Friday, May 15, 2009

Happy If You Buy a New Car, You're Crazy Month

Perhaps I'm slow, but I just realized that we are now officially halfway through with If You Buy a New Car, You're Crazy month. You're crazy if you buy a new car in May 2009 because, chances are, you can get a deal in June that's enough better than May that you can pay to rent a car the entire month with the difference.

There are many reasons why. Chrysler is in Chapter 11. GM is just a couple weeks away. Between GM and Chrysler, almost 2,000 dealers with 120 days of inventory apiece will be losing their franchises and dumping their cars on the market. If the average car dealer sells 785 cars per year, let's say these "underperforming" dealers sell 500. Math time: 120/365 * 500 * 2000 = 328,767 extra cars stuffing the channels, and that's just the new cars. Many of these dealers will be liquidating their used cars also, so you can double this figure.

The economic malaise continues, foreclosures are still going up. Money is still tight. Buyer resistance due to bankruptcies and lack of local dealer support thanks to dealer reductions should reduce demand for Chrysler and GM products to the point where even more incentives are necessary to drive enough demand to support minimal operations.

Add to this uncertainty over the cash for clunkers law. If you are looking to upgrade your old car, you have every reason to wait until Congress passes a cash for clunkers law, otherwise you are throwing away $3,500 to $4,500.

All of these factors suggest that May sales could be shockingly low, significantly below the 9-10 million annual rate that has prevailed the past few months.

I hope I'm wrong, but I can imagine sales over the next couple months at an annual rate of 7-8 million units/year. If this ends up being true, then summer plant shutdowns will last well into fall. I don't have all the answers, but I have one suggestion: decouple the cash for clunkers bill. You need to separate the distinct policy goals of stimulating the auto market and that of getting inefficient polluting cars off the street. Give buyers a tax-credit that is based upon the EPA rating of the car, regardless of whether you buy it before or after the credit is in place, and have a separate program that rewards vehicle owners if they scrap a clunker. By making it clear that the incentives will be paid whenever the vehicle is bought/scrapped this year regardless of the enactment date of the new legislation, you will reduce the number of fence-sitters.

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