Autos: Cash for Clunkers Advances

House legislation would give car and truck buyers up to $4,500 to trade in their gas guzzlers for a new, more efficient vehicle

By David Kiley

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.

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