“Cash 4 Clunkers” and the Law of Unintended Consequences

This is what happens when gov’t meddles in the market. Now, I am torn because C4C did help our AutoNation (AN) holding. But I fear its effect will be short term and leave potential buyers of new cars sitting, waiting for the next gov’t program before they go buy. Basically a short term gain and detrimental longer term effects. Anyway, the ugly result…

From the WSJ:

Michael Darrow, an independent used-car dealer, is still feeling pain from “Cash for Clunkers.”

During the summer, he was shut out of the popular initiative, which allowed only new-car franchises to participate. Now, the inventory he normally buys at auction is sharply limited, a direct result of Clunkers sending close to 700,000 gas guzzlers to the junkyard. That’s driven wholesale prices to new highs at a time when cost-conscious consumers, who sometimes rely on dated information from guide books, aren’t paying more.

“We’ve gotten hit by several whammies,” says Mr. Darrow, owner of The Auto Finders in Durham, N.C. “Now I can’t fill the lot like I used to, I pay more for the cars and I’m getting less for them.”

Independent dealers across the country, most of which have no affiliation with the large auto manufacturers and outnumber franchise dealerships in most states, are struggling in Clunkers’ aftermath. Some of these small businesses – which number between 40,000 and 45,000, according to the National Independent Auto Dealers Association – say they’re being forced to sell vehicles for less than what they’ve paid at auction, a move that’s cutting deep into already shaky bottom lines.

Wholesale prices for pre-owned vehicles are up 19% over December 2008, when the prices first started rising, and may be up “substantially in September, maybe 8% to 9% on a year-over-year basis,” says Thomas Webb, chief economist at Manheim Consulting, an Atlanta firm that tracks data in the used-car marketplace. Official pricing for the month is scheduled to be released Wednesday.

Inventory in August was the lowest in at least 35 years, according to Manheim. The supply has dwindled because gas guzzlers traded in for Clunkers rebates have been taken off the road, rather then sent to auction. And now, franchise dealers who cleared out inventory during Clunkers are holding tight to their pre-owned vehicles as they wait for manufacturers to restock lots, industry experts say.

Roger Hanke, who has owned Roger Hanke Motorcars in Fresno, Calif., for 41 years, says he’s barely pulling a profit. “I’ve never seen anything quite like this,” he says of the auction prices. The situation would be less detrimental if he could translate the rising prices into his selling price, Mr. Hanke says. But it’s difficult to raise prices in a recession, plus consumers – and lenders who supply auto financing – are still consulting guidebook values before settling a deal.

Later:

One book that portrays auction price daily is The Black Book, based in a Gainesville, Ga., but it is not favored by lenders or consumers. “Our focus is the dealer side of the business,” says Black Book managing editor Ricky Beggs. “Our primary customers are those who are buying and selling to the consumers, who need accurate values that are reflective of the marketplace.”

Because of the disparity between auction price and book value, Mr. Hanke sold several vehicles at prices lower than what he paid at the auction. Now, Mr. Hanke is being more upfront about the price he paid by showing his customers the auction invoice – a practice not typical of most dealers. “Now they’re aware, but they’re not aware of why,” says Mr. Hanke.

To be sure, the Clunkers initiative, despite putting pressure on the auction prices, wasn’t all bad for independent dealerships because it whetted the consumer appetite. “We saw more traffic at independent car lots because customers who couldn’t get a deal at the franchise would leave with a yearning to trade and upgrade their vehicle,” says Gil Boers, executive director of the New Mexico Independent Automobile Dealers Association in Albuquerque.

Yet for many independents, the current situation might be too much to bear. While experts aren’t willing to guess how many could shutter before the end of the year, Jim Edwards of the Carolinas Independent Automobile Dealers Association in Harrisburg, N.C., says that 1,500 independent dealerships hard hit by the recession have closed in the past 18 months in North and South Carolina.

Here is the impact of wholesale prices visually:

What politicians fail to realized is the for every action there is a reaction. The reaction cannot be predicted in a free market (I know, but ours is as free as exists out there today). You cannot direct or guide participants in it and when gov’t jumps in the pool with both feet so to speak, there is a huge splash and a wake that may (usually does) cancel out any positive effect of the very thing they are doing.

This is the main reason for opposition to health care reform and my refusal to even consider investing in the sector despite some potentially very appealing companies. It isn’t that people do not think changes need to be made, it is that we are highly confident that when wholesale changes are made, while possibly helping some in many areas, are just as likely to hurt many other folks in other areas. When the general population can’t determine what side of that equation they will be on, they will opt for the status quo.

“Cash for Clunkers” is proof of what can happen…




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