The Latest Bad Idea: Government Sponsored Vouchers for Car Purchases

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Includes: F, GM, HMC, TM
by: Markham Lee

Here is a quick look at a plan to offer government funded discounts to people who trade in old cars for new:

(From the WSJ): "DETROIT — An Ohio congresswoman unveiled another iteration of a cash-for-clunkers plan, a bill aimed at spurring car sales by giving buyers $3,000 to $5,000 to turn in their old wheels for something new and greener.

"This is a very comprehensive bill with multiple beneficial effects that I think will make it palatable to enough of the Congress that we can enact it," says Rep. Betty Sutton, D-Ohio, who introduced the bill Tuesday. "It not only assists consumers who need a lot of help in this economic downturn, but it will stimulate our economy, reduces emissions, and reduces our dependency on foreign oil."

An earlier attempt to pass such a plan failed to gain broad support throughout Congress. But European car sales are benefiting from such efforts. A recent analysis by CSM Worldwide showed vehicle sales in the several nations with such plans will be 400,000 more this year than they'd be without the bonus.

The bill would give $3,000 to consumers trading in cars more than 8 years old if they buy a new car that gets more than 27 miles per gallon or truck getting more than 24 mpg. The rebate would rise to $4,000 to $5,000 for cars getting more than 30 mpg and for commercial trucks getting better mileage than their older counterparts.

Ford Motor (NYSE:F) , with sales down 44.1% in the first two months this year, favors such a plan. "By providing incentives to purchase a new vehicle, the legislation would help reduce consumer costs, jump-start the economy and help support millions of good jobs in every state across the nation," says Ziad Ojakli, group vice president for government affairs. A Ford analysis shows it has 10 cars that fill the bill, General Motors (NYSE:GM) has 12, Chrysler, 10, Toyota (NYSE:TM), nine and Honda (NYSE:HMC), five.

Though the bill has automaker support, the potential cost could doom it, says Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable. "The bill could become the victim of its own success. If everyone takes advantage of it, then the costs shoot up."

Although Talbott says he supports the bill's goals, he's not sure if many legislators are willing to sign on for another costly stimulus bill."

To be sure it's hard to perform a detailed analysis on this plan until it's finalized because so many things can change between the proposal stage, and the time the bill passes. However based on the proposal's high-level concept, I think it will benefit the foreign automakers more than it will the domestic ones.

Just think about it: domestic cars are already heavily discounted and in some cases are selling for 50% off, while the foreign automakers aren't offering discounts of anywhere near the same magnitude. Based on marketing practices that began back around '01 the domestic automakers have already established themselves as the low cost provider, while the cost of foreign cars has slowly increased. As a result the vouchers may be more attractive to consumers for us in purchasing a foreign car than a domestic one. Especially since there is more demand for many of the foreign models in the first place.

A quick look through autotrader.com revealed that brand new Chevy Malibus often sell for less than the cost of a used Accord or Camry, which seems to support the idea that consumers who are already ignoring the heavy discounts from domestic dealers may be more interested in using the vouchers on foreign cars.

Another issue is that people who drive cars that are 8+ years old may not have the financial strength to buy a new car, and/or may be enjoying life without a car payment. Considering the state of the economy they might be unwilling to take on a new expenses, or may find that getting a used car that's 3-4 years old may still be cheaper.

Still it's hard to assess the potential impact of the plan until it's finalized, and there is still a good chance that it won't get passed in the first place.

I personally hope the proposal dies because I don't like the idea of subsidizing car sales with taxpayer dollars, and I think the long-term impact could be fairly negative in terms further cementing the role of the Detroit automakers as low cost providers. It's really hard to put the genie back in the bottle when it comes to pricing.

You can read the original article here, and the web site of the Congresswoman who proposed the plan can be found here.

Sources:

USA Today: "$3,000 - $5,000 incentive for car buyers proposed" -- Sharon Silke Carty, March 18, 2009.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.