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Ta-Ta Clunkers; Now What?

Cash for Clunkers has been a surprise success to many, including government. Hopefully, we won't have a serious dead spot now that Clunkers is kaput. We all know how rebates can be like getting on drugs. Training consumers not to buy until the next program contributes to a whip saw market that makes good consumer satisfaction impossible. It also makes marketing dependent on loading up dealers' inventories

Cash for Clunkers has been a surprise success to many, including government.

Hopefully, we won't have a serious dead spot now that Clunkers is kaput. We all know how rebates can be like getting on drugs.

Training consumers not to buy until the next program contributes to a “whip saw” market that makes good consumer satisfaction impossible. It also makes marketing dependent on loading up dealers' inventories and then introducing a program to sell them.

Still, Clunkers was worth it. In my 38 years in the business, this has been only the second time I have seen a federal initiative spark so much sales activity in the new-vehicle business. The first time was when the Nixon administration repealed the excise tax on cars in 1971.

There have been other government initiatives that stimulated sales, but mostly through tax policy. Most recently, the Bush administration provided a substantial tax credit for those purchasing a vehicle over a particular GVW rating.

This was meant to spur the purchase of trucks by ranchers, farmers, plumbers, and other small business people. It also spurred the purchase or lease of Navigators, Escalades, Suburbans, etc. to doctors, consultants, and anyone who could take of advantage of the business write off.

But the tax policy measures didn't have the broad appeal of Cash for Clunkers.

As a consequence, about 707,000 old vehicles have been designated for the crusher. Engines have been destroyed to ensure the clunkers do not find their way back into the system. Initially, this is having an impact on the Buy Here, Pay Here dealers. What the Feds call “clunkers,” they call inventory. Any revival of the program will exacerbate their plight.

Clunkers is not the only factor impacting the pre-owned market. The low seasonably adjusted annual sales rate has generated fewer sales. This means fewer pre-owned vehicles will be available down the road.

A lot fewer rental vehicles have been placed in service. There's a dearth of new leases put on the books. As pre-owned values strengthen, fueled by the inevitable shortage, there will be more people in an equity position than before.

I expect this trend will be tempered by people keeping their vehicles longer. We all know that above-average miles have a major impact on true resale value at auction. But the trend is certainly toward higher pre-owned prices down the road.

Despite the recent rise in pre-owned prices we hear complaints from dealers that some guidebooks' loan values are not reflective of what is really going on in the pre-owned marketplace, so owners who should show equity are shorted by lenders who use those guides in their finance advance calculation.

Another interesting by-product of the strengthening pre-owned market might be the impact of current lease returns to the OEM captives and independent bank lessors.

I am told many lenders took write offs for current and anticipated residual losses. Some of those previously stated losses may turn out to be profits in the current marketplace, which is driven by the pre-owned shortage and low fuel prices.

Pre-owned values can only go so high, but perhaps we have not yet hit the ceiling. Just imagine a world where new vehicles can be sold without rebates or dealer “trunk money.”

A true pull market scenario would strengthen pre-owned values even more and provide even more trade equity for would-be buyers. Might we be able to return to the pre-Joe Garagiola days when the baseball player turned Chrysler TV pitchman said, “Buy a car, get a check” in 1975? My guess is probably not.

The domestic auto makers have trained an entire generation not to purchase unless there is a rebate. In addition, there are just too many competitors all vying for sales. Where will it end up? Nobody knows. Here's hoping those guidebook loan values will catch up with the market. Dealers and consumers need all the legitimate help they can get!

Former auto dealer David Ruggles is president of Advanced Concepts & Techniques. He is at [email protected] and 312-925-1863..

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