9/04/2009

Cash-For-Clunkers Supply/Demand

Referring to an article found in USA Today relating to Chapters 2&4. I have to ask are automakers making the right decision? The article says that as a result of the highly successful Cash-For-Clunkers program the automakers will be ramping up production for the 3rd and 4th quarters of this year. However, the cash for clunkers program only made a short term spike in demand that is now over since the government rebate program has ended, but it seems the automakers don't realize that they could over supply the dealers again who will be left with cars on their lots because demand has fizzled.

The article also states that once this oversupply of vehicles happens dealerships will "require profit killing rebates in order to unload". It seems automakers are jumping the gun in order to save jobs and think demand will return to normal levels. Although automakers are claiming they are only producing enough to replenish lots from the vehicles that were sold during the Cash-For-Clunkers program.

The Cash-For-Clunkers program definitely spiked demand, and has created an incentive for automakers to supply more vehicles, however what is the short term demand as a result of this program? Are many consumers going to be purchasing new cars anytime soon or did those who were thinking about it already buy them? How much of consumers demand will rely on automakers offering hefty rebates again?

Cash-for-clunkers demand has carmakers boosting production

16 comments:

Christopher said...

I agree. These automakers are nuts.

Not only is the cash for clunkers program dead, but the average automotive consumer is either unemployed, working fewer hours, or nervous about the same. Such changes - decreased income and future expectations - shift the demand curve to the left, thus, shifting the supply equilibrium accordingly.

I hope these companies have some smart SUU economist on their payroll, or they will find themselves overproducing significantly. Hence, the rebates, discounts, cheap financing discussed. Hey, that's good news for the consumers who still have jobs and want a new ride (I suggest Vespa).

Rebecca said...

My thoughts on over-supply in light of the cash for clunkers are similar to the precedent question on the "too big to fail" issue.

The way I look at it is first of all, businesses can have no guarantees. The very nature of business implies risk taking. Not risk to tax payers like bottomless refills at Applebees but a real risk of failure of the given organization.

Car dealers were blessed to be given cash for clunkers even if it represents crumbs from the table relative to TARP and other bailout money spent recently.

The data and assumptions from the C4C spike are far from definitive. Surely some people bought who would not have otherwise made a purchase without the incentive. Others found it fortuitous in the timing because they were planning to purchase anyway. Still other saavy buyers accelerated purchases to take advantage of the rebate.

There is no basis that I can see to ramp it up. Some of the manufacturers (Chrysler) still sucked sand despite the $2.8B give away.

Look, if a firm does a good work, serves and creates value for its customers, practices efficiencies and provides a needed product or service and bites it because of poor market forecasting... well, shrug, too bad.

This smacks of the implied guarantee precedent we must end. There cannot be yet another round of bailouts for auto producers or any other industry!

Should the big 3, because of their historical influence and employment weight be saved in spite of a dumb production strategy? I gotta go with “no.”

They may see positive economic indicators and be hoping for a return to "consumption mode" but I cannot see a return to spending my disposable income on a new car until my loans are repaid.

Christopher said...

Oops...I used the wrong language in the first paragraph, last sentence of my comment. Such sentence should read, "Such changes - decreased income and/or future expectations of such - cause a shift in the demand curve to the left (backward), thus, moving the equilibrium point up (backward)the supply curve respectively.

Amelia said...

Automakers are using the sales numbers from the successful "Cash-For-Clunkers" program as a pre-mature indicator of a change in economic conditions.

I have to opine that they are either crazy or just plain stupid. It is unacceptable to base your production decisions on values based from a limited-time government subsidy. These numbers are conditional upon the fact that consumers got a great deal on fuel inefficient vehicles.

Understandably, in the current economy, consumers have to time their purchases intelligently, with regards to what sales are going on, rebates they could receive, or the amount that will be given for a trade-in.

However, the "Cash-For-Clunkers" program was a limited-time offer and has now expired. The spike in sales for the duration of the program is no excuse for a lack of analyzed numbers.

Daniel said...

Giant auto companies employee teams of brilliant economists and savvy executives – there is likely a good reason they are ramping up production. Economic indicators are down and massive auto organizations understand this better than most. Perhaps the dealers have learned something after the “Cash for Clunkers” program which brought customers back to the lots. Once dealers buy vehicles from producers at wholesale rates, it’s the dealers who assume the risk of loss thereafter. Producers will continue making more vehicles provided dealers demand them.

Dealers may have to continue offering subsidies to attract customers; perhaps giving these incentives generates more profit than having empty lots or having a painfully slow inventory turnover rate. It’s possible both auto producers and dealers learned something from “Cash for Clunkers” and have wisely modified their approach. We live in a different economic world now than we did even a few months ago. Businesses have to adapt while not comparing current profitability treads with those of yesteryear. My opinion is auto companies have greater insight into their industry than we do – they are probably dealing with this economic slump in a thoughtful and reasonable way.

Evan said...

Although I do mostly agree with the preceeding commentors that the auto dealers increasing supply after cash for clunkers is over is bad idea I do feel it's worth giving these dealers some credit. By increasing their supply they are incentivised to sell.

