Friday, August 28, 2009

The Last Word (Hopefully) On Cash For Clunkers

Cash for Clunkers (C4C) ended this week. With the exception of a cumbersome online “paper work” process for dealers the program has to be classified as a success with over 690,000 new vehicles sold.

The most popular vehicles sold? Civics, Corollas and Focuses—all smaller, fuel efficient vehicles. And, the most popular "clunker" traded in was the Ford Explorer. Hopefully the American public is figuring out that it doesn’t need large, inefficient, body-on-frame vehicles to get around and the trends of the last decade and a half will change (unfortunately too late for the “old” GM and Chrysler).

Now, part of the reason for this post is that in the last week there have been rumors floating around stating that buyers of vehicles under C4C will have the $3500 or $4500 received from the program taxed as income by the IRS. It ain’t true. First, the money goes to the dealer not the buyer. That means the dealer has to show it as income.

IRS Advisory to Dealers Not Consumers
Here’s what the most respected publication in the auto industry, Automotive News, had to say about it on August 6:
“The cash-for-clunkers measure…exempts consumers who take advantage of the program from paying taxes on the rebate. But it does not exempt car dealers.”
“It’s akin to a receivable that a dealership might get from a financial institution,” according to IRS motor vehicle specialist Terri Harris who wrote an advisory to dealerships. “Dealers are still getting taxed on the gross receipts. What’s changed is the source of the gross receipts.”

Plus the government's CARS website has an FAQ question on this topic: "Is the credit subject to being taxed as income to consumers that participate in the program?" In bold capital letters the answer is "NO" and then elaborates with: "The CARS Act expressly provides that the credit is not income for the consumer.

Manufacturers Gearing Up
The other really good piece of news is that with nearly 700K units sold, auto manufacturers are having to gear up their production to replace dwindled inventories. That, of course, means more job security for autoworkers (All 3 have manufacturing facilities in the U.S. although the Corolla production facility in Fremont, CA is at risk of closing).

Other auto publications have reported recently that at least some buyers were replacing “3rd cars” their old beaters that were only occasionally driven. The new car “bumps” the buyer’s previous primary car to 2nd car status. The impact of this is that for these buyers, the ultimate fuel savings will be less because there isn’t as great a difference in fuel economy between their most frequently driven vehicles.

Buyers Pulled Forward?
Automakers have reported that many of their buyers were “pulled forward”. In other words these would have been good credit buyers who would have been prospective customers 2 or 3 or even 4 months from now which will not be on the market. This is a situation which dealers experience every time they pull out huge incentives and have become a major part of the “merry go round” that is auto retailing.

I haven’t seen any data but I would imagine that soon we’ll see reports from the automotive media that per unit incentive costs from manufacturer’s declined significantly during “Cash for Clunkers” which should be a further boost to their bottom line.

Buyer’s Remorse Spikes
This week’s issue of “Used Car Manager Weekly” contained a story quoting CNW Research (a leading trend researcher in the automotive industry) as saying that 17% of CARS buyers participating in a recent survey indicated “some or serious doubts” about whether they should have bought a new vehicle.

The major reason? According to the publication, “now they have a $275 to $350 car payment to make each month, a new household expense that wasn’t there prior to their CARS purchase.

"That amount, they say, could negatively impact the total family budget more than expected prior to buying the new vehicle," explained Art Spinella, president of CNW Research. "Typically, in a non-C4C (Cash for Clunkers) environment, buyers' remorse hits roughly 6 to 8 percent of new-vehicle buyers within a month, according to CNW Purchase Path research," he added.

A lot of C4C buyers didn’t have vehicle payments. And now they do. Hopefully this won’t be problematic in the months to come. However, it’s important to remember that many buyers are paying up to $100 a month LESS than they would have otherwise thanks to C4C.

All in all, this has been a successful program providing a real benefit to nearly 700,000 consumers and their families as well as to auto dealerships and auto manufacturers.

This still sounds to me like a better deal than the American taxpayer got from bailing out the likes of AIG, Bear Stearn and other investment banks.

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