On one level “Cash for Clunkers” (CfC) is viewed as a big success. The first $1 billion was used up in a month and 245,000 new cars, 45% from the US car companies,  were purchased.  Congress looks like it is adding $2 billion more to the program, which the government now believes will be spent in another month.  This compares to its initial forecast that the first billion would not be spent fully until November, when the program was scheduled to end.  The seasonally adjusted annual rate (SAAR) of sales in July was 11.2 million. According to Reuters, 994,000 new cars and light trucks were actually sold in July, down 12.1% from a year ago, but up 30% from the previous month.

Without going into great detail, here is a shorthand review of the CfC program. If one trades in a car less than 25 years old that gets a rated 18 miles per gallon or less, one can get a reduction in the price of $3500 if the car purchased gets at least 22 miles per gallon and the pickup in mpg is 4 to 10 mpg. If it’s over 10 mpg the reduction is $4500. One can further negotiate with the dealer on the value of spare parts in the car.  The actual engine block and other critical parts of the car have to end up in the scrap heap. The dealer has to certify a number of elements of the transaction before receiving the rebate. The money is being diverted from a loan program related to green energy.

This seems like a pretty good deal for a new car buyer, particularly if he or she was preparing to trade in or sell a used car anyway. It’s an easy calculation to determine whether the CfC provides a better deal than a straight trade-in.  11.2 million SAAR of sales is about at the minimum replacement rate for scrappage one would expect from the existing fleet of about 240 million cars and light trucks. No doubt, this did accelerate some car sales, likely borrowing from the future but reducing inventories—some might say too much—, providing traffic and cash flow to the dealers, preserving some jobs and boosting the economic statistics. Combined with some other factors, such as better employment stats, maybe this provides a boost to consumer confidence, which is an important factor in getting the economy moving in the right direction. I’m just not sure that the numbers really add up. Let’s look at a few.

If you want to see a very good analysis of many of the metrics on this program you can read Matthew Wald’s piece in the August 8, New York Times, “Doing the ‘Clunker’ Analysis”: http://www.nytimes.com/2009/08/08/business/08clunker.html?scp=1&sq=doing%20the%20Clunker%20calculus&st

I will paraphrase some of what he says and add a bit to it.  It looks like the stats on the clunkers are that they averaged about 16 mpg while the new cars purchase averaged close to 26 mpg. If, on average, these cars were driven 12,000 miles per year there would be a savings of about 280 gallons of gasoline per car. That’s about 1.6 million barrels of gasoline a year for the 245,000 cars or maybe $202 million less spent on gasoline (at $3/gallon x 42 gallons/barrel). Since a gallon of gasoline emits about 20 pounds of CO2, the 67 million fewer gallons of gasoline consumed reduces CO2 emissions by 670,000 Tons per year. Over a 25 year life that would be 16.75 million Tons of CO2.  Without taking into account the cost of money over 25 years that still comes out to about $60/Ton of CO2 that was eliminated from the atmosphere. Is this the target price for cap and trade or a tax? Granted, as discussed above, this program is doing more than just reducing CO2.  But, ultimately, at the lowest cost possible, reducing CO2 emissions is what has to happen. We found that the program worked better than expected.  Why not raise the bar to a bigger spread between the clunker and a new purchase.  Every purchase done today will be producing emissions for close to 25 years.  What if the spread would have been 15 mpg rather than ten?  Of course, at that spread the US car companies would not have gotten 45%.

I did have an interesting e-mail dialogue with a terrific car dealer in Wisconsin, Frank Hallada, who has both GM and Ford dealerships.  His experience is anecdotal, but somewhat telling.  I will quote him direct:   

“The “Cash for Clunkers” has certainly spurred interest in the car business.  The incentive is to the consumer with the clunker….. We have been giving the customer credit for the monies, much like a rebate.  We have currently delivered 13 new vehicles and have yet to receive an approval status from the government.  The paper work is the responsibility of the dealer and the dealers are finding it to be a bit complicated.  We have been told that we would receive payment in 3-7 business days of an approved claim.  We have 7 claims that are a week old and are still in the under review status.  I spoke with 3 dealer friends on Saturday and none of them have received payments.  We will be required to trash the motor of the clunker 7 days after payment from the government.  We will then sell the vehicle to an authorized salvage yard for no more than $50. 

I believe the program could have been successful with a $2,500 rebate.  All but two of our clunkers have a value of $1000 or less.  The demand has slowed in the last few days.  I think the biggest problem with continued success,will be the availability of new vehicle inventory.  I have sold out of the most popular models at both the Ford and GM store.”

