The word clunker has taken center stage in the industry, as Congress looks for ways to prop up automakers and assuage fuel efficiency concerns. But the introduction of recent legislation has left some in the aftermarket questioning the rationale behind the early retirement of vehicles and the long-term ramifications this will have on the marketplace.
“Cash for Clunkers” essentially offers qualifying drivers a $2,000 to $5,000 voucher to trade in their older, less fuel-efficient vehicle for a new one.
The legislation, also referred to as “fleet modernization,” would scrap the older car, rendering it obsolete. The program would run for four years with the intention of removing 1 million vehicles each year from the car parc, with an expectation of saving 40,000 to 80,000 barrels of transportation fuel per day.
President Barack Obama and Democratic lawmakers reached an agreement at press time. The Democrat-compromised Cash for Clunkers bill will likely be included as a provision of a larger Climate Change package being pushed by Democrats.
Used car dealers and aft
“We obviously worry about taking cars off the road that are prime for the aftermarket, and these cars could be more cost-effectively repaired and still have a lot of useful life in them,” says Aaron Lowe, vice president of government affairs for the Automotive Aftermarket Industry Association (AAIA), which has spoken out in opposition to legislative proposals on the matter.
Lowe adds that scrapping perfectly drivable cars could take spare parts from the supply chain and potentially drive up repair costs.
Vehicle manufacturing and dealer associations, however, are supportive of the stimulus this sort of plan could provide.
Originally slated as part of President Obama’s $789 billion stimulus plan, the “Cash for Clunkers” element was removed from the economic stimulus, later to be reintroduced under two separate guises.
The two bills currently before Congress are S. 247, Accelerated Retirement of Inefficient Vehicles Act of 2009, introduced by Sen. Diane Feinstein (D–CA), Susan Collins (R-Maine) and Charles Schumer (D-N.Y.), and supported by Reps. Steve Israel (D-N.Y.) and Jay Inslee (D-Wash.); and H.R. 1550, Consumer Assistance to Recycle and Save (CARS) Act, led by Rep. Betty Sutton (D–Ohio).
Sutton’s bill has garnered support from the United Auto Workers and the Big Three, and offers vouchers up to $5,000 for vehicles at least 8 years old; the vouchers would be used to purchase a North-American-built vehicle that gets at least 27 mpg (24 mpg for trucks).
The Feinstein bill would offer vouchers up to $4,500 for older vehicles that get 18 mpg or less.
Sutton’s proposal has been applauded for its aim to stimulate the domestic new car market (the other bill could be used for any vehicle make as long as it meets the fuel efficiency criteria), but there’s a belief that stipulating country of origin could violate existing free trade agreements.
Dual bills, concerns
The rationale for Cash for Clunkers is twofold: economy and environment.
The parallel bills seek to mend the country’s ailing vehicle market by encouraging drivers to “buy new.” The vehicles that would qualify would be more fuel-efficient than many of the cars on the road, say supporters.
But like much controversial legislation, there are many sides to this issue. And if prominent aftermarket associations have their way, these mirrored proposals will end up in the proverbial scrap heap.
The bills in consideration have been compared to similar programs in France, Italy and Germany, the latter of which saw a 40-percent increase in new car sales.
But some say comparing our proposed scrappage programs with Germany’s is a matter of comparing apples to oranges. The German program also included tax incentives, says Lowe, and others offer that the German program merely prompted those who had already decided to purchase a vehicle to do so a little earlier than they planned.
And it’s believed that any spike in vehicle sales would be temporary.
The National Automobile Dealers Association (NADA) says that it hasn’t formally endorsed either bill, but Spokesperson Bailey Wood concedes that Sutton’s bill is “moving in the right direction.”
Sutton’s bill would be open to any and all automakers, a detail that NADA supports. “The Cash for Clunkers program should be available to all customers who want to purchase any brand of vehicle,” says Wood. “We support any legislation that seeks to boost auto sales.”
Approximately half the vehicles on the road would be eligible for trade-in under Sutton’s plan, according to the American Council for an Energy Efficient Economy (ACEEE), which adds that only 5 percent of the vehicle population would qualify for trade-in under the Feinstein measure.
“The Sutton bill really pushes for people to buy American-built cars, whereas Feinstein pushes for more fuel economy,” says Lowe from AAIA.
Although national and international automakers and dealers support “Cash for Clunkers,” prominent aftermarket associations, have, for the most part, spoken out against scrappage proposals. Each proposal would exclude millions of drivers from participating in a voucher trade-in, says Stuart Gosswein, director of regulatory affairs for the Specialty Equipment Market Association (SEMA).
“I have a 1987 Dodge K Car. Under the one program that focuses on the fuel economy, my car gets 24 miles per gallon,” says Gosswein. “I can’t turn it in and I can’t get a voucher to go buy a new car because you have to be turning in a car that gets 18 miles per gallon or less.”
He adds: “So my car stays out there in the marketplace, which is OK with me because I love my car, but meanwhile there’s no incentive on it to buy a new car. Under the other bill, it gets crushed. It gets destroyed. If I turn my car in, they’re going to send it off and crush it, even though it gets 24 miles per gallon. It’s insane.”
Gosswein says the concept of cash for clunkers has been around for decades. “Again, when you look at the value of the voucher they’re giving out, it doesn’t match the car that’s in fair, good quality,” he adds.
A repair solution
The Automotive Service Association (ASA), however, has taken a more nuanced approach to the issue.
