Eric

Baerren

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August 3, 2009

From ‘Cash for Clunkers’ to Profitable Car Companies?

Congress might be rushing through more money for its Cash-for-Clunkers program, but to call it a success is a bit premature.

There is no disputing that the program has proven more wildly popular than anticipated. Just a week after the rules for it were laid down, it ran out of money because more people wanted to participate than anyone had imagined. This, however, is only a sign of its popularity. Whether it is a success will come down to whether demand for new automobiles can be sustained.

The program’s popularity was good news for dealerships and auto manufacturers, and also its political sponsors. Despite criticisms about how quickly it ran out of money, mostly which seemed predicated on the idea that its popularity with consumers is a sign of failure, it turned out to be more popular than anyone anticipated. That popularity led to a bill that would flush another $2 billion in the program, which itself underscores two things that could ultimately make it a failure.

The first is that the auto industry, thanks to it being a big-unit manufacturing sector, isn’t designed for short-term sprints. It functions in the big picture. A car represents a significant investment by consumers, and most normal people don’t go out and stock up when they’re cheap. Further, one of the problems that auto companies have faced in changes in consumer taste is that their factories are not capable of shifting production to new models quickly. Put short, it’s an industry that depends on long-term, sustainable demand. “Cash for clunkers” may today be moving cars, but the real health of the auto industry, and with it American manufacturing, won’t be realized unless interest among consumers continues after the program expires.

The second and most important is that “Cash for Clunkers” represents a short-term boost in sales, a kind of mini-bubble that if not sustained won’t actually represent a better position for automakers. In that way, it would be the same thing as the bailout for banks, which allowed them to show better-than-actual fiscal health in the first quarter of this year. Automakers will indeed be able to show better numbers on their ledgers thanks to the program, but the sales figures will be inflated due to a government subsidy of their product.

This means handing the baton off to the automakers, who now find themselves in the position of having to justify this short-term bailout. For at least two American automakers – GM and Chrysler – that will be a substantial order to fill. They’ll have to make good on promises during their speedy, federally backed bankruptcies that the investment of the American people was a worthwhile one. They made promises, got the backing of the administration, and will now have to prove that they can keep their words. This is especially since one of their biggest owners – the American people – is very interested in disinvesting.

Much will rest on whether demand for more efficient cars becomes stable. Currently, demand fluctuates with the price of gasoline. Above about $3.50 a gallon, consumers go for more efficient vehicles and alter driving behavior. Below that, consumers don’t much care for efficiency and don’t care about wasting gasoline in lines waiting for fast food.

It will be interesting to see how GM and Chrysler, so soon out of bankruptcy, try to convert government-stimulated short-term demand into long-term sustainability. It will be a good test to see whether the companies can keep their word that federal loans and bankruptcy assistance will be good investments for the American public, or whether the companies opted a route of more of the same while in bankruptcy restructuring. And ultimately, it provides a better answer to whether this was a true stimulus program, or just a popular one because it helped people buy cars for cheap.

© 2009 North Star Writers Group. May not be republished without permission.

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