[Auto] Potential Cash for Clunkers Revival Could Mean Big Car Deals Are Coming

[Mark-x]

People aren't buying cars right now and that has inevitably created flashbacks to 2008 and 2009, when the financial crisis resulted in a tumultuous drop in auto sales and ravaged automaker bottom lines. General Motors and Chrysler underwent bankruptcy restructuring and Ford mortgaged the farm, so to speak, just to avoid direct government intervention. Other automakers saw financial restructuring and stayed solvent, but barely. But it was the government's Cash for Clunkers program that ran from July to August 2009 that helped stimulate new-car sales and kickstart the economy—this is important, as we could see a similar policy enacted again soon.

During the current period when dealers have closed their showrooms, consumers are staying at home, and many have lost jobs and income, thoughts drift to how car sales can be encouraged again when it is once again safe to produce and sell new vehicles. A Cash for Clunkers repeat has come up as a natural option, although this time to drag the auto industry out of a crisis of a very different making.

 

For those who don't remember, it allowed consumers to trade in old vehicles for newer ones, promising a baseline incentive for nearly any worthless old car that could make it to a dealer lot and met certain fuel-economy criteria relative to then-new vehicles. One goal of the program was to spur trade-ins for new cars by giving buyers a voucher for a few thousand bucks (up to $4,500) no matter what pile they traded in; another was to get primarily older, less fuel-efficient vehicles off the road by tying the trade-in incentive to those aforementioned efficiency parameters. Adam Jonas, the outspoken auto analyst from Morgan Stanley, tells Barron's in an interview he does not think carmakers will fail or go bankrupt as a result of the current situation, but the industry will need support to get going again, restart factories, and jolt buyers back to showrooms—and the solution could once again be great deals supported by the government.

"We expect a Cash for Clunkers program to be much larger in scope and longer in duration than what we saw. In 2008 and 2009, we saw a $3 billion package that stimulated about $14 billion of purchases. This time around we're expecting about $10 billion of stimulus that drives $50 billion of purchases and adds about four million of SAAR [seasonally adjusted annualized rate, a measure of car purchases] over a six-month period beginning in the fall and then into early 2021," Jonas said.