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.”
And,
“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.

Cash for Clunkers--A Penny Well Spent

Late last week, the Cash for Clunkers (Car Allowance Rebate System) was at risk of running out of money. So many people had used it, there were so many “pending deals”, and the website dealers use to request reimbursement is so cumbersome that there was a great concern that there would be more buyers wanting to take advantage of the program than there were funds available.

So, on Friday the House of Representatives quickly passed and sent on to the Senate a bill which would triple the Cash for Clunkers program from $1 to $3 billion (or from 250,000 vehicles to 750,000).

Some have questioned the program as throwing good money after bad and being another government bail-out boondoggle. I happen to think that it’s a pretty good thing.

Let’s try to put Cash for Clunkers in context: Take 3, $100 bills and put them on a table. Put a penny next to them.

The $300 represents the amount of money allocated by the government for the Troubled Asset Relief Program (if memory serves it was somewhere around $900 billion). The penny represents the $3 billion proposed for the Car Allowance Rebate System (Cash for Clunkers).

Over most of the last year we have had a succession of bad economic news. Trillions have been spent on bail-outs. All of this is money that Americans perceive as coming out of their pockets with little, if any, benefit.

Most people are like me. They see banks and other mega-financial firms being bailed-out to the tune of billions if not trillions of dollars with absolutely no benefit to individuals other than the fat-cat bankers who continue to get their million dollar bonuses. We see banks being rewarded for participating in the fraud that convinced many to take out mortgages that they shouldn’t have resulting in the “meltdown” which has had disastrous consequences.

And many see the bailouts of GM and Chrysler and think that they we get to pay for companies who through their own bad management went down the tubes and let the government bail them out.

So what are we getting for our “penny”? Trade in a gas guzzler and get up to $4500. Pretty simple. The dealer and the government will take care of the paperwork. Just as long as the vehicle being traded gets an EPA computed 18 miles per gallon or less in combined city/highway mileage and the new vehicle being purchased gets at least 4 mpg better than that. It’s a bit more complicated but that’s the gist of the program.

So, what are the benefits? Quite a few, actually.

A benefit for the “average” person. The person driving an older vehicle can get a government rebate which can be 2 or 3 or 4 times the trade value. It’s not a million dollar bonus like if you’re a fund manager at Bear Stearns but it’s not bad.

It gets less fuel efficient vehicles off the road. This is ostensibly what Pres. Obama proposed to do in the first place. Even the “minimum” fuel economy improvement (from 18 to 22 mpg) represents a bit over 20% improvement in fuel economy. So let’s assume you’re currently driving 300 miles per week (about average for most people), and you pay $2.70 per gallon. At 18 mpg, you’re spending nearly $45 and at 22 mpg you’re spending almost $37. The savings come out to $468 per year in fuel costs. And that’s just for a 4 mpg savings.

$4500 is a bunch of money! If your “clunker” is paid off, the $4500 you save can amount to nearly $100 per month in lower car payments depending on your credit (it might be less and it could even be more). But, let’s use $100—that would be someone with B- to C+ credit. Over the course of a 60 month loan, that’s $6000. That’s real money that hasn’t come out of the buyer’s pocket. That’s the insurance premium for many people. Or, for others, it’s a couple of week’s groceries per month. And it can get even better if the leverage from the $4500 makes the debt to equity equation more favorable to a buyer and results in a lower interest rate.

Dealers are benefiting! Reports coming out last week said that new car dealers were seeing the best traffic that they’ve experienced all year. That’s good news when industry estimates have been showing the projected volume of new cars to be about 10 million this year—down from about 14 million 2 or 3 years ago. Dealers are selling more of their new car inventory. That means that they’ll get out from under some of the interest payments they’ve been making on aged inventory (“floor-plan”—the cost of maintaining inventory). That means that sales people will be earning a bit more—and auto salespeople don’t make a whole lot of money to begin with. That means more potential business in the parts and service department. That means more people keep their jobs at auto dealerships.

Lenders are benefiting! Auto finance companies like Ford Motor Credit and GMAC will be doing more business. Credit Unions will be writing more loans.

