Cash for Clunkers 2.0 – Answer to COVID19?

The Coronavirus pandemic has significantly impacted the automotive industry nearly brining everything to a grinding halt. With stay-at-home orders in place in many markets, dealerships have been forced to stop selling cars, cascading down the supply chain resulting in plants being shuttered and massive supply issues, job losses, and declining sales. Needless to say, it will take time for the industry to recover from the current situation.

What are the issues being faced by the automobile industry?

The Covid-19 pandemic has created crises in both demand and supply. The impact on automotive sales varies widely by market. Some areas are still clocking in consistent sales, while others are still closed and the market isn’t showing any signs of life. As unemployment claims stays high and uncertainty remains in the job market there is much in question that will impact demand. The industry was fortunate in the last recession, showrooms were not shut down, stay at home orders were not in place, and factories shuttered. This time around many customers can’t shop let along get the warm welcome by associates when walking into a showroom. COVID-19 and the consequential policies have created an even more difficult path to recovery.

In markets where customers were still out and about and sales maintained, several dealers are now unable to match demand as plants have stopped production. The used car market has been disrupted as auctions for buying and selling used and junk cars have come to halt or operating drastically reduced capacity. Rental companies are also struggling, and are considering aggressive options such as dumping thousands of low-mileage used vehicles into the marketplace. Only exasperating the market by driving  prices lower and disrupting new car sales. Even the Lease market has been impacted as extensions have disrupted by the timing of supply and in turn pre leased vehicles coming into the pre-owned market. Potentially impacting values of used cars with the erratic  supply and demand challenges.

The Great Recession and Bailout – Can a Cash for Clunkers 2.0 help?

The Great Recession in America began in end-2007 and lasted till mid-2009. The Great Recession was a global economic downturn that devastated world financial markets as well as the banking and real estate industries. The crisis led to increases in home mortgage foreclosures worldwide and caused millions of people to lose their life savings, their jobs and their homes. In an effort to minimize the impact and revive the economy, the government stepped in and provided lifelines to several sectors of the economy and businesses. The automotive industry received two signifigant support packages.

The Bailout

The US and Canadian government jointly made investments and bankruptcy payments of a whopping $80.3 billion, to bail out General Motors and Chrysler. This bailout was largely controversial in nature, and led to huge changes in leadership and structure of both companies.

Cash for Clunkers 2009

Lasting only a few months, the Cash for Clunkers program offered the option to customers to trade in older cars with poor fuel economy for newer vehicles improved EPA-estimated mileage. The government would pay up to $4500 if qualifications were met. To receive the $4,500 in credit, the car to be traded-in must meet the following criteria:

• Less thank 25 years old
• EPA rated fuel efficiency of less than 18 miles per gallon
• Drivable Condition
• Must be replaced with a qualified vehicle, and the car traded in must be scrapped

After only a few of months the program had burned through the $3 billion allocated in November of 2009. $3 Billion in Only 3 Months?!? Believe it or not! Officially known as the Car Allowance Rebate System (CARS). People whose vehicle met the criteria, could receive a credit of up to $4,500 with the CARS program. The total amount of the credit was determined by what vehicle was purchased as a replacement. Those that supported the CARS Program argue for the success citing a stimulus to the economy and replace inefficient cars with more efficient vehicles reducing pollution. According to the Government Accountability Office 677k cars were removed through the program.

However, there are many that did not believe the program benefitted the economy, significantly impacted pollution, or helped Americans that needed the support the most. Several studies, such as “the Effect of Fiscal Stimulus: Evidence from 2009 Cash for Clunkers Program” indicated in their findings that the CARS program “induced the purchase of an additional 370,000 cars in July and August 2009” but also found “strong evidence of reversal” (counties with higher participation in the program had fewer car sales in the ten months following the end of the program, offsetting most of the initial gains). Unfortunately, the research concluded that there was “no evidence of an effect on employment, house prices, or household default rates in cities with higher exposure to the program.”  – Quarterly Journal of Economics  

How long will recovery take?

There is no definite or simple answer to this question, as it is way too early to tell, despite several proposals doing the rounds. The automotive industry in 2020 is considering more aggressive moves to mitigate this  financial crisis. Dealerships can be greatly benefitted by new car deals, by steering traffic to establishments with low- or no-interest financing, cash back incentives, first payment deferrals, or a combination of the three which are already being rolled out. For automakers, it is about shoring up production, which requires a coordinated response with the rest of the world that includes China, North American trading partners Canada and Mexico, and other countries that supply parts to US factories. Restarting factories will be a challenge, as different states have varied conditions for lifting stay-at-home orders. Another auto bailout, as mentioned above, might not be financially feasible.

Will Cash for Clunkers 2.0 work?

Adam Jones from Morgan Stanley is extremely optimistic about this solution as he believes it could drive as much as $50 billion in industry sales. Customers have to meet a US domestic content requirement for the new vehicle purchased, which might include household income limit and price cap for the new car. A sustainability requirement would be in place as well, such as an increase in fuel economy by 50%. Advanced driver assistance and safety technology (ADAS) can be provided as additional support. For instance, the program could offer incentives for consumers towards cars with ADAS, along with advanced and efficient powertrains like plug-in hybrids and pure electric vehicles. But then again most automakers lack the capacity to build significant volumes of electric vehicles. Cash for Clunkers is under discussion, and while the program has merit, the drawbacks also need to be dealt with before it is officially launched. Fortunately, private options exist in the mean time to sell that old vehicle or Junker. Cash for Clunkers private programs provide instant quotes, quick payment and Free Junk car Removal.