Evaluating ‘Clunkers’

Conceived as a prime weapon in the federal government’s economic stimulus package, the much-ballyhooed Car Allowance Rebate System – popularly known as “Cash for Clunkers” – appears to have been a rousing success. At the least it lured Americans into showrooms at a rate auto dealers haven’t seen in years. The Department of Transportation reports that 690,114 sales were registered under the program, with the total value of the rebates claimed by dealers totaling $2.88 billion.

“This program has been a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work,” says Secretary of Transportation Ray LaHood. “At the same time, we’ve been able to take old, polluting cars off the road and help consumers purchase fuel efficient vehicles.”

But exactly who were the biggest winners under this program, aside from the consumers who leveraged some virtually worthless old gas-guzzlers for as much as $4,500 toward a new model? As it turns out, the import brands, which had more fuel-efficient cars on dealers’ lots to offer than the domestics, moved the most metal, accounting for 61.4 percent of all vehicles sold under the Cash for Clunkers promotion. By comparison, Detroit’s “Big Three” automakers – Ford, General Motors and Chrysler – garnered 38.6 percent of applicable sales. This is proportionately less than their combined share of the U.S. market, which stood at 45 percent over the first seven months of 2009.

According to the DOT, all but two of the top 10 selling vehicles under the program – the Ford Focus and Escape – carried Honda, Hyundai, Nissan or Toyota nameplates. Toyota scored 19.4 percent of all eligible sales, with Honda registering 13 percent and 8.7 percent going to Nissan. By comparison, General Motors’ eight combined divisions took 17.6 percent and Ford Motor Company’s four brands were responsible for 14.4 percent of CARS sales.

Not surprisingly the most traded-in clunkers were all domestic trucks, vans and SUVs. That’s because the rules were skewed to get older, low-mileage trucks off the road. To qualify, vehicles had to carry a fuel economy rating of 18 mpg or less and be less than 25 years old. When we searched a database of 10-year-old vehicles, for example, virtually the only non-trucks we could find that would have qualified were a handful of high-powered sports cars that were worth more in trade than the government’s rebate program would have allowed.

Aside from providing a much-needed shot in the arm for the economy, Cash for Clunkers’ secondary goal was to replace inefficient older vehicles on the road with higher mileage models. In that regard the program was reasonably, though not necessarily dramatically, successful. The average fuel economy of vehicles traded-in was just shy of 16 miles per gallon, while the ones that replaced them in Americans’ driveways registered around 25 miles per gallon.

According to estimates provided by the Environmental Protection Agency, someone driving 15,000 miles per year who chooses a 25-mpg vehicle instead of one that gets 16 mpg will save 7.7 barrels of crude oil and emit 4.1 tons fewer greenhouse-gas pollutants annually. Multiplying these figures by the number of vehicles sold under Cash for Clunkers indicates the program has the potential to save as much as 5,313,878 barrels of oil and 2,829,467 tons of CO2 emissions over the coming year. Unfortunately, the actual savings is likely to be a lot less, since relatively few of the models traded in were likely daily drivers.

But what happens now that the program is history? Auto sales were anticipated to drop sharply immediately after the program expired, but it’s uncertain how they will fare farther down the road. “Improved consumer confidence and credit availability during the past six months have combined with the CARS program to lift industry sales out of their slumping year-to-date levels, which have been down approximately 35 percent year-over-year,” says Gary Dilts, senior vice president of global automotive operations at J.D. Power and Associates in Westlake Village, Calif. “These factors set the foundation for a gradual recovery in the months ahead. Reduced inventories will likely hold back some of this momentum, but the automakers are moving quickly to ramp up production and rebuild stock.”

Other insiders remain less optimistic about the program’s role in fueling a full industry recovery, with many worrying that the surge in sales merely “pulled forward” transactions that would have otherwise taken place later in the year. “To me, the jury is still out on Cash for Clunkers – only after September and October sales are posted will we know the overall, net impact of the program,” says Tom Libby, president of the Detroit-based Society of Automotive Analysts. “Historically, these major spikes in consumer demand created by one-time incentive programs have been followed by similarly major troughs, resulting in marginal long-term benefits.”

Source: Department of Transportation, Washington, D.C.