Auto Salvage Companies will benefit. All those clunkers have to be destroyed (even vehicles that are in good enough shape to be resold). Their drive trains cannot be salvaged and must be rendered inoperable by the dealer. But salvage companies will generate income from the program.
A lot of those SUVs sold in the 90’s and the first 4 or 5 years of this decade will be coming off the road. Some to be replaced by “cross-overs”. Others by hybrids. Still others by sedans. That’s a good thing too. Hopefully people are getting it figured out that vehicles are not lifestyle or status statements. They’re a means of transportation.

Many of these vehicles will be paid for. Others won’t (such as those purchased used in the last 4 or 5 years). But the amount of the CARS rebate will mean that many of those owners of financed clunkers will be able to pay of the amount that they’re “upside down” (to use an industry term—another term for it is “buried”) and be able to successfully finance a new car.

Cash for Clunkers is just for new cars. There has been some speculation that it may also be extended to used vehicles but there has been no change on the website. There is a crucial difficulty with extending a program like this to used vehicles. That difficulty is the condition of the vehicle.

The condition of a new vehicle is known. It’s new. The condition (and the reconditioning) of a used vehicle is an unknown with one exception and that is manufacturer’s Certified Pre-Owned vehicles. Manufacturer’s programs only deal with their own brands and have rigorous standards which the vehicle must meet and which must be disclosed to the buyer—typically along with an enhanced warranty from the manufacturer. Perhaps this may happen in the future with the CPOV.

So, again as far as I’m concerned, this is a good program. It’s about time that with all the bail-outs that the average person has something which can directly benefit him or her. This program does that. Out of all the hundreds of billions that have been spent on toxic assets, etc. this “penny” is one which has the potential to generate a return and is a “penny” which is being well-spent. To the U.S. Senate: Approve the additional $2 billion!

Chrysler to Iacocca--Return Your Demo! Can Detroit Come Back?

This morning, Reuters is reporting that former Chrysler CEO and icon Lee Iacocca will be losing both his pension and lifetime company vehicle as Chrysler proceeds through bankruptcy.

Now, I don’t think that Iacocca losing his company car is any huge deal to him. He can probably afford to buy any vehicle he wants. But, the article did remind us that it was Iacocca who became a visible spokesperson for Chrysler appearing in numerous commercials proclaiming “If you can find a better car—buy it.”

This was back in the early 80’s and had more to do with the resurgence of Chrysler Corporation than did Ricardo Montalban’s pitch for the Chrysler Cordoba with its’ “fine Corinthian leather” in his inimitable accent.

Montalban, like Billy Mays, was a paid pitchman. It was entertaining though. But when Iacocca extolled the virtues of his products, we believed him. He was Lee Iacocca—the CEO, a giant in the auto industry. He was just talking to us on the TV and being honest and upfront (at least in our perceptions). Iacocca was talking about the value of the vehicles made by his company. And that’s where I’m heading with this.

The Detroit 3 are all in trouble. The only one which seems to be steadily working its way out of it is Ford. As we all know both GM and Chrysler are in bankruptcy. Very simplistically the way they’re going to survive and emerge from bankruptcy is through careful re-organization and a commitment to doing things right. A commitment which, quite frankly, just hasn’t been there for a while.

Let’s get back to that value idea for a bit. As an automotive sales trainer, the absolute foundation of sales is this from Zig Ziglar: “Buying occurs when value exceeds price.” It’s that simple. Except that too many sales staff, sales managers, dealerships and manufacturers have bastardized their approach to getting value to exceed price by discounting and rebating first and building value either not at all or as a secondary strategy (i.e. “lookit all you’re getting for a dirt cheap price”).

Back in the day, someone at Chrysler (or their advertising agency) knew this and enlisted Iacocca’s active participation. He was the first of the CEO’s to pitch his own product and no one did it better than him until Chrysler tried to reprise the approach in 2006 with “Dr. Z”—Dieter Zetsche, the Chairman of DaimlerChrysler.

Domestic manufacturers have to first engineer and build value into the products that they’re going to offer to the public. This basic rule is one which hasn’t been done well enough or often enough over the course of the last 3 decades or more by the Detroit 3. Even then it will be hard to get customers to return to their products.

“We build value when we talk to customers about what’s relevant to them,” is the next maxim that I work to impress upon sales staff as a trainer. And, the only way to find out what is relevant is to ask questions. The manufacturers are going to have to ask potential customers some questions about the products they want to own and drive and then work like hell to engineer it, make it and market it.

