"Cash for Clunkers" Plan to Be Put to Test

TORONTO - June 14 2009: Bernard Simon writing for FT.Com reported that the US Congress is set to approve a complicated car scrappage scheme this week that may spur demand for new vehicles but do little, critics say, to change Americans’ car-buying habits.

The “cash for clunkers” scheme, patterned on similar initiatives in more than a dozen other countries, will offer electronic vouchers to consumers who are trading in vehicles built before 2001 for more fuel-efficient new models.

The criteria for sports utility vehicles and pick-up trucks are less stringent, requiring a fuel-economy improvement of as little as 2 mpg to qualify for a $3,500 subsidy. Traded-in vehicles must be destroyed.

Critics have noted that even buyers of some Hummer models could qualify for the incentive. But the bill has increasingly been promoted as an instrument to bolster the beleaguered Detroit car industry rather than as a move against global warming.

SUVs and pick-ups are the industry’s most profitable vehicles, and the three Detroit carmakers – General Motors, Ford Motor and Chrysler – have a far bigger exposure to these segments than their foreign rivals.

A group of Democratic senators failed to persuade colleagues last week to support an alternative bill that would have required more ambitious fuel-economy improvements.

Used-car dealers have also expressed misgivings, contending that the bill will divert business from them while doing nothing to help many owners of old cars who cannot afford brand-new ones.

The scrappage scheme is expected to cost about $1bn over the next three months. Brian Johnson, analyst at Barclays Capital, estimates that the incentives could give sales an annualised boost of 1m-1.5m vehicles in the third quarter, equivalent to about 10-15 per cent of annualised sales so far this year.

Similar schemes in Germany, France and Italy have significantly boosted sales in recent months.