January 13, 2013
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August 17, 2009

Cash for Clunkers: An exercise in futility

By Frank Ryan
The Obama Administration and Congress have added a $2 Billion increase in the cash for clunkers automotive program. 

The first Billion was touted as being extraordinarily successful by the administration.   With such success behind them, they decided in their infinite wisdom to expand the program to $3 Billion.

Apparently a $2 Billion increase in this program will improve the automotive industry -- or so we are told.  The Czar of the automobile industry and the Administration hope that the increase in demand will revive the floundering industry.

Hat tip: John McMahon

I am almost numb from watching our government interfere in markets it does not understand.

Why we are not reeling from disbelief with all the government intrusion in banking, health care, and automobiles is beyond me.  This is the same government that brought us unfunded social security promises, the Vietnam War, nationalized railroads, and $600 ashtrays.  Why would anyone conceivably believe that government can solve an automobile problem?  If past performance is an indication of future results, we are in trouble.

Cash for clunkers is likely to cause additional pain to an already troubled automobile industry in general and for General (Government) Motors in particular.  Let me be very clear (where have I heard that expression before?), the government's cash for clunkers will likely cause greater problems for the industry.

The perceived success of cash for clunkers will be offset by forces which will be troubling for the industry and our economic recovery in the not too distant future.

  • Cash for clunkers mostly shifts demand for cars. Very few people who would never have bought a new car will be motivated. Most users of the program will buy cars today and not tomorrow because of the incentive. They will not buy today in addition to tomorrow. The program does not increase underlying demand very much.
  • Cash for clunkers increases production at suppliers today at the expense of demand tomorrow.
  • The dealers were dealt with arrogantly by General Motors prior to bankruptcy and dealers have long memories. Remaining dealers are nervous about the way former dealers were treated and are looking to reduce their risk with GM and the industry.
  • The supplier base to General Motors was dealt with harshly as well. Suppliers will see a temporary increase in demand at a very high cost to produce today with the offset being reduced sales in three to six months from a newly saturated car market.
  • GM's foreign competitors are benefitting. GM has yet to effectively deal with its excess capacity. I still do not believe that GM understands that when it shut down so many dealers that it fired its sales force. GM needed to reduce productive capacity and not sales capability.
  • There is still excess capacity in the industry, which means fixed costs are still significantly out of control and will be a drag on the industry for years and decades to come.
  • Finally, the American taxpayer is angry about bailouts, government intervention, special deals, and continued intrusion in our lives. The automobile industry lost a long term friend in the American people with these bailouts.
 Until government understands that intruding in markets today is a trade off for the disaster of tomorrow, we are likely to get more bad decisions from DC.   Bad decisions do not get better with time.

Failed business models kept alive by taxpayer funds are still failed business models. 

The automotive industry needs to establish viable, profitable relations with suppliers. 

The industry must recognize the value of the dealer.   The direct customer of the automobile manufacturer is the dealer and not the car buyer.  The car buyer is the customer of the dealer and everyone must benefit from a mutually profitable relationship for the industry to survive. 

Automobile executives need to deal with their capacity and recognize that economies of scale is as potent a force as fixed cost absorption.  Boosting sales artificially to keep factories busy is a disaster in the making.

Finally, the great workers who helped build the auto industry must recognize that the car buyers are hurting, that markets have changed, and that you cannot legislate people to buy cars that they cannot afford.

Only when all parties to the automobile industry decide that they want to fix this market will the industry solve its problems.    Bailouts and cash for clunkers only make matters worse.

Col. Frank Ryan, USMCR (ret) CPA specializes in corporate restructuring and lectures nationally on ethics.  He is on numerous boards of publicly traded and non-profit organizations.  He can be reached at FRYAN1951@aol.com
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