It's not just General Motors (GM) and Chrysler that are hoping to get an emergency tow from Washington. Battered by double-digit sales declines, all automakers selling in the U.S. are pinning their hopes on a federal program in the making that would give consumers a rebate for trading in old clunkers for new, more fuel-efficient cars. In Germany a similar incentive caused auto sales to spike 21.5% in February and created the best sales quarter for GM's Opel brand in a decade.
On Mar. 30, President Barack Obama endorsed the idea of a trade-in program, but working out the legislative kinks on bills that have kicked around Congress since December has proved more difficult than anticipated.
One bill, introduced by Representative Betty Sutton (D-Ohio), would give consumers incentives of $3,000 to $5,000 to scrap vehicles that are at least eight years old and then either buy more fuel-efficient vehicles or obtain a mass-transit voucher. To qualify, the newer models must achieve a minimum of 27 mpg on the highway, while new trucks must achieve a minimum of 24 mpg for highway driving.
A Revenue Bump Worth Many Billions
But foreign carmakers so far are protesting provisions in the Sutton bill that would limit the rebates to vehicles made in the U.S. "The bill as written is unfairly protectionist," says Mazda North America (7261.T) spokesman Jeremy Barnes. Capitol Hill staffers say a final bill is not likely to include foreign-built vehicles, but will probably treat those built in Canada and Mexico the same as those built in the U.S.
Automakers could certainly use the sales jolt a national cash-for-clunkers program would deliver. Data released on Apr. 1 showed that sales of new cars slumped 37% in March, compared to a year ago. J.D. Power & Associates estimates that sales from a clunker trade-in program would reach 480,000 to 740,000 units over 18 months. Barclays (BCS), the financial-services firm, reckons the lift could be as high as 3 million units over the same period. George Pipas, chief sales analyst at Ford (F), puts the number in the range of 700,000 to 800,000 units. At that level, the entire industry would get about an $18.4 billion bump in revenue.
"Scrappage bills to take clunkers off the road not only advance the environmental agenda, but would take some of the hurtful boom-bust sales cycles out of the market," says Pipas. At present, he says, there are perhaps a couple of million consumers delaying purchases until the economy strengthens and job security concerns abate. A scrappage bill, he argues, would smooth out the sales spike expected in 2010 and 2011, when the recession is expected to have eased, shifting some forward to now, when the companies need them.
Proponents of paying for clunkers view European programs as a model. Germany spent €1.5 billion in the first quarter to scrap older cars, and sales roared from declines to a 21% gain in February. The German government is looking to add €1 billion more to the program. GM's Opel division saw 120,000 orders in the first quarter in Germany, its best posting in a decade. Goldman Sachs (GS) says sales in Western Europe will be pumped up by 900,000 units this year because of scrappage programs. Aside from Germany, France, Spain, and Italy have also run clunker programs.
Visions of Success in Detroit
For the U.S. government, a trade-in program would be cheap—at least when compared with the $17.4 billion Washington has already spent to prop up GM and Chrysler, with billions more in aid teed up. There are 86 million vehicles in the U.S. that were built in 1997 or earlier, according to CSM Worldwide. Retiring just 5% of those cars and putting the owners in new models would cost the government about $13 billion, says CSM President and CEO Craig Cather. If 800,000 car buyers opt in, the cost would be about $3.2 billion.
What's more, the car companies say their prospects improve greatly—and their need for additional government loans goes down dramatically—if industry sales rise from their current annual level of 9 million units to 11 million units. GM's new CEO Fritz Henderson says the program would go a long way toward helping recovery. "Our industry is going along at a 9.5 million selling rate, and nobody is successful in this environment, nobody," he said.
Consumers would get a pretty sweet deal, too. Under the Sutton bill, a prospective buyer could trade in a 1993 Ford Explorer worth perhaps $1,000 on the used-car market and drive away a $25,500 Chevy Malibu for around $15,000, including incentives from GM and proposed breaks on sales tax.
"I've got to say, that much money would probably be enough to get me to trade in my 1998 Cadillac," says Joseph Dooley, a retired auto-parts executive from Ann Arbor, Mich. "At those kinds of discounts that wouldn't be there a year or two from now, I almost can't afford not to replace it now."
Opposition from Auto Importers
GM officials say getting the word out about the rebates would be a snap: E-mail and direct-mail campaigns would go out to owners of older cars that qualify. Dealers, meanwhile, are excited at the prospect of being able to move fuel-efficient models that have been clogging up their lots since gas prices tumbled, and would quickly advertise.
It looks as if the only losers in this game might be the owners of car repair shops and companies that import a lot of vehicles to the U.S. The Specialty Equipment Manufacturers Assn., which represents shops that modify and repair cars, has been one of the few voices lifted against a scrappage effort. And the American International Automobile Dealers Assn. has been one of the groups lobbying against any bill that would treat U.S.-built vehicles better than imports. "Interested in a fuel-efficient vehicle built outside North America, such as the 2010 Toyota Prius, which gets a whopping 50 mpg? Too bad, no voucher for you," complains AIADA Chairman Russ Darrow.
If such opposition delays the scrappage effort for long, though, foreign automakers could be compelled by public opinion to submit. In any case, such companies as Toyota (TM), Honda (HMC), Nissan (NSANY), and Hyundai (005380) will benefit by having vehicles they build in the U.S. covered by any of the bills being seriously considered.
Detroit, however, has much to lose if Congress dithers. Now that people know about the scrappage proposals and expect one to materialize, "more [buyers] will wait on the sidelines until it passes or fails," explains Ford's Pipas. And the last thing carmakers need now is an even worse month than March.