Once automakers restart new-vehicle production, dealers will face the challenge of coaxing customers back into showrooms. Many industry and government officials believe it will take a shot of economic incentives to make that happen.
Some have even proposed a new Cash for Clunkers program — but not necessarily like the Clunkers event that roiled the retail market in 2009.
“A rebate program would motivate people with creative ways to get them into the showroom — either virtually or by appointment.”
Ray LaHood, former U.S. Secretary of Transportation
"It's a different time," said Ray LaHood, U.S. Secretary of Transportation from 2009 to 2013 under President Barack Obama. "The idea that you would fashion a program where there would be an incentive for people to go back in the showrooms — an incentive for people to buy automobiles — is the real linchpin."
LaHood oversaw the $2.85 billion Cash for Clunkers program — officially named the Car Allowance Rebate System. It gave consumers as much as $4,500 to trade in old gas guzzlers for more fuel-efficient new vehicles. LaHood called the federal scrappage program "wildly popular," resulting in nearly 700,000 old cars being traded in during July and August 2009.
"It was a lifesaver — an economic lifeline to the car industry and to the dealers all over the country," LaHood told Automotive News.
But one devil in the details of a Clunkers reboot? The used-car market.
The 2009 program was great for dealers, said dealer Patrick Primm of Cascade Auto Group in Cuyahoga Falls, Ohio — except that it "decimated the lower-level used-car market."
"At first, it was exciting to have all these deals," Primm recalled of the 2009 program. "But then after a while, we did so many of them, we realized we were destroying perfectly good cars," he said.
The pipeline for used-vehicle inventories experienced a double whammy during that period. As a condition for getting the federal incentive to sell a new vehicle, a dealer was required to turn over the older trade-in to be destroyed, not to circulate into the country's pre-owned pool.
That exacerbated a pipeline problem: The dramatic plunge in new-vehicle sales of 2008-2010 meant millions of new cars and trucks were not being made and not coming into the market. That meant two or three years later, those vehicles would not be showing up on used-vehicle lots.
Clifford Winston, senior fellow in the Brookings Institution's economic studies program
Clifford Winston, a senior fellow in the Brookings Institution's economic studies program, argues Cash for Clunkers was a "classic example of unintended consequences" and a mistake that should not be repeated.
New-vehicle sales from the program mostly were pulled ahead from transactions that eventually would have occurred even without the stimulus, and mostly by high-income earners, Winston added.
"It didn't accomplish any of its intended goals. There was no increase in employment or output. There was very little effect on air quality," he said. "Overall, it turned out just to be a windfall for certain … consumers who would have gotten cars anyway."
LaHood believes Congress should develop a new program that offers rebates to consumers and auto dealers, using lessons learned from the Cash for Clunkers program.
"A rebate program would motivate people to get them into the showroom — either virtually or by appointment," he explained. "This would jump-start the car industry in a very similar way that our program did."
U.S. Rep. Debbie Dingell said any sort of Cash for Clunkers 2.0 or government stimulus package that emerges should have a new name because the auto industry has different needs this time.
"They're looking for liquidity," Dingell, a Michigan Democrat, said of retailers.
Dingell said Congress is putting "every idea out there" for how to reengage the economy and create demand. But dealers will need to look at "new, creative ways to do business" — both short term and long term — as employee and customer safety becomes a top priority, she said.
Any federal program that supports new-vehicle sales should also support the overall auto industry, especially the safety of its workers, said Julie Fream, CEO of the Original Equipment Suppliers Association.
"Safety has to be the overriding objective here as we come up to speed," she said.
The federal government’s $2.85 billion program in July and August 2009 took nearly 700,000 older vehicles off the road and replaced them with more fuel-efficient ones. Customers could get a voucher for $3,500 or $4,500, depending on the difference in fuel economy between their trade-in and new vehicle.
The results:
Source: Brookings Institution
Back in 2009, the American International Automobile Dealers Association met with the auto task force formed by Obama to handle the financial bailout of General Motors and Chrysler. The association argued then that dealers of all brands, including international automakers, were suffering from the market collapse.
The trade association is now calling for the auto sector to unite in drafting a relief package that is "best for the industry and best for customers," CEO Cody Lusk said.
"The dealer body understands there's going to be a need for stimulus. They all did very well, for the most part, under the Cash for Clunkers plan," he said. "But I think we also have to peel the layer of the onion back and see what we're going to need to stimulate demand."
The National Automobile Dealers Association said discussions between the auto sector and the White House on the best way to encourage vehicle sales will be ongoing as the economy recovers.
"Clearly at some point we will want to spark demand through a coordinated strategy to encourage new-vehicle sales," NADA spokesman Jared Allen said. "We're in the early stages of that process."
AutoNation, the country's largest automotive retailer, told Automotive News it supports "all efforts that can bring consumers into dealerships." Other dealers have mixed feelings about the Cash for Clunkers model.
Eve Knudtsen, dealer principal, Knudtsen Chevrolet
Chevrolet dealer Eve Knudtsen of Post Falls, Idaho, recalls it as a "convoluted program" that required customers to trade in nearly new vehicles, which had to be destroyed. She said the emphasis now needs to be on getting people back to work and maintaining employee payroll.
"We can put as many incentives out there as we want, but unless consumers feel reasonably certain that they're going to be able to make their payments, it's going to be tough for them to pull the trigger," Knudtsen said.
Incentives such as deferred payments and 0 percent interest are helping new-vehicle sales at her dealership, she said.
Regardless, a government-funded program could alleviate some consumer fear as the economy tries to come back gradually without triggering a second wave of infections, according to Stephanie Brinley, principal automotive analyst at IHS Markit.
Unlike the Great Recession, the current economic crisis is attached to a pandemic that has yet to be contained.
"Exactly how consumers are going to behave when they come back out of it is going to be difficult to quantify in terms of addressing their fears," Brinley said. In the meantime, automakers and dealers can take steps to try to reduce those fears, such as making online vehicle research and sales easier, she said.
Brian Collie, a managing director and senior partner at Boston Consulting Group, said as long as fear and uncertainty are present, people are going to forgo making big, discretionary purchases such as vehicles — regardless of any incentives.
"It's such an incredibly fluid situation," he said. "We're still in an environment where uncertainty is the descriptor of the day."
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