Cash-for-Clunkers Proposals Gain Popular Traction

Efforts in Congress to boost the U.S. auto industry by paying a bounty for aging gas-guzzlers are gaining support in Washington and Detroit

By David Kiley

It's not just General Motors (GM) and Chrysler that are hoping to get an emergency tow from Washington. Battered by double-digit sales declines, all automakers selling in the U.S. are pinning their hopes on a federal program in the making that would give consumers a rebate for trading in old clunkers for new, more fuel-efficient cars. In Germany a similar incentive caused auto sales to spike 21.5% in February and created the best sales quarter for GM's Opel brand in a decade.

On Mar. 30, President Barack Obama endorsed the idea of a trade-in program, but working out the legislative kinks on bills that have kicked around Congress since December has proved more difficult than anticipated.

One bill, introduced by Representative Betty Sutton (D-Ohio), would give consumers incentives of $3,000 to $5,000 to scrap vehicles that are at least eight years old and then either buy more fuel-efficient vehicles or obtain a mass-transit voucher. To qualify, the newer models must achieve a minimum of 27 mpg on the highway, while new trucks must achieve a minimum of 24 mpg for highway driving.

A Revenue Bump Worth Many Billions

But foreign carmakers so far are protesting provisions in the Sutton bill that would limit the rebates to vehicles made in the U.S. "The bill as written is unfairly protectionist," says Mazda North America (7261.T) spokesman Jeremy Barnes. Capitol Hill staffers say a final bill is not likely to include foreign-built vehicles, but will probably treat those built in Canada and Mexico the same as those built in the U.S.

Automakers could certainly use the sales jolt a national cash-for-clunkers program would deliver. Data released on Apr. 1 showed that sales of new cars slumped 37% in March, compared to a year ago. J.D. Power & Associates estimates that sales from a clunker trade-in program would reach 480,000 to 740,000 units over 18 months. Barclays (BCS), the financial-services firm, reckons the lift could be as high as 3 million units over the same period. George Pipas, chief sales analyst at Ford (F), puts the number in the range of 700,000 to 800,000 units. At that level, the entire industry would get about an $18.4 billion bump in revenue.

"Scrappage bills to take clunkers off the road not only advance the environmental agenda, but would take some of the hurtful boom-bust sales cycles out of the market," says Pipas. At present, he says, there are perhaps a couple of million consumers delaying purchases until the economy strengthens and job security concerns abate. A scrappage bill, he argues, would smooth out the sales spike expected in 2010 and 2011, when the recession is expected to have eased, shifting some forward to now, when the companies need them.

Proponents of paying for clunkers view European programs as a model. Germany spent €1.5 billion in the first quarter to scrap older cars, and sales roared from declines to a 21% gain in February. The German government is looking to add €1 billion more to the program. GM's Opel division saw 120,000 orders in the first quarter in Germany, its best posting in a decade. Goldman Sachs (GS) says sales in Western Europe will be pumped up by 900,000 units this year because of scrappage programs. Aside from Germany, France, Spain, and Italy have also run clunker programs.