U.S. Stimulus Plan Fails to Generate Auto-Sales Momentum

Auto makers anticipating a boost in sales from the Obama Admin.’s $800 billion economic stimulus legislation have been sorely disappointed thus far, as dealers characterize the package as a weak incentive at best.

Signed into law by President Obama 15 days ago, the American Recovery and Reinvestment Act includes billions of dollars in aid for the struggling auto industry. It includes $2 billion for suppliers of next-generation battery technology, with hopes of spurring the U.S. to a leadership position in electric-vehicle development, as well as $600 million to improve the fuel efficiency of government fleets.

But the legislation lacks teeth when it comes to spurring auto sales, which plummeted 39% last month, compared with like-2008, according to Ward’s data.

“It’ll help,” Mike DiGiovanni, General Motors Corp.’s top sales analyst, says of the stimulus. “But we’d have been happier if we could have gotten a little bigger boost.”

DiGiovanni says while the package includes a sales-tax deduction for new-car buyers, which would translate into about 100,000 additional sales this year, an interest-rate deduction for those consumers would have gone much further.

“We think the interest-rate deduction would have been worth another 300,000-plus sales, so hopefully that will get revisited, because the auto industry is a key engine in terms of turning the economy around,” he says in a monthly sales call with journalists and Wall Street analysts yesterday. “We’re still hopeful that might occur, because clearly it is being recognized around the world.”

Adds Chrysler LLC Vice Chairman and President Jim Press: “The No.1 thing the government really needs to recognize is the effect that they have on letting credit flow.”

“Removing financing barriers for dealers is essential,” says Congressman Thaddeus McCotter.

Press tells journalists during Chrysler’s call that about 90% of the auto maker’s customers use financing to buy their vehicles. The lack of available liquidity has made car-buying “difficult.”

Consumers are not the only ones who are suffering, as Michigan Congressmen Gary Peters and Thaddeus McCotter today called on the Federal Reserve and U.S. Treasury to provide dealers with access to the $200 billion Term Asset-Backed Securities Loan Facility (TALF).

A pattern is emerging that suggests dealers are not being considered for assistance if their credit ratings are below AAA.

Says McCotter (R-MI): “If the American auto industry receives an enhanced bridge loan but cannot sell their cars, our communities will greatly suffer. We must forestall this credit crisis by keeping men and women working in the auto industry employed; thus, removing financing barriers for auto dealers is essential.”

Elsewhere in the world, new government sales-incentive schemes are indeed showing results.

In Germany, for example, a scrappage program offers €2,500 ($3,147) for turning in an old car and buying one with better fuel economy. Ford of Europe CEO John Fleming tells journalists at the Geneva auto show the scheme “helps our end of the market.”

Germany’s sales jumped 15% on the program in February; while the remainder of Western Europe saw a sales decline of 25%. Italy and France, which enacted similar programs, saw flat sales in February, Ford’s Fleming says.

Last month, U.S. legislators turned down a scrappage measure. A multi-brand Texas dealer who requests anonymity, tells Ward’s it would not have helped anyway. “The scrappage program might be OK, but let’s be honest,” he says. “If those folks have a 10-year or older car, are they in position to buy a new car?

“That program was run last year in Texas, and I think there was some success. But that was with the previous (economic) environment where we could (finance) marginal-credit people with little money down. I am not sure how effective it would be now.”

In Brazil, sales in February rose 20% after the government slashed the small-car tax from 7% to zero, along with other financing aid from its federalized banks. GM says the country’s auto sales reached 200,000 units in February. “Clearly that reduction in sales tax is helping them,” DiGiovanni says.

China’s government slashed its small-car sales tax in January from 10% to 5% and provided a 10% price subsidy to farmers buying small trucks. Sales rose 10% in February to 745,000 units. Deliveries eclipsed the U.S. for the second straight month.

“These types of packages can boost the economy,” DiGiovanni says.

However, action taken with the Obama stimulus plan on sales tax amounts to roughly a $1,500 credit on a $50,000 vehicle. Sources tell Ward’s the deduction rarely reaches $1,500 and it fails to close deals on the showroom floor.

“The typical consumer is not going to get off the fence because of a $600-$800 tax deduction,” says the Texas dealer, who saw his showroom traffic plunge 45% last month, compared with year-ago.

Instead, the dealer calls for tax breaks aimed at small business. “We need a job-creation package where companies and small businesses would have incentives to hire workers,” he says.

Adds Sam Pack, who owns three Ford stores in Texas and is a partner in Lexus, Land Rover and Cadillac-Saab-Hummer franchises: “It all comes back to consumer confidence.”

The stimulus package is not a “silver bullet,” he says. And the initial billions loaned to the banking industry never trickled down to consumers. “The lending institutions have not demonstrated to us that they are supporting the marketplace. (Consumers) don’t feel comfortable in making big-ticket purchase decisions at this time.

“The real question ultimately becomes can the stimulus create momentum that we need to create – that’s not going to happen until there’s a change of direction in the marketplace,” Pack says. “We are still dealing with consumers that are reluctant.”

– with Derek Stark and Eric Mayne