The Car Allowance Rebate System: buy now, pay later?
By: Martin Kahl, Thursday, August 20, 2009, AutomotiveWorld.com
Much criticism has been levelled at the US government's Car Allowance Rebate System (CARS), from its shaky environmental credentials through to the disastrous administrative errors that have left dealers awaiting payment. What cannot be denied, however, is the fact that, in the short-term at least, the CARS programme appears to have halted - and maybe even reversed - a disastrous decline in light vehicle production in the NAFTA region.
When the region's H1 production results were published, the full-year outlook was dire. In the period January to June 2009, production was down by 52% year-on-year in the US, 47% in Canada, and 42% in Mexico.
The decline in H1 output followed on from a very difficult 2008, which saw vehicle manufacturers battle a slump in demand that worsened throughout the year. In the first six months of 2009, Mitsubishi halted production for three months; Chrysler's Chapter 11 filing saw it halt production from 30 April 2009 until 15 June 2009, and even since then it has not resumed full production; and GM slowed manufacturing during its passage through Chapter 11. The company had already closed three plants in 2008 (total annual capacity cut: 795,000 units), and announced further closures in its Chapter 11 filing.
In August 2009, the latest AutomotiveWorld.com capacity utilization study was published, examining the implied capacity utilization of light vehicle production plants in the NAFTA region (US, Canada and Mexico) in calendar year 2008. The report found that passenger car and light vehicle production across the region fell by around 17% year-on-year from 15.1 million units in 2007 to 12.6 million units. Installed capacity stood at 18.5 million units, relatively unchanged from 2007 (18.9 million), but capacity utilization in the same period dropped by over 12 percentage points to 68%.
Installed capacity was reduced by 1.4 million units in 2008 through plant closures; new plant openings added 381,000upa, giving a capacity reduction of 1.02 million units. However, much of the cut capacity came from plants that closed at the very end of the year, distorting the overall picture. The level of overcapacity in the region has increased from 2.75 million units in 2003 to 3.42 million units in 2007, and 5.90 million units in 2008.
However, there has been some positive news in recent days, with Ford, GM and Honda announcing plans to boost output in the region for the rest of the year, following increased demand as a result of the CARS programme introduced in July 2009.
GM, whose 2 million-unit overcapacity in 2008 accounted for 34% of the total overcapacity of the NAFTA region, plans to increase production by around 60,000 units in the third and mainly the fourth quarter of this year. The additional production will see GM's third quarter output up 35% over the second quarter, and the fourth quarter up 20% on its previous third quarter plans. GM's positive outlook for the second half is primarily the result of its recent sales successes fuelled by the CARS programme.
Ford, too, has felt the positive effects of CARS, and has raised its production forecast for Q3 and Q4 2009. At 495,000 units, Q3 production will be 10,000 units higher than earlier stated, and up 18% year-on-year. Q4 production is expected to reach 570,000 units, which would be 33% higher year-on-year and 75,000 units more than earlier forecast. Whilst Ford's Q4 output increase will be across the model range, the Q3 increase will mainly be targeted at meeting the CARS-fuelled demand for Escape and Focus.
Honda also plans to increase production in the US following increased CARS-led demand. The company will introduce some Saturday shifts in September and October at its plant in Lincoln Alabama (source of the V6 Accord, Liberty, Odyssey and Ridgeline), and several Saturday shifts until the end of the year at East Liberty in Ohio (where it builds the Civic, CR-V and Element).
A significant proportion of the current production increase can be attributed to demand fuelled by consumers making purchases they may have made at a much later date, or worse, may not otherwise have made at all. In the period between the scheme's introduction in July and mid-August 2009, over 411,600 orders were placed. According to Edmunds.com, the Seasonally Adjusted Annualized Rate (SAAR) of light vehicle sales in the final week of July 2009 stood at 19.6 million units, in a market previously forecast at 10 million.
The CARS programme has created a steep spike in demand, and caused sudden and unprecedented demand for cars, with dealers desperate for cars to sell to CARS buyers. In descending order, the top ten vehicles bought through the scheme to date are:
- Toyota Corolla
- Honda Civic
- Ford Focus
- Toyota Camry
- Toyota Prius
- Hyundai Elantra
- Ford Escape (front-wheel-drive)
- Honda Fit
- Nissan Versa
- Honda CR-V (four-wheel-drive).
However, the steep spike in production is likely to also be a very sharp spike in production, able to inflict severe pain on the post-CARS market. When the already extended CARS programme comes to an end, now scheduled for 20:00 EDT on 24 August, car sales are likely to start to return to pre-CARS levels, the impact of the privately-funded Auto Stimulus Plan notwithstanding. Since the production increases are to meet short-term demand, post-CARS production will again follow demand downwards.
A figure of 19.6 million units will not be achieved in 2009, and is far from a reality even in the medium term, with analysts predicting that the market will need until 2013 just to reach 15-16 million units.
Thanks to CARS, the NAFTA region capacity utilization rates for the full year may turn out to be less dramatic than at first feared; they will nonetheless be much lower than in many previous years, and unlikely to return to the levels of 2006 or 2007 for, at best, several years.
The benefit of hindsight is needed to tell whether CARS - and similar scrappage schemes in other countries - have any long-term positive effects on their respective markets. Whilst the schemes may have given a much-needed shot in the arm to the automotive industry, it will soon become clear whether they are anything more than a sticking plaster over a very deep wound.
Martin Kahl is a senior analyst at AutomotiveWorld.com.
The opinions expressed here are those of the author and do not necessarily reflect the positions of Automotive World Ltd.
Published on Thursday, August 20, 2009
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