Congress on May 5 took a big step toward giving consumers with older, gas-thirsty cars and trucks up to $4,500 to buy a new, more fuel-efficient vehicle.
The legislation is meant to give incentives to consumers to dump their gas hogs. But more important, it is designed to give struggling automakers and their suppliers a shot in the arm by boosting sales this year by as many as 1 million new vehicles. April auto sales tracked at an annualized rate of 9.32 million cars and trucks, down 34% from a year earlier. Automakers and industry analysts have been projecting that total sales this year will be between 9.5 million and 10.5 million vehicles.
The sales dive has propelled Chrysler into bankruptcy, with General Motors (GM) threatening to follow. Other automakers also have made deep cuts in production, laid off workers, and even delayed the opening of new manufacturing facilities. "By stimulating consumer demand for new vehicles, this proposal will directly benefit domestic autoworkers and automotive manufacturers, which have arguably been hardest hit by the current economic downturn," said Representative John Dingell (D-Mich.), a co-sponsor of the bill.
Consumers on the Sidelines
The idea of a "cash for clunkers" bill has been kicking around Washington for three months. Germany, France, and the United Kingdom have enacted similar programs in recent months. In Germany, the measure boosted sales by more than 20%.
Automakers are anxious to get a bill finalized because, they say, chatter about it over the past month has kept consumers on the sidelines waiting for the new incentives.
"We are encouraged that President Obama and Congress have reached a compromise on consumer-incentive legislation that will help jump-start auto sales and the U.S. economy, while also providing environmental benefits and increasing energy security," said Ziad Ojakli, Ford's (F) group vice-president for government and community relations. "A program like this is needed now—a point that was reinforced by April's auto sales reported last Friday."
All Automakers on an Equal Footing
President Obama pushed the idea in a speech he gave on Mar. 30, in which he laid out the White House plans for helping to restructure Chrysler and GM. But the clunker bill was hung up over details. Many elected officials wanted to give preferred treatment to vehicles built in the U.S., offering lesser incentives for vehicles built in Canada and Mexico, and no benefits to imported vehicles. Environmentalists wanted tougher language that would compel car buyers to trade sport-utility vehicles for much more fuel-efficient cars, not just new SUVs with slightly improved fuel economy.
As it turned out, the House bill puts all auto manufacturers on equal footing. Previous bill language specified that vehicles had to be nine years or older to qualify; the compromise language does not specify the age of the trade-in vehicle, but sets gas-mileage requirements for old cars and trucks to qualify, and doles out money based on how much more mileage the new vehicle gets. There's no cost cap on the bill yet, but it would be in effect for a year and would be funded to support the purchase of 1 million new vehicles, giving it a total cost of $3 billion to $4 billion.
"We're pleased that the plan will allow equal participation from all manufacturers," said Charles Territo, spokesman for the Alliance for Automobile Manufacturers, a lobbying group that represents both U.S. and foreign-owned automakers and which derided earlier attempts to put imported cars—such as Toyota's (TM) Prius gas-electric hybrid and gas-sippers from Hyundai, Nissan (NSANY), and Honda (HMC)—at a disadvantage.
Waiting for the Senate
The Senate is expected to draft an identical bill, which should pass and get signed into law by President Obama. The original plan was to attach it to a larger piece of legislation that would deal with climate change. But House Energy and Commerce Committee Chairman Henry Waxman (D-Calif.) doesn't have the votes yet to get that carbon-reduction bill out of his committee. So it's possible the clunker legislation will have to find another way to get to the President's desk.
Environmentalists are hoping that the Senate version of the bill will push the fuel-efficiency requirements of the new cars a bit higher. "The legislation was designed to boost sales as well as create a meaningful reduction in CO2 emissions, but this House bill leans heavily to boosting sales first," said Ann Mesnikoff, the Sierra Club's chief analyst for green transportation.
For now, here is how the House version of "cash for clunkers" would work:
For passenger cars: The old vehicle must get less than 18 mpg. New passenger cars with mileage of at least 22 mpg are eligible for vouchers. If the mileage of the new car is at least 4 mpg higher than the old vehicle, the voucher will be worth $3,500. If the mileage of the new car is at least 10 mpg higher than the old vehicle, the voucher will be worth $4,500. So a person trading in a 2000 four-wheel drive Chevy Blazer, for example, that gets 15 mpg, for a Ford Fusion Hybrid, which gets 37 mpg, would get the maximum benefit.
For small trucks and SUVs: The old vehicle must get less than 18 mpg. New small trucks or SUVs with mileage of at least 18 mpg are eligible for vouchers. If the mileage of the new truck or SUV is at least 2 mpg higher than the old vehicle, the voucher will be worth $3,500. If the mileage of the new truck or SUV is at least 5 mpg higher than the old vehicle, the voucher will be worth $4,500. Thus, someone with an old Ford Explorer that gets 16 mpg could trade for a Ford F Series pickup that gets 18 mpg and get $3,500.
Large light-duty trucks: The old vehicle must get less than 18 mpg. New large trucks (pickups and vans weighing 6,000 to 8,500 lbs.) with mileage of at least 15 mpg are eligible for vouchers. If the mileage of the new truck is at least 1 mpg higher than the old truck, the voucher will be worth $3,500. If the mileage of the new truck is at least 2 mpg higher than the old truck, the voucher will be worth $4,500.
Work trucks: Consumers can trade in a pre-2002 work truck (defined as a pickup truck or cargo van weighing 8,500 to 10,000 lbs.) and receive a voucher worth $3,500 for a new work truck in the same or smaller weight class. There will be a finite number of these vouchers based on the market share of this vehicle class. There are no Environmental Protection Agency mileage measures for these trucks. However, because newer models are cleaner than older models, the age requirement ensures that the trade will improve environmental quality. Consumers can also "trade down," receiving a $3,500 voucher for trading in an older work truck and purchasing a pickup or van weighing between 6,000 to 8,500 lbs.
Kiley is a senior correspondent in BusinessWeek's Detroit bureau.