Questions Surround Cash-for-Clunkers Program

AFI - We are all curious about this one.

By Byron Pope WardsAuto.com

Details of the federal government’s “cash-for-clunkers” legislation have yet to be confirmed, but a Ward’s analysis of the program reveals numerous holes and the possibility it may not boost vehicle sales significantly.

Under terms of the Car Allowance Rebate System (CARS), dealers largely will oversee implementation of an incentive that provides up to $4,500 for consumers scrapping used vehicles rated at 18 mpg (13 L/100 km) for new cars that achieve at least 22 mpg (11 L/100 km), or light trucks capable of 18 mpg or more.

Trade-ins must have been insured for the past year - (No pulling out of the backyard allowed).

One potential pitfall of the program is how dealers will provide proof the trade-in vehicles will indeed be scrapped and not wind up on used-car lots, which would negate a primary objective of taking inefficient cars and trucks off the road.

The program is tentatively set to begin Aug. 1, with final rules reportedly due by July 23.

NHTSA spokesman Rae Tyson says the agency “has a lot of details to work out,” but adds careful consideration is being paid to ensure dealers can’t exploit the program.

Potential fraud “is one reason we’re being very careful,” Tyson tells Ward’s. “In order to complete the process, (dealers) have to ensure (the vehicle is) scrapped.

Dealers must first be certified in the program. Go to http://www.Cars.gov for more information.

Following certification, a dealer accepting a trade-in would have to make proper disposal arrangements, then submit documentation to NHTSA showing the process had been handled correctly and the vehicle had indeed been scrapped.

Once NHTSA approves the documentation, the dealer would receive the refund within 10 days.

NHTSA already has warned dealers not to begin signing up customers for the program until the final rule has been released.

NHTSA says in a statement, noting violators face fines of up to $15,000 per transaction.

While NHTSA is working to ensure dealers don’t take advantage of the program, some argue most dealers wouldn’t attempt to do so even if the situation presented itself.

“Some dealers will take advantage, but if you’re going to be blatantly stealing from the government, which that would be, they're going to find out,”

Another issue yet to be addressed is how dealers would prove to NHTSA vehicles will be scrapped, as well as how the actual scrappage will be carried out, Tyson says.

In the U.K., which earlier this year launched its own cash-for-clunkers incentive plan, salvage yards disposing of vehicles must submit documentation available online, along with digital images of the destroyed vehicles, according to British salvage firm Douglas Valley Breakers Ltd.

“One (option) would be to figure out how to render the drivetrain inoperative, or at least the engine; and the other would be perhaps do something to the title to allow it not to be re-titled, or some combination (of the two),”

If the vehicle’s body is in good condition, its parts could be sold off, although NHTSA has yet to decide whether or not that would be allowed. In any case, the priority would be to render the vehicle inoperable, he says.

The program is capped at $1 billion and runs through Nov. 1, 2009, or when the funds are exhausted, whichever comes first.

If the entire $1 billion were used with an average rebate being $4,000, it would result in 250,000 additional new-vehicle sales, barely enough to impact even a down U.S. market, which last year totaled 13,493,165 units, according to Ward’s data.

In May, the U.S. seasonally adjusted annual rate was 9.9 million units. Assuming that figure holds steady, the program would result in a mere 2.5% annual sales increase. If the SAAR improves as many predict, the impact would be even less.

Although European scrappage programs have been deemed successful, it’s largely because their respective markets are much smaller than in the U.S.

Perhaps the most important question concerning the CARS program is what vehicles will qualify.

“There aren’t many cars that get 18 mpg or worse,” Wolkonowicz says. “(The program) is not going to do anything but get trucks off the road, but that’s not its intent. It is a classic example of people (writing legislation) who don’t know anything about (the industry).”

Rikess agrees most car owners won’t qualify for the program, and raises yet another question.

“Affordability is an issue for some people driving 14- (and) 15-year-old cars,” he says. “A typical family with a cash-for-clunkers car couldn’t afford a (new car) payment.”

“The problem for a lot of dealers is if this creates a stampede of traffic and hurts them when they try and figure out what kind of vehicle is eligible and there are a lot of questions from consumers,” he says. “That could eat up a lot of manpower, and the majority won’t buy a car.

“It’s just (going to result in) incremental business dealers wouldn’t have gotten,” Rikess adds. “It’s more of a green initiative than a dealer initiative. It shows politics is the real winner.”

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