Cash for Clunkers

Since the Cash for Clunker government incentive program concluded in the summer of 2009, leasing has been on the rise, but why? The captive finance arms of the manufacturers, especially the domestic brands, nearly lost their shirts when the finance market fell apart in 2008. GM and Chrysler had to claim bankruptcy and now GM wants to buy back GMAC from the Government and Chrysler is partnering up with outside finance companies to capture the sub-prime market. Is it genius or madness???

Domestic and import OEMs have either pulled back or pushed leasing in different ways. The domestic OEMs all but pulled out of leasing while going through bankruptcy proceedings, while the imports continued to lease through 2008 and into 2009.

Either way you look at it, the Cash for Clunkers incentive program appears to have jump-started leasing again for both import and domestic OEMs.

Several OEMs have been using "leasing to drive" incentive programs in recent months. Honda ran its "BIG THING" lease event in 2010 and really pushed leasing as a finance option. Their lease number reached 30% during March 2010, a 24-month high for Honda. Toyota used leasing as an attractive finance option to help overcome its recall issues, and it appears to be working. Nissan has stayed the course on leasing, while VW/Audi have pulled back a bit.

The domestics appear to be on their way back to leasing again, based on industry trends. The question is, "Will domestic OEMs get back to a 20-25% lease rate or will they be more controlled about using leasing as an incentive tool to draw in a new wave of ready-made repeat buyers for the future?"

Only time will tell…

Posted by Mike Dixon, Product Release Specialist, Polk (06.03.2010)

The luxury* and total U.S. new vehicle markets move together as the calendar year progresses, based on average monthly new vehicle retail registrations by month in each of the past five calendar years. Both categories enjoy their highest volumes in the six month period from March through August, dropping off precipitously thereafter. The luxury market peaks in August, with the total industry cresting the prior month. Total new vehicle registrations reach their nadir in November, while luxury deliveries bottom out in February.

Industry and Luxury Volumes by Month

During the May – July time period, industry registrations rise faster than luxury results, which brings a decline in luxury market share. By the same token, from August through December, the industry declines at a faster rate than the luxury market, pushing up the luxury share. These luxury share changes are illustrated in the chart below.

Luxury Share by Month for Each of the Past Five Years and Average

The dramatic decline in luxury share in August of last year was most likely caused by the "Cash for Clunkers" government-funded incentive program, in which the price (window sticker) of eligible vehicles was capped at $45,000. A year earlier, the luxury share rose considerably, probably caused by the decline in the non-luxury market during the same time period triggered by the sudden gas price spike immediately prior. Both luxury and total new vehicle registrations climb as the year draws to a close, driven at least in part by a push at the OEM, dealer and salesperson levels to meet both month-end and year-end sales objectives. Since the two categories are climbing at about the same rate as the year ends, luxury share begins to plateau.

With awareness of the variations in luxury sales and share during the calendar year, dealers and OEMs can adjust their plans accordingly. Inventory levels need to be appropriate for the rise in luxury deliveries in the spring and early summer, while stocks need to be curtailed for the following several months. Similarly, plans need to be put in place to provide for the increase in luxury share at the end of the calendar year.

Posted by Tom Libby, PolkInsight Advisor, Polk (04.05.10)

*Includes basic luxury, mid luxury, prestige luxury and prestige sporty segments

Are you curious what impact the Cash for Clunkers program had on customer loyalty to OEMs? Are you interested in some strategic tips for managing customer loyalty? Do you think that understanding what drives customers' decision to repurchase is critical to building loyalty? Have you ever wondered about the financial impact of loyalty on the OEM bottom line?

If your answer to any of these questions is yes, then you may be interested in the white paper that Lonnie Miller and I have put together and released this week. Click here to get your own copy of the white paper.

Posted by Dan Zetu, Analytic Consultant, Polk (01.13.2010)

Listen-up independent repair facilities! Pontiac, Saturn, Hummer and Oldsmobile brands alone represent 15.2 million vehicles on America's roads today. Combined with the closing of many OEM locations and the consolidation of their networks to meet vehicle sales projections, you should now ask yourself, "Who's going to service and sell parts for all of these vehicles?" There is no question that consumers are keeping their cars for a longer period of time, prompting a greater need to pay for parts and service.

Source: R. L. Polk & Co. Market Study: Consumer Sentiment During Challenging Times, 2009.

I don't know too many people who enjoy reveling in the misery or demise of others. I do know how to recognize an opportunity when I see one, though. It's like this time when I was a junior in high school and the kid in front of me on the basketball team went down with an injury. I got my shot, added value to the team and earned some playing time. Did I enjoy seeing him in pain or losing minutes on the floor just because he got hurt? No, but I did relish the chance and take advantage of the opportunity that was presented me.