I am not sure that the program is really accomplishing what it was expected to. It has been a nice gift to those with clunkers, particularly if Frank’s experience is typical. But, it is truly replacement demand, not new demand.  And, it probably means that the buyers took on additional debt to buy the new car, or used a substantial amount of cash that might have been available for other uses. $60/Ton of CO2 reduction, at best, seems a high price to pay, particularly if the loan program, which was primarily for capital stock which results in real growth, is not replenished.  If the additional $2 Billion is used up in this quarter, it will make the quarter look quite good, but the fourth quarter will look less good.  Another example of unintended consequences. And, no real step forward in true carbon reduction.

On January 2, William Holstein had an op-ed piece in the New York Times titled “GM’s Secret Success.” The piece made the argument that Rick Wagoner had overseen a major transformation at General Motors, and that the company was poised to reestablish itself. Holstein made the point that Wagoner should not be the scapegoat for 50 years of mismanagement. It was a terse but well-written argument to take a closer look at what had been accomplished and not react precipitously. It prompted me to pick up Holstein’s book, “Why GM Matters: Inside the race to transform an American icon.”

I have to say that, in spelling out the history of GM with a concentration on Wagoner’s roles in the more recent history, Holstein makes a very cogent case for why the “small” sum of $37 Billion compared to what has gone and will continue to go to the financial institutions, would be a very good investment on the part of the US government. He does see Chrysler ultimately being absorbed by another auto company, but makes a very strong case for GM. The case is based on a fairly detailed analysis of the changes that have been wrought at GM in terms of cost, design and new technologies. I was impressed. While Holstein wasn’t explicit on this point, one could imply from what he wrote, that the technological changes of which GM is in the midst, could be the foundation for a big piece of the type of innovation and growth that came out of the auto industry after WWII.

This is a bit of a stretch, but one could envision the manufacturing changes, on-board information systems driven by OnStar and the move toward electric and other drive trains as being a significant element in job creation, clean energy and energy independence, with ripple effects on other manufacturing efforts in the US and elsewhere. This could be a significant part of the revitalization of American industry based on technology and a willingness to change.

If Wagoner and his team actually can make it through this financial crisis, complete the restructuring of this behemoth of a company and become an example of what can be done in American industry, it would be a great success story in what will be a difficult period. No doubt, the equity value of the company could go lower or disappear in the near term, but this strikes me as a better bet than what one sees going on thus far with the stimulus package and the financial industry bail-outs

We all have a tendency to look for instant success. Listen to the pundits talk about the markets’ negative reactions to the various efforts thus far to right this ship, as if a different specific action on the part of Congress, the Fed and the Administration would have produced a different response in the markets. Changing a company of the size of GM takes enormous effort and time. I accept what Holstein has written, and I take back my view that a bankruptcy before money goes in would be a better course. I would urge all to at least read Holstein’s op-ed piece. http://www.nytimes.com/2009/01/03/opinion/03holstein.html?_r=1&scp=5&sq=op%20ed%20General%20motors&st=cse might get you there. The book is also worth reading, and I hope that Congressional and Administration staff members are reading it and informing their bosses. Chapter 11, alone, about the development and promise of the OnStar system could actually make one want to go out and buy a General Motors car. I think I will wait until the mileage gets better as well—but that’s coming.

I was going to have this entry in the blog be about the sad story of the US electric transit systems and GM’ and Standard Oil’s sad roles in their demise. I still may write that at some point, but Holstein’s writings make a strong case for not punishing the GM and the UAW of today for past sins. There seems to be a strong element of that at work, maybe combined with a number of Southern congressmen who see the demise of Detroit benefiting the non-US auto manufacturers in their specific states. They may not recall the subsidies provided to those entities to locate their plants in their territories, as they decry the loan requests of two of the Big Three.

So how do all the issues below regarding the quid pro quo for a bailout relate to Contracarbon?

If the CAFÉ standards were high enough, and the economics worked, the need for oil from other countries (except maybe Canada) would ultimately go away. The 2008 CAFÉ standard for combined light trucks and passenger cars was 22.5 miles per gallon, up from 17.5 mpg in 1982 (!). For passenger cars only, we have gone from 24 mpg in 1982 to 27.5 in 2008. We have said we are going to 35 mpg by 2020. The California rules would push that to 37. Of course Europe, Japan and China are at 44, 46 and 36 already with objectives in the 50’s in the time frames we are discussing below. If we instituted serious standards and supported the new car companies that already can get us to 100 mpg or better, we could get to 55 or 60 mpg for the whole fleet by 2030. And the cost per mile could be significantly less than it is today. I can take you through the calculations, but, trust me; at least half the 10 million barrels of oil we currently import every day could be eliminated. That would happen through a combination of conventional fuel efficiency and alternative power trains.

