Cash for Clunkers throws some into reverse

By Alex Johnson
|  Thursday, Aug 13, 2009  |  Updated 4:15 PM EDT
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Used Car Dealers not Feeling "Clunkers" Love

AP

Used cars are seen in a dumpster to draw attention to the "Cash for Clunkers" program at Performance Chevrolet in Sacramento, Calif., Saturday, Aug. 1, 2009. On Friday Congress approved an additional $2 billion for the program that provides $3,500 or $4,500 credits to buyers who trade in older, gas guzzling vehicles for more fuel-efficient new cars.

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People keep coming into Sam Ackerman’s car dealership and asking him about the deals under the federal Cash for Clunkers program.

Which normally wouldn’t be a problem, especially after the government last week tripled funds for the program, which offers rebates up to $4,500 for drivers who turn in certain old gas guzzlers and buy a new ride.

Except that Ackerman is sales manager at the Pre-Owned Department at D&E Dodge in Wilmington, N.C. That means he sells used cars.

“Probably 1 out of 3 customers that pull in the lot are asking about it,” he said, but he has no rebates to offer. Only his competitors who sell new vehicles can make a Cash for Clunkers deal.

“Yeah, it’s an unfair advantage they do have,” Ackerman said.

Cash for Clunkers is rolling on after President Barack Obama signed a $2 billion extension for the program last week, and new car dealers say buyers are continuing to flock in for the deals. But at the other end of the market, companies and organizations whose business models are built on used vehicles say they’re hurting badly as Americans who might have come to their doors suddenly find themselves better placed to afford a shiny new car.

It isn’t just dealers, who say their customers are disappearing. It’s also auto parts businesses, which fear that the cost of used parts could skyrocket as clunkers are destroyed rather than sold for parts. And it’s charities, many of which depend on donated cars to raise cash at auctions.

 

Reduced inventory translates into higher prices
For every new vehicle sold under the federal rebate scheme, which began July 24, a used one is turned in. It can’t be resold, because its engine must be destroyed to make sure it doesn’t keep polluting the air.

 

Before Cash for Clunkers, Jerry Frazier, owner of Save-A-Lot Motors in Cairo, Ga., bought most of his cars from local new car dealers, but “the cars I normally buy they are now crushing, so my source of cars is drying up.”

“I think it’s the worst thing we’ve ever done,” he said.

Kelley Blue Book projected last week that the newly expanded Cash for Clunkers plan would take at least 750,000 used autos out of the marketplace — a nearly 5 percent contraction in supply based on 2008 inventories.

 

That’s enough to have “an immense impact,” inflating used car prices and leaving lower-income buyers behind, said Alec Gutierrez, KBB’s senior analyst of vehicle valuation.

With economists projecting inflation of as much as 15 percent in used car prices, dealers say they’re already feeling the impact.

 

Eric Moore, president of Excalibur Auto Group in Kennewick, Wash., said he was seeing sharply reduced inventories at auctions where dealers buy entire lots of used cars.

“The prices at auctions are tremendously higher,” Moore said.

And “if we have to pay more for the used cars,” said Bob Kiassat, owner of Chico Top Imports in Chico, Calif., then “we have to pass it to the customer.”

When Jeff Carlson, owner of Warehouse Auto in Waterloo, Iowa, heard about the program, “my first thought was, what in the heck is the government doing here?” he said.

“There’s folks out there that that is their price range — that used vehicle that’s in that $3,000, $4,000, $5,000 price range,” he said. “All of a sudden, they’re out of the marketplace.”

 

Fewer cars means fewer parts
Taking old cars out of the market doesn’t reduce inventories just for used car buyers and sellers. It also squeezes the supply of auto parts for mechanics and engine-component retailers.

For “the person who can’t afford a new car and they want to rebuild their car, well, we don’t have those [engine] parts to offer them anymore because they’re destroyed,” said Chris Clos, general manager of Abco Fridley Auto Parts in Fridley, Minn., near Minneapolis.

Cash for Clunkers, said Curtis Buss, who sells used parts at Quincy Auto Salvage in Quincy, Ill., is “going to hurt all of them.”

“You’ve got your local shops that rely on used auto parts, and the price of those parts is going to go up just because they’re not out there anymore,” Buss said. “The guy who is out there trying to do it himself is going to pay more because there is less of it to buy.”

The bottom line, said Norman Wright, chief executive of Stadium Auto Parts in Denver, is that the program will most hurt the people who can least afford it: lower-income Americans.

“A lot of low-income people can’t afford any other type of car, and if there’s a shortage of those engines and their vehicles need one, then those people are going to have a hard time finding a recycled engine to get their car back up and running,” Wright said.

A ‘red flag’ for charities
And when those people turn to charities for help, they may not get it.

At Northwest Charity Donation Service in Tenino, Wash., volunteers sell donated used cars to raise money for more than two dozen local public service organizations. Since Cash for Clunkers got under way, donations have fallen by nearly 50 percent, it reported.

Jeanne Jelke, executive director of the Benton-Franklin County Chapter of the American Red Cross in Kennewick, Wash., relies on donated used cars not only to raise money but also to distribute to clients who don’t have transportation.

 

But now, would-be donors are “thinking I might be able to get more money for that at the new car showroom then I can as a tax deduction,” she said.

The Make-a-Wish Foundation sells donated cars to raise money to fulfill the dreams of terminally ill children. At the foundation’s chapter in St. Louis, “when we found out about the program, it was a red flag,” said Krista Goszewski, the local fundraising coordinator.

“That is a lot of potential revenue that could come to our vehicle donation program, and it was kind of scary to hear news like that,” Goszewski said.

End of program eagerly awaited
For many dealers and public service administrators, Cash for Clunkers is a two-edged sword. The program helps a lot of people and businesses, they say, but the damage it does to their interests is hard to accept.

“I understand that people are getting a good deal in the car showroom, and I realize the car manufacturers need the help,” said Capt. Eric Wilkerson, administrator of the Salvation Army in Portland, Ore.

“God bless them,” he said. “But don’t forget about the Salvation Army. We need your help, too.”

For now, dealers and charities say they’re rolling in reverse while they anticipate the end of the program.

“We are just trying to keep our head above the water,” said Kiassat of Chico Top Imports. “We keep our fingers crossed, hope the economy returns, get more business, keep this place open.”

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