There is a bittersweet opportunity available to the automotive aftermarket in the near future. For independent repair facilities, there may be an even greater opportunity because studies suggest there are exorbitant differences in parts and labor costs between franchise dealers and independent repair facilities. This is just the type of play that could keep independent repair facilities ahead of the game.

I heard much lament over Cash for Clunkers stealing some of the volume from the automotive aftermarket. Although those concerns are valid, the future is looking brighter. Even though I don't see fireworks and hotdogs on the horizon, I still feel confident calling it "Independents Day".

Posted by Therran Oliphant, Account Representative, Polk (10.09.2009)

For all practical purposes, the U.S. government's Cash for Clunkers program is over. While dealers in the states are trying to submit their paperwork into a log-jammed government computer system, you and I are now closed off from seeing an alluring incentive of $3,500 - $4,500. And that means some dealerships are expecting the dust bunnies and tumbleweeds to return to their showrooms and auto lots.

From a success point of view, I think the CARS program was good kick in the tail for auto sales since it: (a) drove traffic into the showrooms, which gave current and future sales opportunities to a dealer, (b) it got rid of inventory unlike anything most dealers have seen (and it triggered production with a few plants for some automakers!), and (c) it pumped money into the cash register (once the government reimburses each dealer for the vouchers). Yes, some people who were going to buy later only bought earlier. But I'd argue that in the business climate right now, spending money sooner rather than later is good to rebuild confidence in the market's view of hopeful progress.

So is the party over in the dealer showroom? For now. Give it 30 days and the clearance sales for the 2009 models are going to kick in aggressively. As of today, the hoards hoping to cash in on an old vehicle are gone. But Fall is right around the corner in North America. And that typically means a slew of new models will hit the showrooms. Even if people are window shopping, traffic for dealers is good. For now, you just can't pay enough for potential car business.

Posted by Lonnie Miller, Director of Industry Analysis, Polk (08.26.2009)

In a recent Polk View on automotive industry challenges, we looked at the impact of Chrysler's and GM's bankruptcies, brand eliminations and dealership closings on consumer attitudes and likely buying behavior. Our ongoing consumer research program painted a picture that wasn’t particularly rosy just a few months back: over two-fifths (43%) of surveyed consumers were likely to defect if their local GM or Chrysler dealer closed; one-third (35%) would be less likely to purchase a brand being discontinued and a similar proportion (34%) said an auto company bankruptcy would make them less likely to buy.

Consumer Attitudes - Impact on Purchase Consideration
Level of Agreement: I am less likely to buy because of...

Fortunately, things are starting to look a little brighter for the U.S. auto industry, with positive signs emerging in a relatively short time. GM's and Chrysler's rapid emergence from bankruptcy and the government's highly successful Cash for Clunkers program have been big factors contributing to the improvement.

While we're clearly not out of the woods yet, there are some signs of an upturn. Chrysler recently announced it's re-signing 140 dealers of the almost 800 closed under bankruptcy protection. As reported in Automotive News, dramatic cost cutting and production cuts, along with Cash for Clunkers sales, have left auto inventories at their lowest levels since 1992 and now automakers are scrambling to build more of their popular models. GM just announced that it's increasing production and calling back laid-off workers at several plants to fill the void. Retailers also report a late model used car sales boom from shoppers who didn't qualify for Cash for Clunkers and the increased traffic is driving service and maintenance business, which are both quite profitable.

Things seem to be boding well for Ford, which gained market share due to the other Detroit manufacturers' duress. Also, Toyota has trimmed its huge losses from last quarter. Economic indicators add to the optimism: the stock market's up, GDP is shrinking less than previously, unemployment is slowing, the housing market may have hit bottom and consumer confidence is showing signs of renewed life.

Let's keep our fingers crossed that the economy, a leaner and meaner GM, and Fiat’s merger with Chrysler all mean that brighter days are ahead for a smaller but "better" auto industry. What do you think? Are things improving for the U.S. auto industry?

Posted by Bruce Giffin, Corporate Market Research Manager, Polk (08.24.2009)

From the "Umweltprämie" (environmental bonus) in Germany to Plan 2,000€ in Spain to "Cash for Clunkers" in the U.S., governments around the globe are stimulating their automotive industries through programs that allow consumers to trade in old vehicles for newer, more fuel-efficient mod-els. While these programs are very popular among consumers, we have seen a rising wave of crit-icism to the effect that such programs are "a useless waste of money," that they constitute preferential treatment for one industry over others, that they have "no actual effect" on sales trends and that automotive demand will collapse entirely once these programs expire. What is the truth? Are these stimulus programs worthwhile?