The sooner we get to higher mpg the sooner this will happen. The US auto fleet of about 240 million vehicles takes about 20 years to turn over at the historical rate of scrappage—about 4.5% of the car fleet goes to the scrap pile each year. Currently, that is about the level of new car sales. That level is logical. In this economic environment and with some belief that fuel economies may improve significantly in the next few years, why would anyone buy a car unless her current car fell apart or was just uneconomical to operate? That doesn’t mean the person scrapping the 20+ year-old car would buy a new one. But as he traded up, ultimately, at the end of the food chain, someone would buy a new car.

The modest improvement in efficiency from older to newer cars does, by itself, reduce emissions. If we could quickly get to higher CAFÉ levels and keep the new car purchases at the scrappage level for a few years (and keep miles traveled flat), we could become significantly less oil dependent in 20 years and reduce CO2 emissions by close to 1 Gigaton per year. 20 years seems like a long time, and the goal of 60 miles per gallon for the fleet seems problematic—at least in the States. But, in the scheme of things, both objectives are reachable. However, they aren’t reachable unless we set them as objectives. In 40 years, if we can’t get to double those objectives, shame on us. The truth is, if we don’t develop the technology to do it, someone else will. That would be a big loss for the US economy. I take full responsibility for these calculations and conclusions, but the early work on this was done by Saurin Shah when he was at Sanford Bernstein and which he continued at Neuberger Berman. He has a chapter coming out in a book on transportation electrification very soon.

Trains and Planes, or more generically, public mass transportation becomes important as well. Reducing or stabilizing VMT (Vehicle Miles Traveled) by substituting mass transit can be a significant factor. Up until recently we were car-traveling about 3 trillion miles a year in the US. Currently, the average vehicle produces about 1.1 pounds of CO2 (or equivalent) per mile. (SUVs are at 1.6. A Prius is at .55.) In the last 12 months, for the first time in a long time, we dropped 30 billion miles. That’s 33 billion pounds or 16.5 million tons of CO2. I hope it doesn’t take a depression to keep those mileage numbers dropping. It does take a commitment to mass transit. More on that later.

I have to start out with a bit of a rant. Trust me, this will relate to ContraCarbon at some point.

I have a problem with money going to the US auto manufacturers before they go into Chapter 11 bankruptcy.  We know that under Chapter 11, the auto companies will keep operating, but they will restructure their finances and their operations. Creditors and equity holders will suffer. The US government will likely provide the funds to keep the companies running as Debtor-in-Possession. Some say that consumers won’t buy a car built by a company in bankruptcy. That may be, although the airlines go in and out of bankruptcy often and still carry passengers.

A few facts: In 2007, the US auto manufacturers directly employed about 240,000 (less now) workers in this country —a little more than half on the line. By the way, 240,000 is also less than half the number of jobs lost here each of the last several months.  The non-US auto manufacturers employed 113,000 workers in this country with a higher proportion working on the line. The auto parts manufacturers, employing about 640,000 workers, service both the US and non-US manufacturers, although the US parts content of a US manufacturer is higher. The retail segment, dealers and parts sellers, employs over 1,700,000 workers.  If you want more facts on auto employment and its projected future try these URLs:  http://www.bls.gov/bls/auto.htm; http://www.cargroup.org/documents/Apale_book8a_001.pdf. If you do check these out, you will notice that the reported numbers differ between the two reports. Just a reminder to take all “facts” with a grain of salt — even mine.

I have a view that car sales are pretty fungible, particularly in this economic environment. If GM sells a car, Honda probably doesn’t. Net job losses ultimately relate to overall car sales. So, how would you feel as an auto worker in Tennessee employed by Honda, or a Honda car dealer, watching GM and Chrysler (and maybe Ford) getting money from the US government to keep their workers employed while your job is being put at risk? How would you feel as an employee (or investor) in a start-up high-mileage/low-emission car company trying to raise a few bucks, watching all this money going to companies that are dealing with the mileage and emission issues incrementally at best?  [Full disclosure: I am a director of Idealab which has an investment in a clean-tech vehicle company, Aptera. I am also an advisor to that company. We are always trying to raise a few bucks. http://www.aptera.com].

Let us hope that, if the new administration proceeds with the auto industry bail-out, it will consider directing some of this capital to bail us out of our CO2 problem in the transportation sector.  That would require instituting some significantly higher CAFÉ (Corporate Average Fuel Economy) standards on new cars as a quid pro quo, providing incentives or funding with some of the bail-out allocation going to the clean-tech transportation companies, truly dealing with alternative power sources in an intelligent way and supporting mass transit.  Stay tuned for what might work