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Cash for Clunkers – A Year Later

Brian Bradley, Matt Roesly
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Was Cash for Clunkers a success? It’s been a year since the Cash for Clunkers program helped to jumpstart car sales amid the recession. Cash for Clunkers took more than 700,000 used cars out of circulation offering up to $4,500 for a clunker, and this federal program gave consumers an incentive to turn in their old cars and trucks to buy more fuel-efficient new models. The program ended in August 2009 but well into 2010 the effects it had on the auto industry are still being felt and different outcomes are being reported for new car retailers compared to used car retailers.

New car retailers seemed to have benefited the most from Cash for Clunkers. But some initially believed that Cash for Clunkers would actually set up new car dealers for tougher times ahead by encouraging consumers to trade in their cars sooner rather than later. So instead of consumers waiting 2 to 3 years to trade in to buy new, they purchased earlier, perhaps before they needed to. The concern being that the program cut out many future buyers down the road. But research released by Maritz Automotive Research Group in March 2010 demonstrates that the Cash for Clunkers program was successful in creating significantly more incremental new car sales than previously estimated without negatively impacting future automotive sales. In fact not only did the study provide strong evidence that Cash for Clunkers spurred consumers to buy or lease but it also found that the program resulted in sales of new cars to people who don’t normally buy them. And even though the new car industry is still facing challenging times in 2010, some companies have actually managed to increase their sales numbers compared to the surge they enjoyed this time last year.

But the Cash for Clunkers program, a boon to new car dealers, had somewhat of a different effect on used car businesses. Those trade-ins were scrapped, not sold, which resulted in fewer vehicles for dealers to bid on at auctions. Because there were fewer vehicles on which to bid, wholesale prices for used cars dramatically increased overnight. With the heightened demand on new cars as a result of the inflated trade-in values for gas guzzlers, used car dealers were not able to increase the retail price of their vehicles to make up for their increased costs at the auctions. The results were that independent dealers were selling fewer cars and making less profit on every car they sold. According to the National Independent Automobile Dealers Association (NIADA) there were 35.5 million used vehicles sold in the U.S. in 2009, down from 36.5 million in 2008.

It appeared that used car dealers were facing a grim future but reports for 2010 tell a different story. Auto Nation, a national new and used car retailer, reported a 23% increase in used car revenue during the first three months of 2010 and had better results during the second quarter in which they reported their used vehicle revenue increased by 25%. Even though many dealers are still scrambling to find vehicles, they are finding that without the incentive to buy new, consumers are turning to used vehicles. Furthermore the retail values of used cars have been increasing again as many consumers consider them to be a bargain compared to buying new.

It appears that regardless of the initial impact the 2009 Cash for Clunkers program had on new and used auto dealers it’s turning out to be a good 2010.

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