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. For clunkers program transactions, banks that made car loans to customers have continued to pay dealers overnight. But three weeks after his first sales under the program, Gregory Jackson hasn’t received any money at all from the U.S. Treasury. He still has to immediately pay the bank that helped him put inventory on his lot. Until the Treasury pays him, he has to dig into his cash reserves — his operating capital — an average of $4,000 for each vehicle he sold under the program.
Cash Flow Issue
Because black-owned dealerships tend to have smaller reserves of cash than majority dealers, they are especially feeling the pain. Very few African American dealers John Stelly knows of participated in CARS. The reason: cash-flow problems. “Even though there is an upside to the program, if you had cash-flow problems before the program, it will definitely magnify it even more,” he says. Minority Ford dealers are experiencing anxiety, says A. V. Fleming, executive director of the Ford Motors Minority Dealers Association (FMMDA). They have bankrolled deals in which paperwork is
still in the CARS pipeline and has not been officially approved. “Nobody I know has gotten their money back yet,” he says.Deerbrook Forest Chrysler Jeep in Kingwood, Texas, has sold about 15 vehicles under the CARS program. Its business increased overall by 20% to 25%, fueled further because CARS brought in buyers who had been out of the market since the mid-1990s. In some cases, it was more advantageous to both the dealership and customer to do the trade-in and purchase outside the program. “The government had stated that we’d be paid within 10 days, but it was obvious that it was not prepared for the amount of volume that was done in such a short period of time,” says owner E. Dale Early. “We haven’t been paid a dime, and that really causes us to have to look for other ways to generate cash,” adds Early, who is waiting for more than $50,000. “I don’t know of any dealer out there that doesn’t have an issue of cash flow related to this.” For some minority dealers, temporarily giving up the CARS rebate cash is a deal breaker, says Perry Watson, III, president of the Toyota Lexus Minority Dealer Association.
To ease CARS-induced problems with working capital, the financing wings of Toyota and Honda are providing their dealers something akin to an advance or short-term loan. “They will give you money as a float for those cars to improve the cash flow,” Watson says. His Indiana-based Lexus of Mishawaka (No. 62 on the BE auto dealers list with $26.673 million in sales) has done six CARS deals. Watson thinks it will take at least another 60 to 90 days for CARS paperwork and payments to be resolved. A General Motors Minority Dealers Association newsletter announced Friday that GM was advancing dealers 30-day interest-free loans for clunkers rebates still being processed. Floor-plan lenders, says Gregory Jackson, will “absolutely not” cut dealers any slack because of the government’s slow pay outs. “They won’t even entertain that conversation,” he says.
Given
that the government invested money in both the auto industry and in banks, says Jackson, “A better way for the government to have done this was to have those large institutions pay us all our money, and the government reimburse those institutions. It’s a whole lot easier for the bank down the street to fund $1 million worth of receivables that it’s waiting on from the government — particularly since they can borrow from the government overnight — than it is for me to be sitting here with $350,000 or a quarter of a million dollars per store of clunker accounts receivable that I have, trying to fund that until the government pays me, and not knowing if the government will pay me,” Jackson says. Administrative NightmareThough Stelly thinks the CARS program has been “awesome,” he describes its paperwork as “horrendous.” Dealers had to scan documents to submit. In his store, Dale Early says his sales managers compiled the information, then office personnel did the actual submission of the claims over the Internet. From the beginning, the CARS computer system was crashing. Submissions were not going through. The CARS Website was not able to handle the volume. Just to submit one claim took half an hour. If the claim was submitted and rejected, dealers had to make corrections and submit all over again. “So who knows at the end of the day how much time you are actually burning trying to get one claim accepted,” Early says.
Clunker paperwork has heavily burdened minority dealers, says Perry Watson, increasing the workload of stores’ administrative staff. “You’ve got to keep submitting the deals, and sometimes it’s rejected and it doesn’t give you a reason it’s rejected. There was nothing wrong with the paperwork, but the system is overloaded, so it kicks it back and you’ve got to re-submit it. For dealers’ administrative staff, it’s been a nightmare,” says Watson.
To guarantee gas guzzlers really are taken off the road, CARS requires dealers to ruin clunkers’ engines by putting a silicone compound into them. If a claims application is ultimately rejected, the dealer will lose the money he discounted from the new-car sale. Yet many applications haven’t been approved.
“At this point, you are really selling in the blind. You have the potential liability if the program overruns its $3 billion budget that you’re left holding the bag,” Watson says. “There are some dealers who are not disabling the engines because once you do that, and you don’t get paid, you’ve destroyed the customer’s trade-in. Dealers are waiting, and you’ve got all these clunkers out back waiting to be approved.”
The Aftermath
Gregory Jackson is hoping CARS‘ boost in summer sales has no negative consequences on late-year sales. He admits some fall sales may have been pulled forward because people wanted to take advantage of the clunker money, but is counting on the economy continuing to get better and auto sales improving over the next few months. Jackson does not believe the CARS program will spoil buyers to expect rebates.
Dale Early, however, wants a stimulus that can keep demand high. “When you get that many people excited about doing business, and then all of a sudden there is not a program available to them anymore, what they do is what they did before: They sit on their hands. We don’t want to get on this rollercoaster ride, similar to what we have with the manufacturers when they come out with a huge incentive program: sales spike, and then when the incentive goes off, sales go way down. There are still plenty of buyers out there in the market place that we haven’t tapped into, we just need to figure out a program that allows for them to come in and for it to be a program that has some type of sustainability,” Early says.