'Cash for clunkers' roars to life, amidst allegations of waste

Update: The "Cash for Clunkers" program was suspended late today when the Federal government feared the program would run out of money within days.

Ford Motors says the just-launched federal "cash for clunkers" program, launched this week, is already revving auto sales. At a press conference, Ken Czubay, Ford's U.S. sales and marketing chief, called the program "a huge success." Ford says new-car purchases jumped in July, thanks in part to "cash for clunkers," and for the first time this year, are on track to eclipse an annual threshold of 10 million. U.S. automakers even feel the government should pour more money into the program. According to Autoblog, dealers have already requested $95 million in reimbursement money from Uncle Same.

Not so fast, say some industry experts. According to auto-ratings and research firm Edmunds, the program is an expensive, inefficient way to stimulate the economy and reduce dependence on foreign oil. Car buyers trade in 200,000 vehicles worth less than $4,500 every quarter on average, according to Edmunds; the program's $1 billion budget will fund at most 250,000 trade-ins during that timeframe. This represents a real gain of only 50,000 vehicles and a cost to taxpayers of roughly $20,000 per extra sale. "We are paying consumers to do something most would do anyway," says Jeremy Anwyl, CEO of Edmunds.com.
Should funding for the program be increased, or dollar values available for trade-ins be raised, "cash for clunkers" might start attracting more owners who otherwise would not have traded in their cars for newer vehicles. But that could be an expensive proposition, resulting in billions dollars more in taxpayer expenses.

Then there's the question of whether the program is actually as green as proponents tout. For sure, putting more fuel-efficient vehicles on the road cuts reliance on foreign oil and cuts greenhouse gas emissions, as newer models almost always have better emissions standards than those "cash for clunkers" targets. But the program fails to account for the carbon expended during the production of the new and old vehicles, as well as the carbon footprint output for gathering the necessary materials (iron, aluminum, plastics). In terms of a total carbon reduction strategy, this program may actually not be a clear winner.

Lastly, the program mandates the destruction of all parts of the vehicle for recycling purposes. But many companies that deal in older cars strip out engines and transmission for reconstruction or sales for parts. This textbook conservation somehow got left out of the "cash for clunkers" bill, an omission that has both environmentalists and metal recyclers crying foul.

Another potential downside uncovered by Edmunds is that, on aggregate, Japanese carmakers stand to gain more sales on a percentage basis than do U.S. carmakers. That's because Japanese car makers offer more new vehicle models that conform to the fuel standards required for the trade-in program. Judging from the lively forum boards at Edmunds.com, the issue is still stirring up plenty of controversy, including some allegations that trade-in candidates are getting turned down by the government due to technicalities on titles and insurance papers.

For auto company investors, however, the implications of "cash for clunkers" are already clear. Ford Motors (F) shares rose by more than five percent today on the news. Honda (HMC), which beat earnings last week and is known for its fuel-effiicient cars, stands to gain significant sales volume from the program. Its shares were also up five percent on the news. So look for more "cash for clunkers" updates to keep driving share prices higher for the battered car sector.
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