Something cash for clunkers has done, at least to some extent, is increase awareness in the automotive industry. People are thinking about purchasing vehicles more than they were two months ago. Cash for clunkers was short lived but dealers are now able to drag out the excitment.

As an example, I saw a television commercial advertising one dealership who is running their own "cash for clunkers" deal where they are offering a "guaranteed" $4.500 on all trade in's, not just "clunkers".

I can't help but speculate that this dealership is up to the same old shannagins that the stereotypical car dealership has fallen pray to for years. Specifically, increase price then offer a discount or something of the sort.

However, if this dealership gets a single sale more than it otherwise would have than the program worked and it was a good idea to increase the supply. I suspect we will see many more of these types of programs where dealers are using the "cash for clunkers" phrase in hopes of capitalizing of the government program.

LUCID FINANCIAL said...

I am really not sure what think. I would hope that these auto makers would see the Cash for Clunkers as just another incentive for people to get something for nothing. I think the Auto makers know that is was a short term thing and will handle it accordingly.

Dr. Tufte said...

I think the auto firms have too many lawyers and not enough economists working for them, or they wouldn't buy into nonsense like this. ;) Daniel's position on this seems sensible, but I also have to note that I've never seen an auto company advertise to hire an economist. Never!

Also, I appreciate the interest in on Obama's policy, but I'd like to redirect the discussion back towards decisions that are internal to the firm (and more the focus of a ManEc class).

I think Amelia is partly right - the automakers behavior is crazy or stupid, provided that they are being run an profit maximizing enterprises. I think we really need to question that last clause with the post-takeover ownership structure.

Dr. Tufte said...

Daniel and Evan: I'll take points off for the spelling and grammatical mistakes you made (but I'll waive them for this warning).

Dr. Tufte said...

Cash for Clunkers actually does fit nicely into Chapters 1-3.

There is an important point about managing the demand for durables on pp. 70-1 that applies here. This idea is found in some ManEc texts, but no Micro texts.

If you read it through, you'll recognize another reason to be against cash-for-clunkers, but not one that you'll hear mentioned in the legacy media.

Connor said...

After referring back to page 70-71 in the text that Dr. Tufte had suggested, I found that the book states "Most drivers buy cars at intervals of several years". It also says that based on lower incomes car purchases become very elastic in the short run. Which means buyers are waiting even longer to purchase cars.

Given the current economy people are making less and even fearing job-loss, and most of the people who were thinking of buying a car anytime soon did so with the clunkers program in effect lengthening the purchase frequency of automobiles. Therefore demand, at least in the near future, is going to be down significantly.

I just have to say that auto manufactures need to tread lightly at least for the next little while or they will soon find themselves back asking for more stimulus money which I'm sure we all love to pay.

kylie said...

One the biggest problems that I have seen with the cash for clunker program is decrease in supply of used cars. This program removed 700,000 cars from the used car market. This has shifted the supply curve in this market left(particular in the low end used car market). This has sent the price of used car on every level upward. I have spoke with a used car dealer in town and they said that they have seen price at the auto auction increase to prices they would sell cars at retail. This means that a used car that they could have bought for $4,000 at auction and sold for $5,500 is now being sold at auction for $5,500 and the dealer has to try to sell a $5,500 car for $6,500-$7,000 to make a profit. The cash for clunker program may have helped some dealers for a little while but it also hurt several other in the process. I think that there are many results from this program which were not considered before it was implemented.

Michael said...

i think "cash for clunkers" is not good idea for car makers. i read the article which says that GM would manufacture 60,000 more cars and trucks in the third and fourth quarters than originally planned, bringing back 1,350 idled workers and providing overtime for nearly 10,000. i do not understand why this automakers producing more car. so i think only UAW is getting benefit with this over production. i agree with Connor. As indicated in book if there is a drop in income then demand will also going to be fall in short run.Right now about 10% people are unemployed so they do not have any income. I think increase in oil price is also going to decrease the demand for automobile. i think this automaker are going to fail again.

Rachel said...

I read an article here I dont`t understand why auto makers want to kill them selves. In short run Cash for clunkers increase demand of new car and supply for used cars. I beleive it is stupid idea for long run. Today unempoyment stand on highr level of history level so people have less or no income. On the other hand oil price also increase. In long run producation and supply of cars are higher than current market demand. According to article auto makers over produce about 60000 more cars and trucks in third and fourth quaters. I don`t understand why and who want to fell again auto industries?

Erin said...

It is a huge mistake for automakers to increase production on cars for the 3rd and 4th quarter in anticipation of future consumer demand. The automakers are getting ahead of themselves. It is obvious to anyone with economic knowledge that the demand for new cars increased because of the government rebate.

Consumers will continue to watch the auto industry decline and they will wait for the government to offer another incentive programs. As dealers are stuck with oversupply, from the anticipation of increased demand the latter part of the year, the government, automakers, or dealers will have to offer rebates, or other incentives, to increase consumer demand for new cars. If incentive programs are not available, demand will not change and the oversupply of cars will ruin dealerships and automakers.

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