NORTHVILLE, Mich., April 28, 2009 – A federal “cash for clunkers” program may be the most efficient way to inject much-needed cash into the entire automotive value chain, including state treasuries, and simultaneously reduce greenhouse gas emissions, according to CSM Worldwide.
CSM, which provides forecasting services to the world’s leading automakers and suppliers, warns, however, that the wrong legislative compromises could disadvantage U.S.-built vehicles, invite challenges from global trading partners and erode the potential economic and environmental benefits.
“When it comes to scrappage programs, simpler is better,” said Craig Cather, president and CEO of CSM. “The more clear-cut the value proposition is for consumers and the fewer exclusions and limitations it has, the more successful it will be. That means finding the right dollar amount to offer consumers, a ‘green’ standard that doesn’t exclude American-made vehicles and a structure that stimulates the U.S. economy without violating international trade rules.
“Acting quickly and limiting the program to several months will create a sense of urgency and deliver sales when the economy needs them the most,” Cather added. “If we get this right, it will be a tremendous opportunity for consumers to upgrade to safer, greener vehicles with unprecedented affordability.”
According to CSM, a scrappage program that delivers at least 1 million sales would have a significant impact on the overall economy and the environment:
Retiring Vehicles Is Expensive
In funding a program, policy makers should allocate enough money so that the incentive offered is greater than value of the vehicle being scrapped, CSM says.
Relatively newer vehicles, especially SUVs and pickup trucks, may be worth more than the $3,000 to $5,000 incentives that have been discussed. In addition, drivers of older vehicles may require significant incentives from automakers to take on a monthly car payment.
“The incentive needs to be greater than the market value of the vehicle being scrapped,” said Michael Robinet, CSM vice president, global vehicle forecasts. “With the bills we have seen, you’re really talking about retiring vehicles that are a least eight model-years old or older, and probably are paid off.”
Ironically, the more thirsty the vehicle to be scrapped is, the more it may be worth, judging from used car values:
“Automakers will need to continue – and possibly enhance – the cash incentives they offer and ensure that low-cost credit is available to convince enough people to part with their clunkers and take on a monthly car payment in this economic climate,” Robinet said. “For lawmakers, making sure the value equation is right is even more important if the goal is to remove as-guzzlers from the road because they tend to have higher resale values.”
Use a Straightforward Approach
As important as finding the right dollar incentive to optimize the plan is making sure the most popular vehicles are included. Year-to-date, the 10 best-selling vehicles include three full-size pickups, four mid-size cars or “D” segment cars, and one crossover SUV.
Making the plan as inclusive as possible doesn’t necessarily mean that pollution won’t be reduced. CSM has found that nearly every 2009 model year vehicle emits fewer greenhouse gasses such as CO2 than a comparable 2002 model:
“Even with generous incentives, most automobile purchases are discretionary, so it makes sense to offer as many choices as possible,” Robinet said. “Business owners, families and others who truly need large vehicles shouldn’t be excluded from the program if you want maximum plan participation and the largest possible amount of CO2 reduction.”
Set the Bar High but Not Too High
Among the proposals floated inside the Beltway is a requirement that eligible vehicles must exceed the current CAFE standards of 27.5 mpg for cars and 22.5 mpg for trucks, perhaps by as much as 10 to 15 percent.
CSM believes that CAFE should not be used to set the fuel economy bar for a scrappage plan because it would severely limit consumer choice. It also would tend to favor imported vehicles.
“CAFE is a sales-weighted calculation that was never meant to be used as a shopping tool,” points out Eric Fedewa, CSM vice president, global powertrain forecasts. “Manufacturers meet the standard by building what they believe consumers really want to buy, then they apply credits to close any compliance gap. Only a handful of cars and light trucks, such as diesels, hybrids and the smallest gas-powered vehicles, actually meet or exceed the published CAFE standards, and many of them are imported.”
Under the CAFE law, manufacturers earn credits for building electric vehicles, hybrids and flex-fuel vehicles that help pull up their fleet-wide fuel economy average. They also can apply credits banked in past years if they face a shortfall.