To find out, I took a look at Polk’s automotive forecasts. I found that global sales will be well over four million units higher in 2009 than they would have been without the stimulus programs. In the context of one of the most severe recessions of all times, this 7% boost in demand is a blessing for carmakers, suppliers and dealers alike.

Global New Registrations of Light Vehicles

It cannot be denied that some of these additional sales actually represent advance 2010 demand, meaning that consumers who planned to buy a new vehicle next year are choosing to do so now. But, of the 4.2 million additional vehicles that will be sold in 2009, just one million are sales that would have been realized in 2010. Rather, most of the growth in demand for new vehicles can be attributed to the rising motorization rate in some countries (e.g. China), and the fact that new cars in some countries are now so inexpensive that many consumers who previously drove used cars are now able to afford a new car for the first time.

It is true that global registrations will fall once again in 2010. But this does not justify the conclusion that the stimulus programs are a curse and not a blessing. After all, we must keep in mind that these programs will have a net positive effect of well over three million sales in 2009 and 2010 globally. All in all, I think these government stimulus programs must be seen as a good thing, not only for carmakers, dealers and suppliers, but for the many consumers who may never have been able to afford a new vehicle otherwise and, above all, for the men and women whose jobs were saved by these programs.

Posted by Ulrich Winzen, Chief Analyst, Polk, Essen, Germany (08.20.2009)

Last week, Congress approved and President Obama signed a bill allocating an extra $2 billion for the popular Cash for Clunkers program. The first $1 billion ran out in less than one week, although one should keep in mind that this program was highly anticipated well before it officially went into effect and some OEMs and dealers advanced the government rebate to qualifying customers.

Even with the extra $2 billion available, many experts are forecasting the new funds will run out before Labor Day. In fact, in a recent New York Times article, Polk predicts that the extended Cash for Clunkers program will last just three to five weeks. It is tempting to conclude that these funds will run out quickly given the significantly higher than expected market response to Cash for Clunkers. But, there are a number of factors influencing the length of the program.

First, many transactions were technically completed before the original funds became available. At the same time, it is reasonable to expect some diminishing consumer interest as the novelty effect of the Cash for Clunkers program erodes. On the other hand, many consumers still interested in trading in their clunkers will rush to do so while money for the rebate is still available, thus shortening the amount of time the program will last.

Given the complex and sometimes contradictory factors influencing the length of the program, I wonder how long the additional funds will really last. Polk is guessing three to five weeks. What do you think?

Posted by Dan Zetu, Analytic Consultant, Polk (08.10.2009)

• Consumer polling conducted by Polk before the program began was an early indication of its likely success, with almost two-thirds (64%) of respondents expressing interest in the program. In addition to the savings, improved fuel economy and a desire to help the environment were reasons consumers gave for interest in the program.
• The huge success of similar "scrappage" programs in Europe that the U.S. Cash for Clunkers was modeled after was another early indication this program was going to be big.
• There was so much interest in the program that the government’s CARS website for dealers to register for certification in the program crashed due to the overwhelming volume when automobile dealers across the country began enrolling on June 24th.
• High levels of local, regional and national automotive advertising signaled the industry was ramping up and getting ready for the program well in advance.

The eagerly awaited Cash for Clunkers program is one of the hot topics du jour in the automotive industry. Given the current automotive industry challenges, any additional incentive program could be an instrument in enabling the recovery of auto sales. Although experts in general are skeptical of the real impact on sales trends, many in the industry are wondering how many households qualify for this new program (although the budget cap on the program will make it impossible for everyone who qualifies to participate).

Here at Polk we created a model identifying the households likely to own a vehicle that qualifies for the Cash for Clunkers program. At the same time, independently of the Cash for Clunkers model, we segmented the entire US market into groups based on the type and number of vehicles they own, age and market value of the vehicles, income and ability to pay for a new vehicle (with or without extra incentives). Based on this segmentation and the Cash for Clunkers model, we came up with a rough estimate of the program's market potential: 4 million.

Let me explain how we arrived at that number.

Roughly 11 million households are highly likely to own clunkers. However, not all of these will be able to afford a new vehicle, will be interested in taking advantage of the program or will even be aware of it. Of the 11 million clunker owners, we identified a group (about 6.5 million), that have high income and can easily afford a new car. Most likely, these people keep the clunker as an extra vehicle in their garage. It is hard to tell without further research how many of these households will actually be interested in getting another new vehicle, but a fair estimate is about 3.5 million.

Another segment of 2.5 million clunker owners have relatively low incomes and will probably be challenged in securing funding for acquiring a new vehicle, even though they may actually need one. We estimate conservatively that about 500,000 consumers from this group will actually be able to acquire a new vehicle via the program.

