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Why the Cash for Clunkers program is a failure.

Consumer Economics Failure  |  Market Economics Failure

Impact on the Car Market.

Car Sales

Now, the big automakers want everyone to buy new cars, so they neglect to remind us of the seconday markets for cars. Congress has been short-sighted and doesn't even consider these markets and how it imapcts the industry as well as the consumers of their products.

We all know that the entirety of the auto industry is not all of us consumers buying new cars. In fact, that's only a percentage of what occurs in the industry. There are actually 5 distinct markets for complete, running vehicles: New, Gently Used, Used, Driveable and Collector. The first is obvious, that's anyone who buys a used car. Many more people acquire cars in the first five years of it's existence either through dealerships or private parties. This has been increasing over the past decades and can be loosely measured by the rise in the "certified used car" market. After this phase the general used category is entered. This is where family or personal economic demand the acquisitiion of a lower priced vehicle to meet their needs. The driveable category is where the worst condition cars exist. This particular market segment is where the purchaser's primary goal is a vehicle that can get from point A to B with the lowest pricetag possible. Finally, if a car survives long enough it enters the collector market which continues for said vehicle through the rest of it's existence.

So, if we were to continue with my example of the 2002 Ford Explorer you have the following breakout:

Market Segment Year Range* Estimated Survival Rate
New 2002 - Until initially sold 100%
Gently Used 2002-2007 90%
Used 2008-2012 80%
Driveable 2013-2026 60%
Collector 2027 - end of time >50%
* - Year Range dependent on quality and mileage

Now, there's a natural rate of vehicles being permanently removed from the road annually, this is based on things such as accidents, poor maintenance and the like. The artificial creation of the destruction of these vehicles through the Cash For Clunkers or CARS program impacts the the overall market space by removing vehicles that would have otherwise continued in this market cycle. Now, the goverment and auto manufacturers want us to believe that this is a good thing, but let's think about this for a moment.

For every vehicle that's removed from the market chain there is a minor percentage of supply that is no longer available to fill demand. The larger the percentage of vehicles removed, the greater the disparity between supply and demand. Remove enough of these cars and it drives up the prices in the later markets. Those vehicles surviving cost more to acquire than they would have normally. As these prices are driven up the ability of consumers to acquire the cars drops. So, someone who may have originally been able to buy a "Gently Used" vehicle may only be able to buy a "Used" vehicle, and a someone who may have been able to barely afford a "Used" vehicle will now be only capable of buying a "Driveable" one. Collector car prices, for the most part, are irrelevant in this discussion because of the highly specialized nature of the market and the low mileage driven by said cars.

Since the Ford Explorer did not exist before 1990, we'll use the Ford Bronco (which was their comparable vehicle for the time). The Bronco range is near the end of it's life cycle and have some verging in between "Driveable" and "Collector." With the removal of the Ford Explorer (1990-2002) from the used vehicle pool, the people who presently would have driveable Broncos and wanted to upgrade to a "newer" comparable car that's in the "driveable" or "used" category no longer have the ease of access to the Explorer that previously would have. Rather than being able to pay more money for a used Explorer they would have to continue using the Bronco. An 80's Bronco gets roughly 10mpg. My explorer gets 22.5 You do the math. So, if the goal is raising fuel economy on cars across the united states they've robbed Peter to pay Paul.

There are a lot more of these real "clunkers" on the road than anyone would want to admit. The only places where you see the newer cars are affluent areas, which are becoming fewer and far between. Go down side streets in middle and lower income areas and take a look at the cars in those driveways.

Parts and Service

Now, aside from the complete car sales market, there's also the Parts and Services markets. The impact here is quite different. Because the decrease in the middle year cars occurs, the collections of parts inventories intended for these cars will sit in warehouses and not be sold. Every part that remains unsold carries a cost: the initial cost of acquisition and the continuing cost of storage. The longer a part sits unused, the more expensive to the parts supplier the part becomes. Eventually the cost of the part exceeds the retail price of the part, and either the parts supplier/retailer takes a loss on the part, or that additional cost is passed on to the consumer in terms of parts cost increases.

Adding on to this is the requirement that any "Clunker" have it's drivetrain permanently destroyed. While the goal of this is to keep the engine and drivetrain from being reused, the actual impact is that the rebuildable parts (of which there are many) are no longer available to the secondary markets. A common example is a water pump. The cost of manufacturing vs. the cost of remanufacturing is significant. Remanufacturing means the dissasembly of the part, repair/replace of necessary bits, and reassembly. There's a lot less work (and money) involved in this instead of having to completely cast the part from new. This then drives down availability and up cost which will eventually be passed on to the consumer.

Now, those vehicles that are still on the road but are too old or out of scope of Cash for Clunkers or CARS program are impacted somewhat differently. These cars will now be called upon to stay on the road much longer than originally planned, and longer than the existing owners would want because they cannot upgrade to a newer car. Many of these vehicles have limited global availability of parts compared to the newer cars. Since the demand for these parts is artifically increased, the cost and availability of these parts will subsequently decrease. To continue parts availability aftermarket parts producers will have to reintroduce and/or reengineer (at cost) the ability to produce these parts. Again this is another cost to be passed on to the consumer.

Service providers will be similarly affected. All of these new cars, with extented maintenance schedules, will cause shops to lose out on work that would have occurred to the "Clunker" cars. Less maintenance work means a downturn in employment rates at shops as well as increases in hourly rates (which at roughly $90/hour are already expensive enough!).

So in the end, it will be more expensive to buy a used car, more suppliers will carry greater costs, and parts and maintenance on cars will also become more expensive.

Consumer Economics Failure |  Market Economics Failure

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Contents copyright 2008, 2009 - Jody F. Kerr

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