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Cash for Clunkers

September 23rd, 2009 No comments

By now the Cash for Clunkers program is well behind us. Before the chaos of this financial crisis, I had never thought that the government would introduce such a program, and I’m not sure I’ll ever see another one like it in my remaining years. Given that, I’m glad that we (specifically, my parents) were able to take advantage of the program. Based on my experience, a few thoughts:

The government’s objective was the lift vehicle sales; there’s no doubt that they were successful. About 700,000 vehicles were sold under the program, resulting in a total of $2.87 billion paid out by the government. In addition to this, we should add the cost of processing the applications and any additional infrastructure needed to execute the program. The cost still comes in under the $3 billion the government had budgeted. This was a great thing for car dealers, for people who were able to take advantage of the program, and for the auto industry in general (production was ramped up and thousands of people were put back to work). However, my concern is about the short-lived nature of the program. I’m afraid that in the books of history, this will be but a blip. Now that the program is finished, we still have extremely high unemployment, we still have lack of desire for American cars, and we still have no evidence of improved American cars (in terms of quality and reliability). So, what will happen to the auto industry and all the workers who were put back to work over the next six months? I hate to say it, but it isn’t looking pretty – auto sales are down again, and I feel like it’s only a matter of time before production stops again. We need a more permanent solution to this problem…

Buying a car through the Cash for Clunkers program was quite an experience. Firstly, finding a car was an issue. Many dealer lots were empty and inventory was scarce. Dealers couldn’t really get cars from other dealers since the problem was systematic. We pulled the trigger pretty quickly – I spent a couple of days reviewing candidate cars, did my usual email blitz, and then ended up deciding where to go. We bought on the Saturday of the final weekend (the program was to end on Monday and Illinois law requires dealers to be closed on Sunday, so we effectively bought on the last day of the program). We visited two dealerships and I’d never seen dealerships so busy. Both dealerships were swarming with people – in the showrooms, on the lots, and in the tiny cubes doing paperwork. Sales people were juggling 4-5 deals at a time. Normally a sales person is asking what they can help you with within minutes of your entering a car dealership. Now you could be looking at a car or trying to get someone’s attention for over a half an hour before you finally got to talk to someone. It was taking about 5 hours to get a customer from agreeing on a price to out the door with a detailed and inspected vehicle (when normally it shouldn’t take much more than an hour or two). I asked the sales guy at the dealership what time they close and how their day yesterday went. He told me that the were supposed to close at 9pm the previous day (a Friday), but couldn’t. They had new customers walking in at 8:55, and ended up staying at the dealership until 1am. They returned to work at 5pm the following day. There was an immense buzz and excitement in the dealerships – something I’d never seen before, and unfortunately am not likely to see in the near future.

The Cash for Clunkers program created interesting distortions in the auto industry. Prior to the program dealers would do anything to get a car off the lot. In addition to rebates, the dealers were willing to pass along any marketing incentives they were given by the manufacturer, as well as part of any volume discounts they got. Basically, if they could make a couple of hundred dollars on a deal (or less!), they’d sell you the car. Heck, it was difficult to understand the quotes you’d get for a car – they’d be below the invoice less all available discounts – a price that just made no sense! As far as choice goes – you could get almost any color with any options – there was so much inventory either on the lot or with nearby dealers that you got whatever you wanted. After the program, things couldn’t be any more different. Cars were scarce – the only color available at all the Chicagoland Honda dealerships we spoke to but one was black. You’d be lucky if you could get pricing any lower than $50 below MSRP or so (I even received a couple of quotes OVER MSRP!). From an economics point of view the government incentive created a surplus for the consumer. However, much of that surplus was consumed by the dealers. As incentives disappeared and demand went up, prices went up by thousands. Of the $3,500 or $4,500 the government gave you, it wasn’t unusual for the dealership to take more than half (as a result of the higher prices). At the end of the day, this gives a double bonus to the dealers, and only a slight incentive to consumers. Dealers win because they reduce inventory and get MSRP for the vehicles sold. Consumers are told they’re getting $3,500 or $4,500, but in reality are getting much less since they paid much more for the vehicle than they would have paid before or after the program.

Another interesting dimension of the program is that the government didn’t put any restrictions on re-selling vehicles bought under Cash for Clunkers. What prevents someone from buying a new car at a steep discount and then turning around and selling it? Granted that after factoring in taxes and the dealerships’ higher prices this idea isn’t too lucrative, but depending on the situation (getting the full $4,500 and buying one of the less popular vehicles), one could make $1,000 or more doing this. Not preventing this from happening results in car prices (both new and used) falling (since there would be several new clunkers cars hitting the used market with less than 1,000 miles). Practically this may not be doable for most people since they’d lose the use of the vehicle (i.e. if I used my clunker to get to work everyday and then traded it for a new car, I can’t exactly sell my new car since I will no longer be able to get to work!), but I do find it interesting that the government didn’t limit this behavior.

Finally, one unfortunate side effect of this program is the cost to people who were in the market to buy a vehicle but don’t have a clunker to trade in. Because of the spike in demand, car prices shot up. If you had a clunker to trade, that was fine since the government rebate more than accounted for the increase in prices. However, if you didn’t, that $13,000 car you were looking at just jumped to $16,000 with no recourse for you. If you can delay your purchase until the program is over, inventory is sufficiently replenished, and demand has slowed again, you may be able to buy that car for $13,000 again. However, hopefully manufacturers learn from their mistakes and don’t create so much supply this time, keeping prices high. Even if prices to fall to the pre-clunkers level, the annoyance and inconvenience of not being able to buy for months is still significant.