ASA favors a repair voucher rather than a voucher used to buy a new vehicle, says Bob Redding, the association’s Washington, D.C. representative.
Redding says the repair option has been a success in Texas’ state-run program. In line with this, ASA supports a state-mandated approach to scrappage proposals as a rule.
SEMA also supports the idea of retrofitting existing vehicles to gain better fuel mileage. Gosswein says that vouchers also should be indexed according to how much money a person makes.
In line with the repair options, the Automotive Aftermarket Service Association (AASA) takes issue with H.R. 1550’s lack of an inspection program. A quality emissions inspection system should be a prerequisite for selecting vehicles for scrappage, the AASA believes.
An inspection program that averaged 30 minutes per vehicle also could provide full-time employment to more than 60,000 Americans, the AASA adds.
AASA supports repair vouchers as well, a stance underlined in the association’s recent report “Unintended Consequences of Accelerated Retirement of Inefficient Vehicles.” The report states concern over the future of aftermarket parts manufacturing, especially in light of record low new car sales.
Vehicle production had decreased 40 percent over last year as of March, according to AASA. “Depressed vehicle sales in 2008 through 2010 will set the stage for a slump in aftermarket activity for much of the next decade,” states the report, which projects the delayed impact of the current recession to take full effect from 2016 to 2019 with a greatly decreased market base.
The report also asserts that scrappage programs are not as effective as repair programs when it comes to pollution abatement.
AASA takes issue with some of the newer vehicles that could potentially be scrapped. Taking these cars out of the aftermarket now could potentially inflict long-term damage on the aftermarket.
Vehicles with model years prior to 2001 represent 58 percent of all vehicles on the road, according to AASA, which adds that those vehicles built prior to the advent of OBDII, which the association believes are the most inefficient and highest polluting vehicles, represent 28 percent of the population of vehicles in service.
Further, scrappage programs should instead focus on vehicles built before 1995, AASA adds.
When BB&T Capital Markets looked into the effects of “Cash for Clunkers” legislation, the investment banking firm concluded that the negative impact of the legislation for the aftermarket would be minimal at best.
Even if the Cash for Clunkers program removes 500,000 to 1 million vehicles from the car PARC, combined with the 10 million vehicles removed from the PARC each year, the number of new vehicles sold would still be the lowest level seen in 25 years, according to a BB&T report investigating scrappage legislation.
BB&T found that vehicles that would be deemed worth more in a voucher situation would be older vehicles driven by lower income drivers, and, the report states, many of these drivers would likely be unwilling to take on a car loan due to overarching economic factors.
Additionally, the under 18-mpg vehicles, like trucks and SUVs, would have a greater chance of being kept by drivers for occasional utility purposes, and owners of these vehicles would be unlikely to use a $2,500 to $4,500 voucher to buy a $20,000 to $30,000 new hybrid SUV, the report projects, adding that these vehicles also are likely to receive less maintenance if they do remain in the vehicle population.
It’s also the belief of some that the low-income drivers most affected by this legislation are those who are less likely to maintain their used vehicles. These same drivers also would be more likely to sell their vehicles to private owners rather than trade them in at dealerships, BB&T believes.
A major point of contention for aftermarket associations and companies is that scrappage legislation would remove vehicles from the aftermarket prematurely. And this is a delicate chain to begin with, says Gosswein.
“So cars that are perfectly fine and that would naturally go down the economic chain and would be available for lower income folks, all of the sudden they’re being removed from the marketplace,” he points out. “What happens is the price of other used cars go up just because of supply and demand, and the parts that would have been available through recycling for the cars that are out there in the marketplace, they disappear.”
The environmental benefits of scrappage programs also are called into question. Gosswein cites a research report that concludes that 10 to 20 percent of a vehicle’s lifetime emissions contribution is made when the car is produced.
For example, Toyota Prius batteries are made in Canada, shipped over the Pacific Ocean, then put in the car and shipped overseas again.
“That was the equivalent of 1,000 gallons of gasoline,” he says. “And if you put that up against a couple of other cars, it would take 100,000 miles of driving to equal the savings of a 10-year-old Toyota Tercel.”
A difficult enforcement
Regulating vehicle scrappage legislation would be difficult, a fact that even proponents admit.
Wood from NADA says that redeeming vouchers under the program should be “a simple, standardized, clear process to ensure trade-in vehicles are included. The Department of Transportation should set up rules to ensure someone doesn’t go out and buy a car off of someone down the street, own it for 48 hours and try to access a ‘Cash for Clunkers’ program. That is the easiest way to fraud.”
AAIA’s Lowe poses these questions about the Cash for Clunkers: “How is this going to be structured? How is this funded? How long before the dealer gets paid? How does this affect financing?”
Wood concurs. “The other concern, at least from a dealer’s perspective, is how the reimbursement gets back to the dealer. If this program goes gang busters, dealers could be put out of business if the government owes them thousands of dollars.”
Lowe reiterates the message of other opponents of scrappage legislation: What if a driver turns in a vehicle that’s not driven much as a “clunker?” This would merely scrap a workable car with no clear environmental benefit.
SEMA contends that this proposal could prompt drivers to trade in a third car that gets little to no mileage each year. Gosswein says to his knowledge there is no provision in either of the proposals that asks drivers how many miles they’ve put on the “clunker” over the past year. This, he adds, would be an accurate gauge of whether the trade-in would have an environmental benefit.
Editor's note: Krista McNamara, Tschanen Niederkohr, Mike Seuffert and Bruce Adams contributed to this report.