And finally (bear in mind that this is all in the 1st 10 or 15 minutes of the basic sales training class) as I trainer I cover the ways in which value is built with customers: “We build value when we talk to the customer in terms of what we do more of, better than and differently than anyone else when it comes to ourselves, our dealership and our product.”

Here’s my point. Most organizations don’t train their staff to approach sales in this way and yet it’s the optimal way to do it. Most organizations put the emphasis on sales at the end of the line—after the product is made and delivered to the retailer (remember that’s when the sale is counted by the manufacturer).

Chrysler and GM have an onerous task ahead when it comes to the financial and legal ramifications of their bankruptcy filings. But when all is said and done they are companies which design, build and market vehicles. Ultimately they have to do that and do it well.

What if the Detroit 3 reversed the process? Take a page out of Tom Peters. Put the focus on determining what is relevant to customers about the vehicles they wish to own and drive. Be “more, better and different” than any of the competing automakers when it comes to focusing on and responding to the needs and wants of consumers. And then deliver it to the dealer-body ready to be sold to the American consumer.

As these companies work to emerge from bankruptcy, they are going to have to do things to re-instill faith and confidence from the buying public. Maybe this is the way to go about doing it. And then maybe Lee Iacocca can get his car back.

Car Buying 101: What to do with a Trade-In

Note: See my post from April 20 "Is Now a Good Time to Buy a Car" for the 1st 2 Rules of car buying. http://just-walt.blogspot.com/2009/04/is-now-good-time-to-buy-car.html Rule #1 Start your shopping at home and Rule #2 Shop for your money before you go to a dealership. This post starts with Rule #3.

In car sales, over 80% of transactions involve a trade. Chances are that you’re already driving a car when you want to buy a different one and you’re thinking of “trading it in”.

As a profitability and sales training consultant in the auto industry I have encountered various ways this is handled at hundreds of dealerships. And, in a lot of them it’s not handled very well. The vast majority of customers don’t know how to handle it either.

Rule Number 3: Be realistic about your trade
A few simple steps will help you as you’re getting ready to buy a new vehicle and trade your old vehicle.

Step 1— know the pay-off amount if you still owe a loan balance on your trade-in. This is easy to do either online or by phone. Most loans now have a website where you can access the pay-off amount. You can usually find it by looking at your loan documents. And most lenders have a phone number where you can find out the pay-off. It’s usually automated and all you typically need is either your loan number or your social security number or both.

Know the pay-off amount! It will be critical in finding out whether or not you owe more than the vehicle is worth. And the pay-off is NOT the same as the sum of the remaining payments.

Step 2—get an idea of how much your trade is worth. This is easy enough to do as well and you need to go back to Rule #3—be realistic about your trade. The simplest way is to go online to KBB.com (that’s Kelly Blue Book). This site will open and 2 boxes will be on you screen, one for new cars and one for used cars. Click “go” in the used car box and it will walk you through the process. You’re going to ask for Trade value not for “sell it yourself” or “retail”.

You want to get an idea of what you might expect a dealer to offer you for the vehicle and this will get you reasonably close. If you look up “sell it yourself” or “retail” the difference between the results you get and what a dealer tells you will send you through the roof. Now, whatever the trade-value shows on KBB.com, subtract about $1000 from that amount. This should get you reasonably close to what a dealer will offer you. Why the discrepancy? Here’s why:

“Trade-in Value is what consumers can expect to receive from a dealer for a trade-in vehicle assuming an accurate appraisal of condition. This value will likely be less than the Private Party Value because the reselling dealer incurs the cost of safety inspections, reconditioning and other costs of doing business.”

That’s right off the KBB.com website. Look at the bold phrase. That’s why you will be offered less than what the KBB amount shows. I can’t think of anyone who has ever had their vehicle inspected and reconditioned prior to taking it to a dealer for trade-in. It’s things like 4 matching tires each with a minimum of 40% of their tread or 50% of brake pad remaining. That’s just for starters.

Yes, if the dealership keeps your trade and re-sells it at retail, they will be marking it up several thousand dollars. They may have to spend $1000 or so for it to be ready for retail. But that’s how dealerships make money.

