Why Cash for Clunkers Could Devastate Auto Sales

The end of Cash for Clunkers

Cash for Clunkers is over.

More than 625,000 vehicles were sold as a result of the program, so I can’t imagine anyone who wanted to take the government up on its $4,500 offer missed out. Needless to say, the Cash for Clunkers program was hugely successful at luring people into dealerships to buy new cars.

But without the program, what happens next? Who will buy new cars now?

Well, guess what - I have a prediction: Auto sales will languish once again, and dealers will have one heck of a hard winter trying to sell enough cars to keep their heat on. The recovery of the auto industry will probably take even longer than it would have had the government just kept their hands off.

I don’t think Cash for Clunkers actually increased auto sales, I think it condensed auto sales into a single month. Which means the next few months are going to hurt for dealers and auto manufacturers.

Americans just binged on buying cars. The binge made us feel good. It gave us a sugar high of sorts that quickly spread across the country, resulting in even more binging. Now comes the big crash.

The fact that Ford, GM, and Chrysler all increased production of fuel-efficient vehicles made popular by Cash for Clunkers, combined with no more government assistance for consumers, means we’ll soon see an overstock of cars on dealers’ lots with no one to buy them.

Somehow dealers are going to have to lure people into their stores without powerful rebates, and we’ll be right back where we started.

Was Cash for Clunkers worth it?

-tgriffith

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GM Looks in the Face of Liability and Laughs

On this Monday morning, I want to open the week with a quote from a favorite movie:

A new car built by my company leaves somewhere traveling at 60 mph. The rear differential locks up. The car crashes and burns with everyone trapped inside. Now, should we initiate a recall? Take the number of vehicles in the field, A, multiply by the probable rate of failure, B, multiply by the average out-of-court settlement, C. A times B times C equals X. If X is less than the cost of a recall, we don’t do one.

That’s from Fight Club and is pretty accurate, considering the state of auto companies today. If it’s cheaper for a company to just pay off people hurt by its products, why issue a recall and face potentially damaging PR? Those liability payments are costs car companies have to count on.

Unless of course you’re the “new GM.”

As part of GM’s bankruptcy filing, it’s possible it will no longer be liable for injuries or deaths caused by vehicles built by the “old GM.”  Our friends at Autoblog reported that GM may be reconsidering, but Chrysler set a precedent earlier this month when they emerged from bankruptcy free from such liabilities.

So if you’re driving around in an ‘06 Cherokee or a ‘94 Lumina, and it suddenly bursts into flames, the folks at Chrysler can just let out a sigh of relief knowing the third-degree burns their vehicle gave you are not their responsibility. Awesome, huh?

News like this doesn’t exactly instill the kind of trust GM and Chrysler so desperately need. Why are we supposed to believe that the “new” GM will be run any differently than the old, considering most of the top execs are still in place? At least Chrysler has the advantage of an all-new CEO and top management team.

I don’t think the world’s auto buyers will just forgive and forget a century of mediocre vehicles and start buying cars from a post-bankruptcy Chrysler or GM. Especially if they keep showing signs of continuing in their old ways, only with a brand new set of government-issued credit cards.

A company can’t hide in the shroud of bankruptcy and keep screwing its customers. Eventually we’re going to catch on.

Would you buy a pre-owned GM or Chrysler if you knew the company wouldn’t assume liability if it malfunctioned?

-tgriffith

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