Whether or not the Cash for Clunkers program results in the additional 4 million sales we estimate will depend on a series of factors that are difficult to control. First, the $1 billion budget cap allocated for the program limits severely the number of customers able to take advantage of the program. Even if the budget were unlimited, some households would want to purchase new vehicles that wouldn't qualify due to poor gas mileage. Other consumers will simply not want to incur payments for an extra new vehicle, even if they can afford it, and yet others may not even be aware of the program. Even with those caveats, we believe that the potential of the Cash for Clunkers program is significant.

I was on a web panel last week that addressed how dealers can market to customers and leverage the U.S. "Cash for Clunker" program starting later this month. It's amazing how many questions surfaced about the implementation of this program and the questions that remain in the minds of dealers about what to expect once customers start calling them. The folks at NHTSA (National Highway Traffic Safety Administration) have no small chore to get everyone running a dealership up to speed on this program.

From an automotive marketing view, here are some things dealers can do to prepare and capitalize on the showroom traffic the Cash for Clunkers program will hopefully create:

1. Check in on your past customer base. The $3,500 - $4,500 incentives tied to the Cash for Clunkers program give dealers a perfect reason to reconnect with their past clientele in hopes of building further customer loyalty.
2. Look at the vehicle mix in your local market. Find out what the dominant vehicle age and vehicle segments (e.g., minivan, SUV, small car) are that define your trade area.  And be highly conscious of the domestic and import brand mix in your area. A lot of the qualifying vehicles will be domestic nameplates. 
3. Buy outside marketing lists. At my company, we provide analytically-based targeting tools that help marketers (dealers, OEMs, ad agencies) spend less money on targeting campaigns by using information that's refined to hit the audience they wish to reach. This week, we just launched a targeting model to help find households likely to own a "clunker." 
4. Don't use the word "scrappage" when describing this program to the public in your advertising. The phrase "cash for clunkers" is more common and will result in better web hits from prospective customers. "Scrappage" has been used widely in Europe to describe similar programs, but it doesn't seem to be descriptive enough for the U.S.
5. Make sure you have inventory in stock to enable someone to buy the type of car that fits this Cash for Clunker program. And if you're a dealer who doesn't want to order new units right now (due to inventory and carrying cost concerns), start looking for relevant dealer trades with other stores.
6. Dealers should talk to the OEM marketing reps. I'm aware of several national programs that the automakers are working on to help drive traffic to their dealer network. Find out what is coming, if anything. 
   
7. Don't forget to integrate deals from other incentives/promotions with the Cash for Clunker incentive. 
8. Lastly, use what's fundamentally worked in the past to draw in people who are likely to buy a new vehicle. Remember, this is still about selling a new car or truck, so some of the proven marketing messages and techniques should still be considered when getting the attention of the "clunker" audience. 

This week, President Obama signed the “cash for clunkers” bill.  So let’s talk about the impact this will have on auto sales this year. In case the basics of this bill are foreign to you, it's essentially a cash incentive. The goal is to motivate us to turn in an older vehicle (that has to then be destroyed) and purchase a new one. The government will provide a voucher worth up to $4,500 to help pay for the new set of wheels. And, you have to buy a new vehicle that’s more fuel efficient than the older one you’re turning in. 

How will this affect automotive sales trends?

Obviously, there have been a lot of estimates on how many more auto sales this type of government program will create.  To those hoping the automotive industry challenges facing so many can be put to rest, this legislation is one source of optimism. But, it can only go so far.

One thing to realize is that the funding for this bill was decreased to $1 billion dollars, down from a reported $4 billion in its earlier version.  Given the current details of the cash for clunkers bill and the dynamics of the car market right now, we know the bill can only fund roughly 200,000 additional sales.  While this newly-signed bill won’t make or break the year for any auto manufacturer, it’s a good sign of commitment to help stimulate sales and hopefully add to rebuilding consumer confidence. 

While sales of new cars or trucks are down across the globe, many countries in Western Europe implemented similar legislation earlier this year (aka "scrappage programs").  Between January and May 2009, roughly 500,000 additional passenger vehicles sold due to cash for clunkers programs in various European countries (here's a recent Polk press release on this).  By the time 2009 closes, it’s expected that more than 1.3 million additional sales in that part of the globe will occur. 

This is only one piece of a larger economic reform plan to get the U.S. economy back on its feet.  Selling cars is one part of that formula.  Will it be the single biggest deal benefitting our industry right now? No. But at a local level, it’ll drive traffic into the dealerships...and maybe give a few dealers some much needed cash flow now versus later. Those looking to get a deal on a new car or truck would be smart to see if they qualify...and take the money while it's still available.