Tony Cristello
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The "Cash for Clunkers" (CFC) legislation has recently taken on steam as the current administration scurries to find ways
to assist struggling automakers. Although we expect to see minimal impact on aftermarket fundamentals from currently proposed
CFC legislation, we do disagree with the two reasons most commonly cited by proponents as justification for the legislation:
perceived environmental benefits and the creation of incentives to spur new vehicle sales.
On the environmental side, accelerated vehicle scrappage legislation oftentimes results in automobiles that could be retrofitted
to improve emissions performance in a more cost-efficient manner simply being removed from circulation. In addition, the destruction
of the engine and drivetrain components results in some detriment to the environment in that the energy consumed in the original
fabrication of these parts is squandered. It also results in higher automotive repair costs to consumers as it reduces the
supply of combustion and transmission-related parts which could be recycled, remanufactured and reconditioned for future use
— of particular consequence in our opinion given the current macroeconomic backdrop and multitude of pressures confronting
the consumer.
Individuals can usually obtain as much or more for their used car by selling it into the used car market rather than scrapping
it in exchange for a voucher. Therefore, inasmuch as the owners of used vehicles are unlikely to be in a stronger position
(i.e. more cash on hand to fund down payments) to pay for the purchase of a new vehicle by scrapping their older auto, CFC
legislation on a standalone basis should not result in a material number of consumers entering the marketplace to purchase
new vehicles. Lastly, the reduction in the supply of available used vehicles for purchase as a result of such programs seems
unduly punitive to those individuals in lower income brackets (who typically purchase such cars as the second, third or fourth
owner) who must now pay more to obtain a vehicle of similar quality.
We expect CFC to have a neutral to modestly negative impact (at worst) on the traditional automotive aftermarket. With a solid
base of more than 245 million vehicles on the road today, further increases in average fleet age likely (in turn driving higher
critical parts replacement rates in aggregate), heightened levels of new car dealerships and easing comparisons in miles driven,
we are simply of the viewpoint that results for aftermarket participants should only improve further as 2009 progresses and
continue for the foreseeable future. We acknowledge that the recent introduction of accelerated vehicle retirement programs in various European countries has served
as a catalyst to new vehicle sales. In Germany, new passenger car registrations increased roughly 22 percent and 40 percent
in February and March, respectively. However, in our opinion, the majority of the spike in German new vehicle sales was not
tied to the €2,500 (about $3,320) environmental bonus (similar to the vouchers proposed in the U.S.) from scrapping 9-year-old
and older vehicles.
More important to the pickup, in our opinion, was the combination of a tax holiday on new purchases coupled with greater clarity
into future operating tax considerations.
BB&T Capital Markets is a full-service investment banking firm that focuses on specific industries, including the Automotive
Aftermarket industry. BB&T Capital Markets is a division of Scott & Stringfellow, LLC NYSE/SIPC. Scott & Stringfellow is
a registered broker/dealer subsidiary of BB&T Corporation, one of the nation's largest financial holding companies with $152
billion in assets.
TONY CRISTELLO Senior VP, BB&T Capital Markets Equity Research
