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The Potential Impact of Cash for Clunkers 2.0 on the Automotive Industry

DuckerFrontier, April 23, 2020

The Cash for Clunkers (officially known as the Car Allowance Rebate System) initiative rolled out in 2009 under the Obama Administration in response to a deeply troubled 2008 automotive market that required a jolt to get back up and running. The government-issued $4,500.00 voucher was intended to ultimately boost consumer confidence while encouraging consumers to trade in eligible (older, less efficient) vehicles for newer, safer, and more efficient vehicles. The results of the original Cash for Clunkers (CFC) program have faced both praise and criticism; however, the program provided the intended immediate spike in sales with a $3 billion investment stimulating $14 billion in car sales.

The new Cash for Clunkers (CFC 2.0) program is expected to offer over $10 billion in stimulus funding, in turn driving over $50 billion in vehicle sales and over 4 million vehicle SAAR over a 6 month period. The new Cash for Clunkers program does have some requirements for consideration:

  • The vehicle should be produced in accordance with USMCA rules, or a minimum of 60% of the vehicle should be produced in North America
  • Additional incentives for Electric Vehicles (EVs) – commensurate with level vehicle electrification

Unintended Consequences of Cash for Clunkers 2.0

According to several OEMs, Battery Electric Vehicle (BEV) production significantly alters the medium- to long-term labor required at production plants and will negatively impact aftersales services compared to traditional Internal Combustion Vehicle (ICV) production. Although the original 2009 CFC plan proved effective, the price of gasoline exceeded $4 per gallon and demand was for highly efficient and smaller cars (benefiting small, subcompact, and compact vehicle segments). This led OEMs to implement major changes in product portfolios during the second half of the past decade and to request a revision of the EPA standards in 2016. As crude oil long term prices have collapsed (~$1 per gallon at the pump) – we can expect better alignment with the Detroit 3’s (General Motors, Ford and Fiat Chrysler) vehicle line-up and the CAFE/SAFE rules.

Key learning from Europe’s Scrappage Scheme

The 2009 and 2010 economic recession and subsequent vehicle scrappage scheme in Europe, intended to spur short term vehicle purchases, had long-term side effects on the market, natural demand cycles, and OEMs planning and forecasting. Long scrappage scheme programs generate opportunistic and anticipated sales leading to a slower recovery and sometimes a depressed post incentive market. Programs favoring selected vehicles usually create temporary distortions in the demand impacting margins (smaller vehicles) and manufacturing (peak productions for some assembly plants and excess inventory for others).

DuckerFrontier’s automotive and materials experts are closely monitoring the potential impacts of Cash for Clunkers 2.0 on the automotive industry. Below our experts outline some opportunities and challenges resulting from this updated program:

Opportunities:

  • Reduce dealer inventories – opens the door for business. The program creates positive dynamics for consumers to start visiting dealers again while generating consumer confidence
  • The program supports the restarting of production of vehicles (aligned with demand)
  • Per program rules, the belief is that less safe, less efficient, and more polluting vehicles will be replaced by safer, more efficient, and environmentally friendlier alternatives
    • The average vehicle produced and sold in 2019 is expected to have an average CO2 (tailpipe) emission rating of ~340 grams of CO2 / mile, compared with a car that is 15 years old emitting ~450 grams of CO2 / mile
  • The market is experiencing a new need for mobility solutions (new driving habits, evolving needs for mobility) – work from home options can be more compelling and demand, interest, and popularity of electric vehicles can benefit consumers

Challenges:

  • Short term relief programs can lead to longer term implications of mismatched production and demand planning in the medium- and long-term.
  • Opportunistic and anticipated purchases may lead to a delayed recovery
  • This program may create distortions in the demand towards smaller and less profitable specific segments, leading to manufacturing stressors and unexpected investment patterns as it relates to the economy.

DuckerFrontier’s Automotive & Transportation team is at the forefront of key trends impacting the industry. How can we help you deliver the best performance for your business in 2020? Contact us to connect with an industry expert.

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