Cash for Clunkers No Big Deal for Automakers

Moody’s comments on the US govt’s “Cash for Clunkers” program, known in genteel circles as the Car Allowance Rebate System (CARS).  

Essentially, Moody’s feels that the program has given car companies a helpful boost, but lacked an impact significant enough to affect ratings.  As much as 60% of such sales are estimated by us to be to consumers who previously had not intended to buy.  Generally, Asian manufacturers appear to have achieved greater benefits from CARS than their Big 3 counterparts

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The U.S. government’s Cash for Clunkers program has provided a helpful boost for automakers, but the impact is not significant enough to affect ratings.
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We estimate that as much as 60% of vehicle sales under the program represented “stimulated demand” from consumers who were not otherwise intending to buy.
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While the program pulled forward some sales that would have occurred later, we are maintaining our base-case scenario of an 11.5 million unit SAAR for 2010.
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The Detroit-3 automakers’ relatively weak showing in vehicle sales under the program underscores the continued vulnerability of their brands.
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Asian manufacturers generally achieved greater benefits from the program and could be better positioned to increase production at their North American transplant facilities.

The nearly 700,000 vehicles sold under the U.S. government’s Car Allowance Rebate System (CARS), better known as “Cash for Clunkers,” provided a quick boost for automakers who have endured a protracted period of depressed sales volumes. We believe more than half of the sales activity represented “stimulated demand” from consumers who were not otherwise intending to purchase a new car, as opposed to a mere acceleration of sales that would have happened in the near future anyway.
Nonetheless, the positive credit impact of the program is minor and it will not affect automaker ratings. Moreover, the Big-3 Detroit automakers captured only 39% of the vehicle sales under the program, underscoring the continued vulnerability of their brands and the need for product reinvestment. Rating upgrades for U.S. automakers will only come when they can generate positive earnings and cash flow supported by stronger market acceptance of their new car and crossover vehicle offerings.
One consideration in the ratings of auto OEMs and their suppliers is the degree to which the program stimulated new vehicle demand that would not have occurred otherwise, as opposed to simply pulling forward purchases that would have taken place during coming quarters. Based on anecdotal information, our current estimate is that as many as 400,000 units, or 60% of the CARS-related sales, represented “stimulated demand” that would not have occurred in the absence of the program. Assuming an average transaction price of $15,000, vehicles sold under the CARS program would have generated about $10 billion of revenue for the industry, with about $6 billion representing “stimulated demand”. When spread across the universe of auto OEMs, this revenue boost, although constructive, will have only modest impact on the financial performance of any individual automaker.
For the Big 3, a troublesome observation is that eight of the ten top-selling vehicles under the program were from Japanese or Korean manufacturers. The Ford Focus and Ford Escape (four-wheel-drive versions) were the only Big-3 vehicles to make the top 10 list. Looked at another way, the Big-3 manufacturers sold only 39% of the vehicles under the program, well short of their 45% share of all vehicle sales through the first seven months of the year. Asian manufacturers were the big winners, each selling more under the program than their year-to-date market share: Toyota (19% of CARS sales vs. 16% YTD share) Honda (13% vs. 11%), Nissan (9% vs. 7%), and Hyundai/Kia (11% vs. 7%). This result likely stems from the historic product focus of the Big-3 on larger cars and trucks; the Korean and Japanese manufacturers offered a much richer portfolio of vehicles that were attractive to consumers who were eligible for the program rebates.
In keeping with the program’s orientation toward more fuel-efficient vehicles, approximately 60% of the vehicles purchased were passenger cars while more than 80% of the vehicles traded-in were trucks. The requirement that trade-in vehicles be permanently removed from the road suggests that the disproportionate trade-in of trucks will reduce the inventory of used trucks available for sale in the market, which might otherwise have posed a further drag on used-truck values over the coming months.
The program is expected to help reduce the inventory of unsold vehicles on dealer lots, and thereby support increased rates of new vehicle production in coming months. As of July 1 (before the kickoff of the program) total U.S. car and truck inventories stood at about 1.8 million units, representing about 64 days of supply. Ford, Toyota, Honda and Nissan were at or slightly below the industry statistic with supply of about 57, 47, 64, and 58 days, respectively. But GM and Chrysler were longer on new vehicles at 82 and 71 days, respectively. To the extent that Toyota, Honda and Nissan had leaner inventories at the start of the program and achieved a share of sales under the program than exceeded their normal market share, they could be best positioned to consider increasing North American vehicle production rates over the coming months. GM and Chrysler, with higher inventories and under-achieving their normal share of market under the program, will likely need to continue to work through their elevated inventory levels ahead of meaningful production increases.

The 690,114 vehicles sold in the roughly four weeks that the program ran should help boost the Seasonally Adjusted Annualized Rate (SAAR) of vehicle sales above 10 million units during the second half of 2009, after being mired in the 9 million unit range through the first six months of the year. This level of sales is still well below the estimated annual scrap rate of approximately 12.5 million vehicles in the U.S. market, and further improvement in the SAAR should occur as the economy improves. As a result of the program, SAAR for 2009 will likely be in the range of 10.0 million to 10.5 million units. Despite the possible pull-forward of some sales into 2009 from 2010, we are maintaining our base-case scenario of an 11.5 million unit SAAR for 2010.