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Auto Sales: 'Clunkers' to the Rescue

The federal government's "cash for clunkers" program gave the U.S. car market a nice shot in the arm in July.

U.S. car sales hit an annualized pace of 11.2 million vehicles, a 13% jump over June's sales rate, according to data-tracking firm Autodata. And while sales still fell 12% compared with July 2008, the performance was so much better than the 35% drop-off registered in the first half of this year that automakers are giddy with hope that the worst of their sales doldrums may be over.

Ford Motor (F) posted a 2% monthly sales gain over July 2008, its first increase since 2007, while Detroit rivals General Motors and Chrysler managed smaller declines than they had earlier this year. "The clunkers program just got people thinking about buying a car," says Maryann N. Keller, an independent analyst who is on the board of directors for dealer chain Lithia Motors (LAD). "It brought people into showrooms and cleared out some inventory."

The program gives car buyers $3,500 or $4,500 for trading in an old model for something more fuel-efficient.

It's clear that the clunkers program helped sales, but some analysts argue it wasn't the only reason for the jump. Some of the sales increase came from shoppers who were already heading to dealerships to take advantage of summer deals, which carmakers traditionally offer to get rid of 2009 model-year cars before the 2010 cars arrive. "The program was never funded at a level that would pull more people in," says Jeremy Anwyl, CEO of "Consumers have been waiting all year for summer months when carmakers blow out inventory."

No. 1 Trade-In: Explorer for Focus Still, the hype over the program—which has been in the news for several months—brought people to showrooms even if their trade-in cars didn't qualify for subsidies, Keller says.

Regardless of the reasons, some carmakers saw a real boost. Hyundai, Kia, and Subaru—in addition to Ford—all saw sales increases. Ford's Focus subcompact was the most purchased car in the clunkers program. Also, the Ford Explorer, once one of the most alluring vehicles on the market, has become the industry's most popular trade-in under the clunkers program, according to government data.

Ford chief economist Emily Kolinsky Morris says the sales boost from the clunkers program pulled a lot of buyers off the sidelines. "We know from looking at past months' sales that a lot of people stayed out of the market because of anxiety over the economy, so clunkers unleashed a lot of pent-up demand."

Ford's good news didn't extend to other U.S. automakers, though. GM sales plummeted 19% for the month, but this was largely because of a drop-off in sales to rental fleets, said Mark LaNeve, GM's vice-president of U.S. sales. Retail sales for the four brands GM will keep—Buick, Cadillac, Chevrolet, and GMC—were up 12%. Buyers continue to flee the brands that GM is either selling or killing off: Sales at Saturn, Saab, and Hummer dealers all fell by at least 57%.

The clunkers program helped GM sell more of its Aveo subcompact, HHR retro-styled wagon, and its full-sized pickups. Aside from the clunkers program, GM's resurrected Chevy Camaro muscle car is flying off the lot. The car could qualify for clunker cash if the buyer gets it with a V6 engine, but the car had plenty of interest before the program started. LaNeve said GM has almost no inventory on dealer lots and more than 17,000 unfilled orders.

VW Far Outpaced German Automakers Hyundai, which gained 1.2 points of market share in the first half of the year, posted a sales increase of 12% in July. The Korean carmaker had been closing deals all month based on clunker reimbursement from the government, advancing dealers $3,500 or $4,500 until officials could start processing the applications on July 23. Hyundai's top seller was the Elantra, which posted a 30.2% gain. Overall, 22% of Hyundai sales in July were assisted by clunker rebates. Hyundai's cousin company, Kia Motors, posted a 4.7% increase.

German luxury carmakers are not apt to get many sales via the clunkers program, and their July sales reflected the continued apprehension of affluent consumers about jumping into new-car purchases or leases. BMW (BMWG.DE) sales were down 27%, while Mercedes-Benz (DAI) saw a 22% drop. Volkswagen's Audi division continues to do well despite the times, helped by new models and increased ad spending: Sales were down just 5.8% from a year ago. Volkswagen (VOWG.DE) brand sales were down a mere 1.4% as VW was in a better position to get clunker trades. VW also has a few new models it wasn't selling a year ago—or was just launching—such as the Routan minivan, Jetta wagon, and Tiguan small SUV.

The questions are whether the clunkers program will continue and if it will have a lasting impact. The Senate is considering a measure already passed by the House of Representatives to extend its funding by $2 billion this week. The initial $1 billion was exhausted over the weekend.

Some senators are calling for a rewritten clunkers bill to force consumers to buy more fuel-efficient vehicles than those that qualified in the original legislation. The industry warns that this could backfire. Not only were nine of the top 10 vehicles purchased through the program subcompact and compact cars that are much more fuel-efficient than the trucks and SUVs that were traded in, but there could be a shortage of the most fuel-efficient cars in August and early September. Automakers will argue this week against changing the language so as to encourage sales of pickup trucks and SUVs that didn't sell well in July—but which are a few miles per gallon better than the same vehicles they were selling a decade ago and qualify for the federal subsidy.

Dealers Run Low on Popular Models Anwyl of, which tracks transaction prices at dealerships, says that even as the program helped sales, carmakers and dealers are trying to raise prices to boost their revenues. Just as consumers are looking for deals, some may be dismayed when they find fewer savings in showrooms than they expect.

Ford sales analyst George Pipas said the clunkers program boosted weekend sales during the first selling days of August, with dealerships staying open in some cases until midnight. If President Barack Obama is able to sign the $2 billion extension this week, it will likely boost sales by up to 500,000 vehicles. But industry executives say the pace of clunker trade-ins will slow down as the buzz that had built up for months wears off and dealer inventories run low on the vehicles that qualify for the maximum benefit.

Mike DiGiovanni, GM's executive director of global market and industry analysis, says there are about 5.5 million vehicles that qualify for trade-in across the U.S. But not all of those consumers want a new car and not all of them could get financing. If another $3 billion were approved (that was the initial amount of money approved by Congress), the industry could add up to 1 million total new sales.

That would give an ailing car industry a 10% jump over the sales rate predicted earlier in the year, before the program. That's a far cry from the 30% monthly jump that a similar, more richly funded program has achieved in Germany. But it's the equivalent of production at four auto assembly plants and several parts plants.

With national unemployment nearing 10%, and the jobless rate in automaking states such as Michigan and Ohio already well into double digits, cash for clunkers is one federal stimulus that has become very popular in the nation's hurting heartland—and with the consumers who are taking advantage of it.
David Kiley is a freelance writer based in Ann Arbor, Mich.
Welch is a reporter for Bloomberg News and Bloomberg Businessweek in Detroit.

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