Questions Surround Cash-for-Clunkers Program

Details of the federal government’s “cash-for-clunkers” legislation have yet to be confirmed, but a Ward’s analysis of the program reveals numerous holes and the possibility it may not boost vehicle sales significantly.

Under terms of the Car Allowance Rebate System (CARS), dealers largely will oversee implementation of an incentive that provides up to $4,500 for consumers scrapping used vehicles rated at 18 mpg (13 L/100 km) for new cars that achieve at least 22 mpg (11 L/100 km), or light trucks capable of 18 mpg or more.

Replacement vehicles must cost less than $45,000 and the trade-ins must have been insured for the past year.

Dealers will decide who is eligible for the rebates.

One potential pitfall of the program is how dealers will provide proof the trade-in vehicles will indeed be scrapped and not wind up on used-car lots, which would negate a primary objective of taking inefficient cars and trucks off the road.

John Wolkonowicz, a senior analyst with IHS Global Insight in Lexington, MA, questions the decision of placing dealers in charge of the implementation of the program.

“If a customer comes in (to a dealership) and doesn’t know about the program and has a vehicle that qualifies, a dealer could take it as a trade-in and say the resale value is $2,200,” Wolkonowicz tells Ward’s. “So, the guy buys a car and the dealer gets the full $4,500. How do you prove the customer got the money?”

The program approved last week by President Obama is being administered by the National Highway Traffic Safety Admin., which has less than 30 days to craft the final rules. The program is tentatively set to begin Aug. 1, with final rules reportedly due by July 23.

NHTSA spokesman Rae Tyson says the agency “has a lot of details to work out,” but adds careful consideration is being paid to ensure dealers can’t exploit the program as Wolkonowicz suggests.

Potential fraud “is one reason we’re being very careful,” Tyson tells Ward’s. “In order to complete the process, (dealers) have to ensure (the vehicle is) scrapped. That’s one of the pieces we’re looking at carefully.”

Under preliminary rules, Tyson says dealers would first have to be certified to participate in the program, although details on the certification process have yet to be hammered out.

Despite being 18 years old, ’91 Ford Tempo’s combined 21 mpg fuel economy rules car out for clunker status.

Following certification, a dealer accepting a trade-in would have to make proper disposal arrangements, then submit documentation to NHTSA showing the process had been handled correctly and the vehicle had indeed been scrapped.

Once NHTSA approves the documentation, the dealer would receive the refund within 10 days.

“Then we check to make sure the transactions were done correctly,” Tyson says. “Dealers make those decisions and if they have questions can contact us.”

NHTSA already has warned dealers not to begin signing up customers for the program until the final rule has been released.

“If a dealer chooses to structure a transaction before the final rule is issued, they will bear the risks associated with later demonstrating that the transaction meets all of the specifications of the final rule,” NHTSA says in a statement, noting violators face fines of up to $15,000 per transaction.

While NHTSA is working to ensure dealers don’t take advantage of the program, some argue most dealers wouldn’t attempt to do so even if the situation presented itself.

“Some dealers will take advantage, but if you’re going to be blatantly stealing from the government, which that would be, employees would find out,” says dealer-consultant Mark Rikess of The Rikess Group in California. “Dealers in (financial) trouble may do that, but the majority wouldn’t do that.”

Another issue yet to be addressed is how dealers would prove to NHTSA vehicles will be scrapped, as well as how the actual scrappage will be carried out, Tyson says.

In the U.K., which earlier this year launched its own cash-for-clunkers incentive plan, salvage yards disposing of vehicles must submit documentation available online, along with digital images of the destroyed vehicles, according to British salvage firm Douglas Valley Breakers Ltd.

NHTSA currently is examining its options and several possibilities have emerged, Tyson says, noting the agency has been seeking counsel from European countries operating scrappage programs.

“One (option) would be to figure out how to render the drivetrain inoperative, or at least the engine; and the other would be perhaps do something to the title to allow it not to be re-titled, or some combination (of the two),” he says. “We’re looking at a combination of things, but no decision has been made yet.”

If the vehicle’s body is in good condition, its parts could be sold off, although NHTSA has yet to decide whether or not that would be allowed. In any case, the priority would be to render the vehicle inoperable, he says.

Rikess says he has heard from dealer sources that NHTSA has promised $50 per vehicle to cover the cost of having it towed off a lot for scrappage.

Even if NHTSA is able to craft adequate rules to address all the potential issues in the CARS program, the question remains whether it will be enough to significantly stimulate sales.

The program is capped at $1 billion and runs through Nov. 1, 2009, or when the funds are exhausted, whichever comes first.

If the entire $1 billion were used with an average rebate being $4,000, it would result in 250,000 additional new-vehicle sales, barely enough to impact even a down U.S. market, which last year totaled 13,493,165 units, according to Ward’s data.

In May, the U.S. seasonally adjusted annual rate was 9.9 million units. Assuming that figure holds steady, the program would result in a mere 2.5% annual sales increase. If the SAAR improves as many predict, the impact would be even less.

Although European scrappage programs have been deemed successful, it’s largely because their respective markets are much smaller than in the U.S.

According to an Agence France Presse report, a similar program in Germany managed to improve auto sales in the country in March some 40% vs. 2008. However, that program had $2 billion in government financing, and sales for the month rose by 401,000 in a market that accounts for 3.5 million units annually.

As such, the impact of the $2 billion for the German market would be substantial compared with the U.S. putting in only half that much money in a market that even in a bad year is four times the size of Germany’s.

But many remain optimistic the program will be a success.

“‘Cash for Clunkers’ is going to stimulate the market for new-vehicle sales, this is something our economy has desperately needed for some time,” says Annette Sykora, dealer principal of Smith Ford Mercury in Slaton, Texas, and Smith South Plains Ford, Lincoln-Mercury, Dodge, Chrysler and Jeep in Levelland, Texas. “What a great time for consumers to buy a new car.”

Perhaps the most important question concerning the CARS program is what vehicles will qualify. According to preliminary rules outlined on a government website, trade-in vehicles must get 18 mpg or less.

However, there aren’t many older cars that get such dismal fuel economy. For example, another government website shows the fuel economy of a ‘91 Ford Tempo is a combined 21 mpg (11.2L/100 km), meaning even the 18-year-old vehicle would not be eligible for trade-in.

As such, owners of trucks, vans and SUVs will most likely benefit from the program, industry experts say. NHTSA has yet to determine whether cross/utility vehicles will be categorized as a truck or a car, spokeswoman Karen E. Aldana says.

“There aren’t many cars that get 18 mpg or worse,” Wolkonowicz says. “(The program) is not going to do anything but get trucks off the road, but that’s not its intent. It is a classic example of people (writing legislation) who don’t know anything about (the industry).”

Rikess agrees most car owners won’t qualify for the program, and raises yet another question.

“Affordability is an issue for some people driving 14- (and) 15-year-old cars,” he says. “A typical family with a cash-for-clunkers car couldn’t afford a (new car) payment.”

However, Rikess maintains the program will prove beneficial by increasing showroom traffic as details of the program reach the public. That said, he suggests the program may create some issues for dealers and likely won’t prove a huge boon to the market.

“The problem for a lot of dealers is if this creates a stampede of traffic and hurts them when they try and figure out what kind of vehicle is eligible and there are a lot of questions from consumers,” he says. “That could eat up a lot of manpower, and the majority won’t buy a car.

“It’s just (going to result in) incremental business dealers wouldn’t have gotten,” Rikess adds. “It’s more of a green initiative than a dealer initiative. It shows politics is the real winner.”

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