Now this may come as quite a shock if you’ve been living in an isolation chamber for the better part of your adult life, but the public is being fed a constant stream of lies from the government, media, and auto industry itself about the “great success” of the cash for clunkers program, formally the Car Allowance Rebate System (CARS).    The sad state of our society is no better illustrated than by the morally and intellectually bankrupt continuation of this tragically ill-conceived and ill-timed “stimulus” program, other than the lack of resistance by the experts in this industry who know better (I wouldn’t expect those in government or the media to have a clue).   On net, there are simply no positives from this program, save an insignificant improvement in the average fuel consumption ratings of the national population of motor vehicles – the actual impact on fuel consumed is much less clear for many reasons. 

  Of course if you’re a direct beneficiary of such government largesse, it’s wonderful!  The litany of supporting sound bites to prove the point is endless; perhaps my favorites have come from AutoNation CEO Mike Jackson, whose comments include, “This program is achieving all the government's goals, so how can you shut it down?"  (Oh, really?  The government’s goals?  Just what, pray tell would those be? What about the public’s goals?), and my favorite non sequitur of the month, “This is the kind of buyer that comes to market once in a decade. They buy these things and keep them forever," Jackson told Reuters. "It really is incremental business and that's why it's a brilliantly conceived stimulus program."  Um, Mike if these folks are those who buy once in a decade, then they don’t represent “incremental” sales – this handout just pulled their purchase forward from some time in the next 10 years, right?

  To understand why this program is a travesty, we’ll need to put discounting (rebates) in the auto industry in the proper context, and (forgive me) do some math.

  Historically, and by that I mean 25-30 years ago, rebates were temporary tactics employed by individual automakers on specific models primarily to clear excess inventory as a result of poor demand planning or regional/local imbalances in dealer stock.  The industry as a whole, led by the domestics, guided only by short-term results, effectively decided that the short term cost of lowering prices was more acceptable than the cost of shuttering production, and collectively refused to accept sales levels as dictated by the market – to Hell with any thought of the long term impact.  As you may recall from Econ 101, ultimately higher sales (actually a higher rate of sales) can only be achieved from (you guessed it) lower prices; thus the transition of rebates from a temporary inventory management tactic to a systemic market strategy.  The march toward insolvency really began picking up pace in the late 1980’s and through the 1990’s, as those clever folks running these firms concocted a multitude of ways to discount today and defer realizing those costs until sometime later, including subsidized leasing/ financing and dumping vehicles in rental fleets.

  During this period, the cost of sales programs (which sounds much more fiscally responsible than discounting) soared, obviously, but their market impact waned.   In my early years at Hyundai, slapping an extra $250 incentive on a product resulted in a 10% improvement in sales (no, really!), however by the end of the 1990’s an incentive increase of over $1000 was required to have the same impact if any at all. 

  Calculating the return on incentive spending is where it gets ugly.  In an ideal world, from a marketer/seller’s POV, price discrimination would be possible, and you’d only have to offer a lower price to that incremental buyer – that 10% extra expected from a rebate.  At the retail level, this dynamic is in play, and the reason why not all buyers get the same price at the same dealership – caveat emptor there, baby!  In that case, it would make good economic sense to discount that last unit down to the point where it broke even on the basis of variable cost.  Unfortunately, that’s not the way it works with manufacturer discounting– the rebate applies to ALL of the sales that period, not just the incremental 10% of buyers who’d negotiated more stridently.

  Consider a hypothetical (but not unrealistic) example:  If sales of a given model priced at $10,000 were 5000 per month without discounting, a $1000 rebate (a 10% discount) might boost that total to 5500 (a 10% sales increase).   If a product’s profit margin is 20%, you can imagine the idea that a 10% discount would still make financial sense.  Unfortunately, the cost of the rebate that month isn’t $1000 multiplied by the incremental sales (500), its $1000 multiplied by the TOTAL sales that month (5500).  Thus the cost of this $1000 rebate isn’t $0.5M (500 units multiplied by $1000), it’s $5.5M.  Calculating the return on that “investment” (which is another classic case of self-delusional-auto exec-speak), therefore, requires dividing the total cost by the incremental (not total) number of vehicles sold; in this hypothetical case the “incremental cost per incremental unit sold” – the metric that matters -- is therefore $11,000.   Think about that; in this hypothetical case, five hundred $10,000 cars were sold at a cost of $11,000 each!