Plus, the dealership has to pay for its facility, advertising, etc. This is part of being realistic about the value of your trade. If the number you come up with is unsatisfactory to you, be prepared to sell your vehicle on your own—and you can put however much or little money into reconditioning and merchandising it as you want. But if you do that, be patient and it’ll be up to you whether you want to wait to buy your new car until after you’ve sold your “trade” or not.

So, if you’re going to proceed with trying to trade your vehicle, have these 2 key pieces of information (pay-off and estimated value) with you. Hold these 2 cards close to your vest because they’ll come in handy later in the process.

We’ll jump ahead just a bit in the process here. Let’s assume that you’ve selected a vehicle to buy and that now you’re going to go inside the dealership with the sales person. You’ve established that you’re interested in trading.

Let me put it slightly differently. In sales training, I would suggest to sales staff that they introduce the “trade” with this “wordtrack”: “Sir/ma’am were you going to continue to drive your current vehicle or were you thinking of selling it to us?” Think about those words. When you’re trading a vehicle you ARE SELLING it to the dealer. They’re not “trading” with you; they’re buying it from you.

One of the things I have trained sales staff to do is to do a silent walkaround of your trade-in, with you present. It’s a technique to “de-value” your vehicle and to get you more realistic about its value. If you’ve done your homework (pay-off and estimated value) you’ll already be realistic. At that point they will need to see your vehicle registration which is also a good time for you to provide your insurance slip as well.

Step 3—Expect disclosure. Once you’re inside with the sales person, at some point he or she will take a bunch of papers to “the desk” or to the manager. Ideally the manager will get up and go outside and “put his hands on” the car, even drive it. Then he will come back in to do some “mumbo jumbo” which will yield a “trade value” or “allowance”. The “mumbo jumbo” involves going to KBB.com or another source to “book” the vehicle. Sometimes if you’re trading another manufacturer’s car it will involve a phone call to a used vehicle manager at a dealership that sells that make to get a value.

Then the manager will come up with a “book” value from which he/she will subtract reconditioning and other costs which should then yield what is known as ACV or “actual cash value”. Quite frankly, this is the true trade value of your vehicle. A scrupulous dealer will show you how they arrived at that figure.

What the dealer of course wants to do is to provide you with one figure (usually a monthly payment amount) for a proposal to buy the car. Often they will also include the “trade allowance”. If that isn’t provided, send the sales person back to the “desk” to get it. If it’s at great variance with what you came up with, ask for the “form” or documentation on HOW they arrived at that figure. You can also request an MMR or Manheim Market Report.

This is a document available to subscribing dealers which shows how much automobile wholesalers have recently actually paid for vehicles similar to yours in your market area. It is arguably the most accurate source for the value of a trade in vehicle because it shows the “real” money that wholesale buyers have paid for vehicles that they intend to recondition and retail.

Quite frankly, if a dealership is unwilling to share with you HOW they arrived at the ACV/trade valuation or to provide an MMR what you might wish to do is leave. There are hundreds of dealerships out there with thousands of vehicles for you to buy. Expect and require disclosure. And, odds are that the dealership will disclose the information once you are insistent that the whole “deal” depends on it.

This doesn’t happen very often anymore, but when the trade appraisal is provided to you, make sure that your keys are returned. Yeah, some dealers still play the game of “hi-jacking” your keys so just make sure that you get them back now. This will also send the message that you are still not committed to “buying and driving today” which is fine. If that question comes up, your answer is simple: “If I buy this car and trade you mine, you’ll get the keys. But let’s concentrate on this other stuff first.” And then just leave your keys sitting conspicuously on the table or desk top.

You want to be satisfied with your trade value, and you also want to be satisfied that if you owe more than what it’s worth that the difference will be accommodated in whatever final deal is negotiated. We’ll talk about that in a future post.

And lastly for today, a little information can be a dangerous thing. It’s as counterproductive for you to take this information to a dealership and act like a know-it-all butthead as it is for dealership personnel to act the part of fast talking, bs’ing, conniving jerks. However, one of my consistent messages to dealer sales personnel has always been that their success depends on the “Golden Rule”: “Them with the gold, make the rules.” The customer has the gold and dealership staff are trying to earn the privilege of getting you—the customer—to part with some of it.