Friday, July 31, 2009

Cash for clunkers

By now you may have heard that the "Cash for Clunkers" program is broke (or not depending on who you listen to). This post is NOT about that issue. The story on that issue is not yet complete. I may post about that in a week or so when all of the facts are out.

Back about a year ago, I posted an entry about the cost of a gallon of gas (about $4 at the time). A year ago when gas was $4/gallon, I made the bold prediction that "the subject of gas prices will be quiet again." (see here).

Well, let's check into the current situation. People have criticized American automotive companies and said that they focused on trucks and SUV's. During times with high gas prices, this hurts auto sales and, according to critics, helped cause the downfall of GM, Chrysler and Ford. However, prices are down now, around $2.20 or so depending on the day. It now appears that SUV sales are back up (according to Bloomberg) and truck sales are also on the rise (see here). Maybe American car companies were focusing on the right markets after all.

Of course, you have to acknowledge that everyone wants to save gas and go green right? Well, Toyota is having a tough year just like the American companies and has decided to close a Mississippi Prius plant even before it opened (see here). In fact, Motor Trend magazine says Toyota is no long profitable in the US. Seems it's not just American cars that are hurting.

So what does this have to do with "Cash for Clunkers"? The program was initially designed to improve fuel mileage on the highways by encouraging consumers to get rid of older, less fuel efficient cars in favor of newer, more fuel efficient cars. A side benefit is that the ailing automotive market (both domestic and foreign) gets a short-term boost.

The program has been tried in other countries as well. Countries such as Slovakia, France, Germany, Spain and Italy have all unveiled a cash-for-clunkers program at various times in the last year according to this NY Times article. And the program has some history as France had a "similar incentive program ... from 1994 to 1996."

How successful will the program be? According to the same NY Times article, the "plan produced a comparable sales bump initially." Sounds great, right? Well the rest of the sentence goes on to say that the initial sales bump "was followed by a severe drop in 1997 and 1998."

So here's my prediction for 2009 and it will basically echo the prediction from 2008. Americans are less concerned about fuel efficiency than they are about the size of the vehicle (see SUV sales and truck sales above). People will trade in cars under the plan and get minimal improved gas mileage (2 mpg improvement for trucks and 4mpg improvement for cars is the minimum to get the cash). More importantly, these people will take out 4, 5 or 6 year loans to pay for these cars and find that they have trouble making the payments or making their other payments (e.g. mortgage). Next year, we'll all be worse off.

And the country will be no greener than it is today.

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