  It’s not as if these metrics aren’t understood by the management (or at least some of them) at car companies, they are.  The justification for such tactics, however, can be understood, if not condoned, in the context of competition, since those incremental 500 sales “would have gone to a competitor”.  At the risk of stating the obvious, if a high rebate strategy were viable, Chrysler, Kia, Suzuki, etc. would rule the world – how’d that work out?  Even for a single competitor in a single segment it’s difficult to justify such tactics, but more to the point, the impact of rebates or discounting in general at the market level are ZERO – not horrible as in our example, but ZERO.  These rebates/incentives don’t “increase” share, since “share” for the market is 100% forever and ever.  So where did Mr. Jackson’s “incremental business” come from?  The future!  On net, over time, no more people will buy any more cars than if this silly program hadn’t existed.  Sorry, but that’s the truth.  It’s what we analysts refer to as “pull-ahead”, and the unavoidable consequence of pull-ahead is payback.  Of course borrowing from the future is “business as usual” in Washington, Sacramento, and Detroit, so hardly a shock that this economic gerrymandering is proffered as “doing something positive”.

  OK, let’s look at this CARS program specifically; how’s the math work on that first $1B?  Well if ignore the issue of timing and “believe” (insert Kool-Aid here) that there were “incremental” sales in July due to CARS, we face the following variables in our “incremental cost per incremental sale” calculation:

  Estimates vary widely, but let’s assume for the sake of argument that the incremental sales in July due to CARS were 100,000, which is rather optimistic given the increase in annual sales rate in July to 10.1M compared to that in June of 9.7M.  Now unlike the case in the example, not all car buyers in July received the discount, only, it would seem 250,000 or so did (which would be consistent with the claim that the entire $1B was consumed in July), therefore the numbers are a bit fuzzy, but obviously the entire $1B was being consumed, thus the emergency move to extend it for another $2B ASAP!

  So here’s the math: $1,000,000,000 ÷ 100,000 incremental sales yields an “incremental cost per incremental sale” of $10,000.  Congrats, taxpayer, you just paid $10,000 for each “incremental” sale – if this sounds like a brilliant move, you qualify for senior sales management at any automaker.  In fact, as discussed above, none of these sales were truly incremental, so really, Mr. And Mrs. Taxpayer, your deal was far worse.  How is it that the maximum rebate was $4,500, yet this calculation yields a cost of $10,000?  Simple, 150,000 buyers who would have purchased a vehicle anyway received rebates.  For those fortunate folks, this was nothing but manna from heaven (or it’s representative here on earth, our beloved racist-in-chief Obama).  Is this a learning opportunity?

  As is always the case, when Peter’s paid by robbing Paul, Peter (the now nationalized auto industry) and his minions (all of us who try desperately to make an honest day’s pay in it) are in full support of living on some else’s nickel.   Meanwhile, Paul (the few of us remaining  who actually are required to pay taxes and those of you who don’t understand that inflation is the hidden tax on the masses), reeling from much larger and more overt attacks on his wealth, like health care reform (oh, excuse me – in response to the public outcry,  it’s now referred to as “health insurance reform”), the war on drugs, profligate public spending at the state, county and local levels, hasn’t the breath to raise a stink over something that their elected officials and industry “experts” assure him is a great boon to one and all.

  Now if they’d just let the original program expire, I might have a slightly different opinion of CARS.  As referenced earlier, a temporary price decrease, funded by whatever means, will help clear excess inventory, of which there was (key word, was) plenty.  In our difficult economic environment, a bit of shifting funds from the future to today is not only acceptable, it’s probably optimal.   The problem is that now the “big problem” dealers have (other than dealing with the byzantine requirements for obtaining these funds) is “not enough inventory”.  If they’d have just stopped now, I’d have said the $1B might have been worth it to clean up the mess.  Now, however, it’s clear that the real intent is to “stimulate demand” (you know, by systemically lowering the cost of supply via taxpayer supported subsidization) and keep those factories churning out vehicles the market would otherwise not demand.  Now facing increasing evidence that the recession is at the trough (the stock market typically leads the recession by 6-9 months, while employment lags by 6-9 months) and the need for economic stimulus has passed, the truth is apparent -- the fix is in; the new $2B for CARS is nothing more than an on-going jobs program.  Just when, would you guess, the lead players in this farce will deem it a good time to let the program die and allow sales to fall?  (Hint: never)  We’re not completely done with the central planning committee’s take-over of this critical sector of the economy, but we’re well on our way, and the pleas for continuation of this industry-level subsidization will continue until such schemes are “normal” and no longer newsworthy.

  Please note, the following “issues” with CARS that I’m not even addressing:

·         A rather staggering percentage of this “incremental” demand will be supplied by the good folks in Japan, Korea, Mexico and Canada – your tax dollars hard at work.

·         Fraud over the disposal requirements will be rampant – more pocket-lining for dealers, scrap yard owners, etc. – you don’t really believe dealers will destroy those engines do you?  If so, I have a bridge for sale – it’s in Brooklyn, and I’ll make you quite a deal.  Heck, for $50 I’ll get you a certificate “proving” you poured exactly ˝ gallon of sodium silicate in the case and the sucker seized up nicely! 

·         Vehicle repair shops, quite logically given how bereft of integrity our political system has become, are howling about the lost business this program is creating for them (no more clunkers to fix), and (shocking!) requesting a bail-out for themselves!

And to think they put Madoff in jail for just such a scheme!