Author’s note: As federal officials and OEMs consider a program like Cash for Clunkers to help stimulate demand in the retail automotive industry, it’s important for them to understand the a more critical need for our industry—helping move late model used vehicles rather than new vehicles. I thought the following form letter might be useful for dealers to share with their elected officials and OEM representatives to make the case that stimulating demand for late model used vehicles would produce far better financial outcomes for OEMs, dealers and consumers than encouraging new vehicle sales at this time.
Dear (insert name of your OEM or elected representative):
As one of the thousands of retail automobile dealers across America, I appreciate your efforts and enthusiasm to find ways that would help stimulate retail demand and help my business survive the current COVID-19 crisis.
In recent days, there’s been much interest and talk about bringing back a program like 2009’s Cash for Clunkers to help our industry. The discussions underscore an awareness that the auto industry, like so many others across the country, needs outside help to bring our businesses back to some semblance of normal.
But I would ask you to consider a few reasons why a Cash for Clunkers program that provides incentives for consumers to purchase new vehicles would, at the present time, do more harm than good in moving our industry forward. Instead, I would encourage you to consider a program that would address the real problem manufacturers and dealers like me currently face—the millions of late model used vehicles that are sitting unsold at auction facilities, dealerships and inventory storage lots across the country.
Let’s examine the reasons why I believe a concerted and coordinated effort to stimulate demand for late model used vehicles would result in far better financial outcomes for OEMs, dealers and consumers alike.
First, let’s look back at the circumstances that led to the introduction of the Cash for Clunkers program in 2009. Much like today, the financial markets and the economy were in bad shape. The auto industry was no different. Dealers were suffering. Customers weren’t buying cars, and we had an unprecedented pile-up of new vehicle inventory that wasn’t selling. At the time, the Cash for Clunkers program correctly zeroed in on the automotive industry’s primary problem—encouraging consumers to buy the unsold new vehicle inventory and correct a supply/demand imbalance.
But that’s not our primary problem today. Right now, our industry is suffering from an unprecedented, and growing, supply of unsold late model used vehicles. Further, thanks to manufacturer efforts to right-size production levels to demand in recent years and disruptions to factory supply chains and production schedules in recent weeks, we will likely have a shortage of new vehicles as the market returns to normal. Meanwhile, the burgeoning supply of unsold late model used vehicles remains on the balance sheets of OEMs, commercial and rental car fleet companies and dealerships like mine.
Second, we must consider the basic economics of how an unprecedented supply of late model used vehicles accompanied by a lack of retail demand affects the values of this unsold inventory. When you have a lot of vehicles no one wants to buy, their values only diminish. We already know, for example, that wholesale values of vehicles have fallen by an average of 12 percent in recent weeks.
This valuation decline means that anyone with an inventory of unsold late model used vehicle now owns them for more than they are worth in the current market. In short, auto retail stakeholders, like me as a dealer, now face a significant financial loss that effectively came out of nowhere. Even worse, the value of these assets on our balance sheets are likely to experience further erosion as time goes on, and we draw ever closer to the new model year introduction.
Third, the size and scale of this valuation loss will translate to lower residual values going forward—a dynamic that will constrain the ability of OEMs and their captive finance companies to offer attractive lease and other incentive programs that will be necessary to sell new vehicles.
Fourth, even prior to the pandemic, my fellow dealers and I have been selling cars to customers with a sizable amount of negative equity in their current vehicles. It’s now common for new vehicle purchases to include carry-over debt from the vehicles customers currently own and want to trade in. If values for late model used vehicles continue to decline, it will make the negative equity position of many consumers a lot worse and may prevent them from purchasing any vehicle, whether new or used.
It is for these reasons that I believe an incentive or stimulus program to help spur retail demand for late model used vehicles offers a far better course of action in the current environment than a program that would drive more new vehicle sales. If our industry had a program that would stimulate demand for factory-certified late model used vehicles or something similar, it would ultimately provide several important benefits for all stakeholders:
- The program would spur dealers like me to go to auctions and acquire late model vehicles, an injection of wholesale demand that would cause prices and values for the unsold late model inventory to increase.
- As demand for wholesale late model used vehicles and their prices grew, it would mean less financial loss for manufacturers, commercial and rental fleet companies who currently own much of this unsold late model inventory for too much money.
- As manufacturers and others suffered less financial loss on their current late model inventory, future residual values would be stronger. In turn, manufacturers would be better positioned to offer and maintain incentive programs that drive retail sales of new and used vehicles.
- The improvement in wholesale valuations for late model used vehicles, driven by the stimulated demand, would mean less harmful impact to consumers’ current negative equity positions, making them more able to purchase a new or used vehicle.
Beyond these financial considerations, there’s another reason I do not believe a Cash for Clunkers program that supports new vehicle sales would make sense for our industry or our country at this time. If you think back to 2009, the Cash for Clunkers program certainly helped dealers retail more new vehicles. But the program also spurred an unprecedented level of vehicle scrappage. Collectively, our industry trashed tens of thousands of cars. I’m concerned that a similar effort today would make things more difficult for the millions of people who have recently lost their jobs in the pandemic and may need affordable transportation options in the coming weeks and months.
I appreciate this opportunity to share my perspective that another Cash for Clunkers program, in the current moment, does not appear to be the best approach to helping dealers like me, and the automotive industry itself, get back on its feet. Our industry most certainly needs your help to get the retail market moving again. It’s my hope that this assistance comes in the form of a program that will address the auto industry’s current, most-pressing problem—the vast numbers of unsold, late model used vehicles.
Thank you for your consideration.
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