Cash for Clunkers – The Inventory Problem
The Cash for Clunkers program may be controversial from a debt point of view, but there is no doubt it is acting as a shot of adrenaline to the auto industry. The increase in sales has been so dramatic that inventory issues are going to exist through the end of the year.
As we all know, the car market has been dead as a doornail the last year and a half. The Great Recession brought sales to a stop. When this occurred, companies started taking dramatic measures to save money. One of the common steps was to greatly reduce inventory by offering amazing terms and bringing production to a stand still. It was a classic reaction.
Cash for Clunkers was expected to increase sales a bit, but nobody expected the wild success of the program with consumers. Consumers have flocked to dealers to trade in their old bombers for sleek new models. The car companies were unprepared for this jump in sales and have been caught flat footed from an inventory perspective. The Toyota Prius, for instance, is almost sold out and most of the popular cars being purchased are in relatively short supply.
So, what are car companies doing to cure this? Well, they are doing what you would expect. From Toyota to Ford, these companies are cranking up the production of cars. It seems to make sense until you think through the Cash for Clunkers program. How so? Well, the program is not an ongoing concern. It terminates on November 1, 2009. At that point, what is going to happen? Sales are going to drop dramatically and dealers will once again have too much inventory. It is a vicious cycle that will end up bringing in another down period in the auto market.
There are many critics of the Cash for Clunkers program. Given the current economic environment, I don't happen to be one. That being said, the car companies need to serious consider the timeline for the rest of the year so they don't over produce inventory and create another supply gut that rocks that industry.
