Cash for Clunkers: A Review

Its time now to review the $3 billion cash incentive program — Car Allowance Rebate System (CARS), informally known as “Cash for Clunkers” — which officially ended Tuesday. The program, launched by the U.S. Government in late July, allowed consumers to trade in their old gas-guzzling cars and trucks with a mileage of 18 miles per gallon (mpg) or less for a value of up to $3,500–$4,500.

The U.S. Department of Transportation reported that as many as 690,114 new cars were sold under the program, reflecting $2.88 billion in rebate applications, which is closer to the program allocation. About 84% of the vehicles traded in by the consumers are trucks and SUVs. About 59% of consumers opted for passenger cars in exchange.

The average fuel-economy of the vehicle purchased was 24.9 mpg in combined city and highway driving, compared to 15.8 mpg for vehicles being traded in. This reflects an average fuel-economy improvement of 58%.

As expected, the biggest sellers under the program were industry leaders in fuel-efficient vehicles – Honda (HMC) and Toyota (TM). Honda and Toyota were the only two automakers to feature three models each among the top 10 buys under the program. Toyota Corolla (31 mpg) topped the list followed by Honda Civic (31 mpg, 42 mpg-hybrid) and Toyota Camry (25 mpg, 34mpg-hybrid), while Toyota Prius (47 mpg) ranked seventh followed by Honda Accord (25 mpg) and Honda Fit (30 mpg).

Ford (F) had two models in the top 10 buys. The company’s Ford Focus (30 mpg) ranked fourth and Ford Escape SUV (24 mpg) ranked tenth. The remaining models in the top 10 were Hyundai Elantra (fifth; 29 mpg) and Nissan (NSANY.PK) Versa (sixth; 28 mpg). The most traded-in vehicles under the program included the Ford Explorer SUV, Ford F-150 pick-up and the Dodge Grand Caravan minivan.

In terms of market share, Toyota led the program with 19.4% of all clunker sales followed by General Motors with 17.6%, Ford with 14.4% and Honda with 13%. Chrysler ended in seventh place behind Nissan and Hyundai.

The program has no doubt lifted the auto industry as well as the U.S. economy. The program boosted the monthly sales to the levels unseen since September of last year. This has led economic growth in the third quarter to increase by 0.3%–0.4%, as estimated by the White House Council of Economic Advisers.

However, real play will now begin as the incentives have expired. Speculation is rife that overall auto sales will fall back sharply and demand swinging back to traditional levels. Nevertheless, the White House Council of Economic Advisers anticipated program-driven economic growth to continue in the fourth quarter as automakers work to rejuvenate depleted inventories. It also expected the program to create or save about 42,000 jobs in the second half of 2009.

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