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Customers have been coming back again into automobile showrooms. Vehicle sales have jumped by double digits. Dealers should be jubilant, right? Well, not quite.
As the federal government’s $3 billion Cars Allowance Rebate System (CARS) program comes to an end at 8 p.m. today some auto dealers feel endangered by the cloud lingering behind the Cash For Clunkers silver lining.
“It’s been a mixed blessing,” says Gregory Jackson, owner of St. Clair Shores, Michigan-based Prestige Automotive (No. 1 on the BE auto dealers list with $646 million in sales). While dealers are benefiting from sales increases that would not have happened without CARS, they are “strapped for cash” because the government has not reimbursed them for the price reductions they gave to customers. Jackson’s Ford and Saturn stores got about a 30% sales boost from CARS, but for now, his company is $660,000 out of pocket. Several firms on the B.E. Auto dealers list are having similar experiences.
Yvonne Hovell, owner of Oklahoma-based Dodge Chrysler Jeep of Tulsa (No. 36 on the B.E. Auto Dealers list with $47.397 million in sales) says she’s “not surprised” in receiving “not a penny” from the government for the clunker discounts. She’d dealt with government programs before. Her firm had sold about 25 vehicles under CARS as of Aug. 20. “It’s no question that the national program has been an incentive to the public to come back to the automobile dealer showroom,” Hovell says. The reality for the individual dealers is, however, “You literally have to have cash to play in the game. I have been extremely fortunate,” Hovell says of her store’s strong cash position.
By Aug. 20, John F. Stelly, owner of Lake Charles, Louisiana-based Paramount Nissan (No. 28 on the BE auto dealers list with $54.55 million in sales) had sold 61 vehicles via the program, a 20% month-over-month increase. Stelly says the government’s slow reimbursement is not causing him cash-flow problems. “I knew what I was getting into, and I set up some reserves just in case the government choked,” Stelly says. He set aside roughly $70,000 “just in case I don’t get all of my money.” The dealership keeps three to four times the working capital the manufacturer requires.
How It Works
Under Cash for Clunkers, when customers trade in a qualifying old gas-guzzling vehicle, between $3,500 and $4,500 is subtracted from the price of the new fuel-efficient vehicle they purchase. The customer gets a car loan from a bank or other financial institution. That lender pays the dealership the reduced price of the new car, and the federal government pays the dealership the $3,500 to $4,500 difference. When the customer drives the new car off the dealer’s lot, the bank that made the car loan typically pays the dealership overnight. That’s mainly via an electronic funds transfers (EFT) or direct draft. The dealer then pays off the cost of the car to the financial institution that loaned him “floor plan” money to get the car as inventory from the manufacturer.