When we initially addressed the "Cash for Clunkers" issue a few months back, we were of the opinion that it would marginally,
if at all, impact the underlying fundamentals for the aftermarket. So here we are, a few months later, and while the program
has caught fire (with the initial $1 billion in funding exhausted within the first few days and an additional $2 billion in
follow-up funding having been appropriated), we maintain our view that the aftermarket will ultimately not be greatly impacted
by the program.
As we reflect on what the CARS (Car Allowance Rebate System) program is actually accomplishing, we note that many are focused
on the here and now. And in fact, it's next to impossible to avoid media attention as most news articles and commentaries
appear to have positioned this program as the single largest stimulus for the economy and the saving grace for the auto industry
as a whole. The Obama administration highlights how this program is successfully stimulating the automotive industry in addition
to helping the environment as these "old clunkers" are taken off the road, improving aggregate emissions levels. At the end
of the day, however, we wonder how many of these new car purchases would have happened anyway over the next 6 to 12 months.
Sure, it's great to have a $3,500 to $4,500 credit, but as with most things, nothing in life is free. So for those staunch
supporters who view $3 billion as a small price to pay for up to 750,000 in new car sales, we pose this question: Did the
auto industry learn nothing from the 0-percent financing or employee pricing schemes of just a few years past?
In fact, one could argue that once the funds for this program have been exhausted, there will be a pronounced deceleration
in the seasonally adjusted annual sales rate (SAAR) on a monthly basis. As an owner of GM (as all taxpayers are), we just
wish a few more of the vehicles being purchased with tax dollars would be Chevys. GM sales in July were down 19 percent year-over-year,
and 38 percent year-to-date versus total light vehicle sales declines of 12 percent and 32 percent, respectively.
It seems almost unfair that the government would be able to sponsor a program that stimulates new car sales when it has such
a large ownership stake, as the government now juggles the many roles of owner/operator, investor, regulator and consumer
advocate. Has anyone noticed that trends in the rest of the retail segment appear to be stalling (retail sales, excluding
autos, declined 7.9 percent year-over year-in June, following -7.6 percent in May, -7.5 percent in April and -5.6 percent
for all of Q1)? While consumers are putting proceeds to work purchasing new vehicles, they now also have a monthly car payment
that will prevent them to some extent from putting dollars to work in other areas of the economy. Overall, we still worry
that reinforcing bad habits of the past may simply result in a more cash-strapped consumer.
The point for the aftermarket is this: Of the 243 million or so cars on the road today, roughly 113 million (or 47 percent)
are 8 years old or older. When we think about the 750,000 or so cars that are likely to be taken off the road and scrapped
as a result of the CARS program, this subset represents only .7 of 1 percent of vehicles in the 8-year-old or older category
and only .3 of 1 percent of the U.S. vehicle PARC in total. It will certainly be interesting to compare the scrappage rate
at the end of 2009 and see just how much higher above the historical norm it will be.
