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Government may reward car buyers

Measures offer motorists as much as $5,000 to scrap gas-guzzlers and buy new vehicles.

April 02, 2009|Jim Puzzanghera and Ken Bensinger

WASHINGTON AND LOS ANGELES — The road to recovery for U.S. automakers could be jammed with hundreds of thousands of gas-guzzling used cars, which President Obama hopes will be traded in for more fuel-efficient vehicles -- with the lure of government money.

So-called cash-for-clunkers programs in Germany and France have worked well this year to spur new car sales. But similar initiatives aimed at reducing smog in Southern California have not fared so well in recent years. And roadblocks to a national plan abound, including its potentially huge cost.

The idea of stimulating new car sales by coaxing old cars into the salvage yard is gaining bipartisan momentum in Washington amid federal efforts to reshape an industry that on Wednesday released dismal sales figures for March.

"The simple reality is we have got to get American consumers to buy automobiles," said Rep. Candice Miller (R-Mich.)

She is among 19 lawmakers co-sponsoring a bill by Rep. Betty Sutton (D-Ohio) that would offer $3,000 to $5,000 to motorists who scrap an old car and buy a new one. Sen. Dianne Feinstein (D-Calif.) is leading a bipartisan group pushing its version of the legislation in the Senate.

Either plan would cost $1 billion to $2 billion a year, or more, depending on who would be eligible and how many people participated.

Supporters said the legislation would help save the automakers and the environment, with both bills promoting sales and forcing higher polluting vehicles off the road.

U.S. carmakers strongly support the idea, with a GM executive Wednesday saying it could increase new car sales by 1 million to 3 million vehicles annually. That would be a huge boost for an industry now on pace to sell fewer than 10 million vehicles domestically this year. Obama on Monday touted what he called fleet modernization as a way to help the auto industry recover.

But some major barriers must be overcome.

Obama said the money would have to be carved from existing programs in the $787-billion economic stimulus package passed in February, a potentially difficult task. Supporters said there may be as much as $3 billion in unallocated stimulus cash. Alternatively, the program could be funded with about $1.8 billion in stimulus money that has been rejected by governors in some states.

The Senate and House bills differ in one major way. In the House version, the cash incentive for buyers would apply only to new cars built in North America, with more money for those built in the United States. The Senate bill has no such restriction, and Feinstein said she would oppose one.

"It has to be across the board," she said. "It's the fair way to do it."

In addition, auto parts manufacturers and retailers are strongly opposed to requirements that trade-ins be scrapped, arguing that crushing perfectly good cars would simply increase the cost of parts and used vehicles.

But automakers and their supporters are excited at the prospect of federal money being used to stimulate new car sales.

"We think it's an important element to get the customer back," said Jim Farley, Ford Motor Co.'s head of marketing and communications.

He predicted the stimulus could lead to an additional 500,000 to 1 million sales a year. Mike DiGiovanni, GM's lead sales analyst, was more optimistic, saying the most conservative versions of the plans under consideration "could be worth at least a million more sales to the U.S. industry." If a more aggressive plan, with larger cash vouchers, were enacted, the sales increase could be as large as 3 million, he said.

A lot of the excitement is based on the experience of Germany, whose government is spending about $2 billion a year on such a program.

The country's new "scrapping bonus," which provides an incentive of about 10% of the average new car purchase price, helped boost new car registrations in February by 21%, according to German government data. The program is on track to reverse a projected 10% drop in new vehicle sales this year, said Pete Kelly, the senior director in Europe for J.D. Power Automotive Forecasting.

"We're actually seeing a market that is flat or growing, which is completely at odds with a German economy that is in quite deep trouble," he said.

A similar plan in France is projected to boost new vehicle sales there by as much as 8% this year, helping keep the market stable, Kelly said.

Barclays Capital estimated that a U.S. program similar to Germany's could boost sales by 3 million vehicles. But the increased sales would come with a big price tag: Matching that projection would cost the U.S. government $12 billion, Barclays estimated.

The House bill offers graduated incentives to people who junk a car or truck at least 8 years old. They would get a cash voucher for $3,000 for buying a new truck that gets at least 24 miles per gallon and was assembled in North America. A new car that gets at least 30 mpg and was assembled in the United States would qualify for $5,000. The new car would have to cost less than $35,000.

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