issue of whether we need another $2 billion or more for extending the cash for clunkers program beyond that which is already underway.

It is true that Internet car shopping activity, showroom traffic, and sales are all up, which is why the auto industry wants to keep the program going.

I love a good sales surge as much as anyone. But it’s not that simple. First, it’s not clear that cash for clunkers actually increased sales. Edmunds.com noted recently that over 100,000 buyers put their purchases on hold waiting for the program to launch. Once consumers could start cashing in on July 24, showrooms were flooded and government servers were overwhelmed as the backlog of buyers finalized their purchases.

Secondly, on July 27, Edmunds.com published an analysis showing that in any given month 60,000 to 70,000 “clunker-like” deals happen with no government program in place. The 200,000-plus deals the government was originally prepared to fund through the program’s Nov. 1 end date were about the “natural” clunker trade-in rate.

Clearly, cash for clunkers was underfunded from the start. Consumers quickly figured that out and rushed to take advantage before funding ran out.

This sales frenzy was inevitable. We have crammed three to four months of normal activity into just a few days.

What everyone fails to realize is that once this backlog is met, interest in the program will fade.

There is also an ironic unintended consequence. Car companies have cut the number of vehicles coming off their assembly lines in response to the recession, which is leading to spot shortages. This is particularly the case for fuel-efficient models the program was suppose to encourage consumers to buy. As prices for these autos rise, buyers will inevitably use their cash-for-clunker dollars to buy less-efficient models and thus crush one of the touted environmental benefits of the program.

It will be interesting to see just how the new sales break down, and whether the program actually resulted in new sales above and beyond what should be expected for the current quarter and the next quarter (when the new model year comes into showrooms and dealers need to clear inventories).

In other words, based on the Edmunds.com data, it appears that customers looking to trade in their clunkers either delayed their purchases to take advantage of the $1 billion program, or have accelerated their sales. In both cases, that means that they haven't actually increased the overall sales, just shifted around when those sales occurred.

UPDATE:
Ford released its earnings for the quarter, and it reported 2.3% increase in sales. Good for Ford. While the media is quick to credit cash for clunkers for the increase, what about the fact that it was the only domestic automaker not to receive a government bailout, and that it has one of the most popular cars in the country, the Ford Focus, which was cash for clunkers eligible.