I’m glad that I was able to be involved in a Cash for Clunkers transaction – it was great to see a buzz in dealerships that I’d never seen before. Getting $4,500 for our old van (which was probably worth no more than $500) didn’t hurt either. However, I’m not sure that in the long term the program will be as effective as the administration had hoped…

Categories: Economics Tags: , ,

Battle of the minivans: 09 Oydssey vs. 09 Sienna

March 25th, 2009 1 comment

We recently purchased a new minivan to replace our 15-year old van, and so I thought I’d share some of my thoughts on the top two contenders for us: the 2009 Honda Odyssey and the 2009 Toyota Sienna. Hopefully these notes will provide useful insight to someone else who may be considering a similar purchase.

The Honda Odyssey and Toyota Sienna are widely considered the top two minivans in the U.S. There were a few features we (okay, fine, I – the rest of the family isn’t so into car gadgets) were looking for: three-zone climate control, navigation, rear entertainment system, and 8-passenger seating. Furthermore, the vehicle is to be used mostly for family driving and so comfort was preferrable over handling. To be perfectly honest, after the two test drives I wasn’t too excited about either van, which was a surprise for me since I’d heard so many good things. Don’t get me wrong – they’re both fine vehicles, it’s just that neither is perfect for what we were looking for (and, yes, I suppose there is no such thing as the perfect vehicle). Here are my thoughts:

Odyssey:

  1. At the trim level we’re interested in (EX-L R/N or XLE EVP #4), the Odyssey allows for 8-passengers. We have a large family and so an 8-passenger van is a must for us. I’m surprised that Toyota offers an 8-passenger for some trims (CE and LE), but not for the higher trims. That seems pretty stupid to me.
  2. There’s more legroom and headroom in the 3rd row. I’m 6′ tall and thought I’d sit in the back of both vans to get a feel for it. In the Sienna my knees where pressed against the 2nd row seat back, which was uncomfortable (though I believe the second row seats do roll forward, which may have helped a bit). Also, the back of my head would keep touching the roofliner towards the back of the van. The Sienna definitely has a larger storage space behind the 3rd row, but I’m afraid it comes by moving the third row forward, costing you leg room there. The Odyssey was much more comfortable in this regard.
  3. The RES is more flush with the roofliner so you don’t bang your head. Both my wife and I banged out heads on the RES in the Sienna. It sits lower than that of the Ody. My guess is that this is because in the Sienna the actual DVD player and screen are mounted in the roof whereas in the Ody the DVD player is up front with just the screen in the back.
  4. Quieter acceleration in the Ody. Yes everyone raves about the Sienna being quieter, but in acceleration it was notable louder than the Ody. In fact, I believe Car and Driver also found this to be true.
  5. Bigger NAV screen in the Ody than in the Sienna. The two main reasons for me to get a factor NAV is the integration with other car functions and the larger screen (relative to a hand held). So, the bigger screen in the Ody is great.

Sienna:

  1. The ride in the back seat is MUCH more tolerable than the Ody. The ody was much more bumpy in the back, and also caused me to slide around more while back there. This, in my opinion, is a direct result of the stiffer suspension that allows the Ody to handle better (though the Sienna handled just fine for our purposes – the difference is good vs better, not bad vs good). Since we want a comfortable family mover, this is my biggest concern with the Ody.
  2. Features: for about the same price, the Sienna has all the features of the Ody plus some, like: auto on/off headlights (come on now Honda, how can you not include this. Do I really have to pay $40K to get this basic feature). Trip computer – miles to empty, MPG, etc (this is the most frustrating thing of all from a feature perspective – Honda requires you to pay $40K for a touring to get a feature that should be included in all models from the LX up! This is probably stupider than Toyota’s not having an 8th seat in all trims!!). Finally, sonar – the comparable Sienna has the corner and rear proximity sensors that you don’t get on the Ody unless you get a Touring.From a feature perspective, the Sienna hands down wins
  3. This is purely subjective, but I thought the Sienna had a better navigation system. First off, I fully acknowledge the frustrating inability to use it while moving – no argument there. It’s the same way in my Lexus, and I hate it (well, I do the 5-key bypass, but it’s still way worse than just being able to use it when I’m moving). However, I can get around this by getting a hybrid disk. So, looking past that, I thought the Sienna system was better for a few reasons: 1) the resolution and color depth seem better – the Honda looked grey and grainy to me compared to the Sienna. 2) the most important is that the POI search on the Toyota systems seems much better than Honda. I often find that I know the name of the place I’m looking for, and need directions to the nearest one. For instance, the nearest Steak n Shake. I tried to search for places by name in the Honda, entered Steak n Shake and was presented with a couple of options, all more than 300 miles away (I know there are some closer than that). I then tried the same for a Baskin Robbins and was presented the directions for one that’s in Canada! The dealer sat in the car with me the whole time and admitted that he didn’t think I could search by the name of the place – just by category (either that, or he didn’t know how to – he also insisted that the Ody had a 255HP engine, which was wrong). It could just be that I need to play with it some more, but after fumbling with it for over 15 minutes, we just weren’t able to get it.

After MUCH consideration we decided to go with the Odyssey. An 8-passenger Sienna XLE with package #4 would have been the perfect vehicle, but they just don’t make that vehicle. We also ended up dropping the navigation and rear entertainment system from the van. I disliked the Honda system so much that I decided that I’ll install an aftermarket system in the van myself this summer. As far as rear entertainment – as we thought about it more we realized that the kids will get enough television at home – we don’t want to give them more in the car…

Categories: Life Tags: