Obama to auto dealers – hey buddy, can you spare a couple of billion?
August 19, 2009
Clearly, Obama and the vast majority of his team have never been responsible for the operation and management of a private company. Take for example the cash-for-clunkers program. One day on a Tuesday our fearless leaders announce an idea (not a plan) to give Americans $4500 for each ‘clunker’ they exchange for a new qualifying car. Sounds like a great idea? Not so fast.
Turns out our economy has been slowly improving (Obama’s words), but in the midst of this modest recovery we implement a plan that will accelerate car purchases by bribing Americans. This is bad for a number of reasons including:
- reduced inventories, creating shortages of new cars (increasing cost for buyers)
- shortages of new GM cars pushed buyers to foreign models (reducing value GM – owned by the taxpayers)
- used cars typically available on the secondary market are being destroyed, increasing the cost of used cars (increasing cost for buyers)
- GM, Chrysler and Ford have had to increase production, but once the program has ended they will, again, be forced to cut production (increasing cost for buyers)
- The spike in sales will result in a slump sometime early next year – likely spooking the market (perhaps causing credit markets to tighten again)
The bigger problem is for the thousands of small business owners (i.e. car dealers) who operate on very small margins. The dealer nets around $1,300 gross profit per new car. This is just enough to cover the rent, electricity, insurance and sales commission. In the past the dealer would then turn around and sell the used car for a much higher gross profit – closer to $4,000 per used car (where the real profit in the transaction was). In the cash for clunkers program the used cars are destroyed. Ouch, no profit. This means the dealer has to make a profit somewhere – and that place is usually in the F&I department selling stuff like GAP, Dent&Ding, Rim insurance and VSCs. So what is the big deal? The big deal is that under the cash for clunkers program the dealer (a small business guy operating on thin margins) is forced to loan the federal government $4,500 – $4,500 he doesn’t have (especially since he can’t resell the trade).
This wouldn’t be a huge problem for most dealers if the federal government would actually send them the money. Guess what. They aren’t. The administration is telling dealers to calm down – they will get their money eventually. Eventually? Before or after they go bankrupt? Cash flow is king in business – small and large. With credit tight and margins that are slim it is the difference between life and death for a business.
How many of the ‘clunkers’ have the dealers been reimbursed for? According to the Automobile Dealers Association less than 2% of the cars turned in have been paid for by the federal government. Auto dealers have in effect, loaned the federal government almost $2 billion – do you think they have $2 billion to lend? Not on your life. What are dealers doing? To avoid going out of business they are having to pull out of the program. Half of the dealers in New York (hundreds of dealers) have left the program according to Dan Srtumpf an auto writer for the AP.
Obama and Pelosi are not bad people, they just don’t understand how businesses operate. And they want to start their own health insurance company…
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Alex where was your analysis of the cash for clunkers program before it got enacted? While theres no defending the government paying its bills late, there is so much wrong with the cash for clunkers program, in hindsight, it should never have been launched with the T&Cs that it did.
However, as they say, hindsight is a wonderful thing, especially when you are looking back at somebody else’s mess.
And what does this have to do with running a business? Are you suggesting that there are no large business who spin out their payment cycles because they can’t afford, or don’t want to pay their bills on time? Must be a nice world up in that rarefied atmosphere…
Face it, the Obama administration rushed this one through and made too many compromises to bow to businesses, and lobbysts of business, not because they’ve never run a business.
Comment by Mark Cathcart — August 19, 2009 @ 2:29 pm
@mark I cite a number of reason – based on general economics that would indicate to anyone that the cash-for-clunkers program would be a bad idea. I wrote a number of posts (see below) about the program. I really must disagree with you. These people have NEVER run businesses and as a result they think government is the answer to every problem. Not selling enough cars – pay people to buy cars. Insurance doesn’t cover enough people – start a new insurance company. I don’t think the government should be buying cars for anyone.
My kids are going to pay for these ‘clunkers’ sometime in the near future. Too bad they didn’t get anything for their money. If we want to stimulate our economy why not build capital assets – oh, I don’t know, how about a bunch of nuclear power plants? These would produce power for the next fifty years, reduce global warming, reduce our dependence on foreign oil and make my electric car run emission free! Buy assets, don’t buy liabilities. Business people know this – Obama doesn’t.
Post: Cash-4-Clunkers = More Japanese Car Sales!
http://dallas.conservativemuse.com/2009/08/18/cash-for-clunkers-japanese-car-sales/
Post: Cash for Clunker is like Katrina.
http://dallas.conservativemuse.com/2009/08/05/npr-agrees-cash-for-clunkers-is-like-katrina/
Post: Cash for Clunkers costs $1,700/ton of CO2 reduced versus $20/ton of CO2 to convert a coal fired plant to natural gas.
http://dallas.conservativemuse.com/2009/08/12/obama-and-pelosi-dont-believe-in-global-warming/
Post: Senate authorizing more funding for Cash for Clunkers – buy more Hummers.
http://dallas.conservativemuse.com/2009/08/06/senate-will-confirm-sotomayor-at-3pm/
Post: Obama not revealing data on Cash for Clunkers.
http://dallas.conservativemuse.com/2009/08/15/obama-bush-on-transparency/
Comment by Alexander Muse — August 19, 2009 @ 3:02 pm
That’s not exactly fair, Mark, as “Cash-for-Clunkers” was pulled from stimulus money and not voted on as a separate measure. Many of us were up in arms about the stimulus money from the beginning.
If the money is already approved, signed, and available, what is taking Obama and his crew so long to get the approved money distributed out to those that have held up their end of the transaction? Only the incompetence of federal government and it’s molasses-speed bureaucracy…
Comment by AxiomThree — August 19, 2009 @ 3:05 pm
But Alex, mostly all those references are from post cash for clunkers program start. Yes, I agree with you that it’s not a good program, yes I agree with you the government should pay up and not put further car dealerships at risk; yes I agree with you there were better ways to spend the money; and yes to a point I agree that nuclear power plants(even as a former, advised not to do it any more by employer, Greenpeace Frontline member and activist) might be the best of the current bad options assuming they come come up with a MUCH better plan for waste disposal.
Otherwise your children, and their children, and their children will likely have a much bigger problem than paying for something they didn’t get anything from, nuclear waste is the gift that keeps on giving!
What I’m really arguing is exactly the thing that you, in this post, are taking them to task over, is common practice by big business, late payment. It’s got nothing to do with the fact that anyone in Government has ever been or run a business, in fact there is every likelihood that the same shyster accountants(businesses) that advise big companies to do this, are advising the government.
http://www.google.com/search?&q=late+payment+by+big+business
Taking Obama and Pelosi to task for not ensuring the payments is made on time is one thing, but deriding them for not having run businesses just doesn’t add up.
ps. I can’t vote in the US and have no stake in politics here, I do pay a large annual US Tax bill though, so do have a stake in the debate. My kids will be paying for the UK version of said program too.
Comment by Mark Cathcart — August 19, 2009 @ 5:17 pm
[...] can use. Dealers are pretty frustrated. They have been forced to front the government almost $3 billion, interest free. According to the NADA, the federal government has only funded 2% of the deals to date. Ouch. [...]
Pingback by Obama cancels cash-for-clunkers program Monday. | Conservative Dallas — August 20, 2009 @ 4:16 pm