THE IMPACT OF THE CASH FOR CLUNKERS PROGRAM ON CUSTOMER LOYALTY - A SUSTAINABLE ECONOMIC POLICY?
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THE IMPACT OF THE CASH FOR CLUNKERS PROGRAM ON
CUSTOMER LOYALTY – A SUSTAINABLE ECONOMIC POLICY?
Maik Huettinger
Aras Zirgulis
ISM University of Management and Economics, Lithuania
Abstract
Purpose – The cash for clunkers program was considered a way by many national governments to save their auto industries during
the financial crisis. This paper analyzes the impact that the program had on customer loyalty in the national industry.
Design/methodology/approach – The paper starts by giving a brief overview of the cash for clunkers policy in several countries
and analyzes the impact and causes of the subsequent changes in consumer loyalty using systems analysis approach through the
creation of a model of consumer loyalty in the automobile industry.
Findings – The paper found that government cash for clunker programs had the effect of reducing customer loyalty for national
brands. Findings indicate that the market share of domestic car brands drop significantly while the programs were running and
returned afterwards back to the normal level. In the short run the domestic brands had higher sales but in the long run the authors
predict that the decrease in consumer loyalty caused by the program will lower sales in the future.
Research limitations/implications – Customer loyalty as a variable is difficult to measure. For this research it was only measured
indirectly and without the use of consumer surveys, which many other research papers use.
Practical implications - This paper has implications on the way that lobbyists, politicians, and companies should behave in the face
of a financial crisis.
Originality/value - This is one of the first published studies to construct a model showing the impact of the cash for clunkers
program on consumer loyalty.
Keywords: Cash for clunkers, CARS, Umweltpraemie, loyalty, economic policy.
Paper type: Research paper
Introduction
This paper examines the effect that the cash for clunkers program had and will have on customer loyalty and
sales for domestic automobile brands. The program was designed to give a direct subsidy to consumers who
traded in older, less fuel-efficient cars, to buy new, more fuel-efficient cars. Most research dealing with this
program has looked into the macroeconomic impacts on the economy, total car sales, employment and fuel
efficiency. This paper attempts to look at the program through the eyes of a domestic automobile company
and evaluate the long-term implications on future sales through the use of systems analysis. Often times,
managers are concerned with pleasing the customer—they focus their resources on understanding what
customers want and they tailor their products to suit the customers’ needs. What we would like to emphasize
in this paper is the influence of a third, hard to see, participant in this buyer seller relationship—the
government. The automobile industry in the US and Germany were very good at providing customers with
what they wanted and they consequently sold many cars. However, the governments of the US and Germany
have different opinions from some consumers on what cars people should be driving. Through the use of
subsidies they were able to change the preferences of consumers and wreak havoc on the sales of local auto
firms. The cash for clunkers program came as a macroeconomic policy response to the severity of the
financial crisis. It was seen as a way for national governments to do some stimulus spending to boost
aggregate demand and to prop up their local auto industries. However, the effects of the programs resulted in
diminished consumer loyalty in the respective auto industries. In the long term, consumers who were
induced to switch brands during program are more likely to stay with the brand, which they recently
purchased. From the perspective of society, which subsidized the program with taxpayer money, it is
questionable if this in line with the ideas of a sustainable economic policy which aims to support national car
brands.
1Theory of loyalty
Loyal consumers guarantee corporations higher revenues, more predictable sales and are usually the ones
who will more likely buy additional services or goods (Gremler and Brown, 1998). The theories of loyalty
are based on various studies, which started in 1956 by Cunningham with a fundamental work on the
importance of brand loyalty in consumption (Cunningham, 1956). Other scholars contributed with works on
vendor loyalty, service loyalty, and store loyalty (Dick and Basu, 1994; Jacoby, 1971; Jacoby and Kyner,
1973; Newman and Werbel, 1973). Loyalty, was defined as the “relationship between relative attitude and
repeat patronage” (Dick and Basu, 1994). Relative attitude is determined by the extremity towards a brand
and the perceived differentials of brand attributes.
Brand loyalty can be defined according to various conditions. Most studies refer to the question of
repurchasing, frequency of purchase, probability of purchase, or the proportion of the purchase devoted to a
given brand (Caruna, 2000). Jacoby and Kyner (1973) stress nonrandom behavioral responses and the
possibility to select and evaluate the products as necessary further conditions. In the case where consumers
are willing to use a service provider on a regular basis or have a strong attitudinal disposition towards a
specific provider, Gremler and Brown (1996) term this “service loyalty”. Store loyalty occurs when
consumers express a biased behavioral response over time towards a specific store out of a set of stores
(Bloemer and de Ruyter, 1998). In other words, store loyalty is a commitment and binding of an individual
to a store. In the case of organizations with a strong fidelity towards a supplier, one talks about vendor
loyalty. In the case of industrial products, switching costs play a significant role, resulting in a pair of
commitments by two parties over time (Jackson, 1987).
As loyalty is an artificial concept, scholars use various concepts in order to explain its determinants. Most
authors suggest behavioral and attitudinal aspects in order to classify consumer loyalty (Day, 1969; Jacoby,
1971). Behavioral aspects focus mainly on repeat purchasing, relationship management among buyers and
sellers or buying on recommendation (Yi, 1990). Attitudinal aspects deal with the degree of feelings and
emotions a consumer has towards a product, a service or an organization (Fornier, 1994; Hallowell, 1996).
Olivier (1997; 1999) uses this concept as well, but include the “act of consuming” as an additional
determinant. He suggests a four-stage model (cognitive, affective, conative and action), pointing out that
aspects of loyalty emerge consecutively over time (Blut et al., 2007). Of particular interest is the relationship
of satisfaction and loyalty. Whereby, most of the scholars see the two terms somehow linked, a minority of
researchers exclude satisfaction as a sufficient criterion (Oliver, 1999; Prus and Randall, 1995).
Of particular interest for this study is the national loyalty effect on consumption. The concept of national
loyalty is based on studies of sociologists and psychologists which focus on ethnocentrism, authoritarianism
and nationalism (Brunning, 1997). Shimp and Sharma (1987) developed a scale to measure “consumer
ethnocentrism”—which has been termed by Hadjimarcou et al. (1993) “economic nationalism”. Broadly
speaking, three streams of research cover aspects of national loyalty in the purchase decision process
(Brunning, 1997). Besides consumer ethnocentrism, country of origin effects and reference group influence
play and important role.
Country of origin effects can be defined as “intangible barriers to enter new markets in the form of
negative consumer bias toward imported products” (Wang and Lamb, 1983). Obviously, country of origin
effects and group influence are strongly linked with each other, as product attributes and stereotypes form
country of origin effects as well as group identities. National loyalty will be for the purpose of this work
defined as the “as the market share of national brands in a country”. As a matter of fact, the market share
does not perfectly mirror repurchasing behavior but it is the most representative measurement of an ever-
changing population sample
Loyalty in the Automobile Industry
For a long time, automakers did not consider loyalty as an important strategic asset. However, various
studies have shown that a small percentage increase in loyalty translates into a profit increase in the millions
of euros. Loyalty in the auto-making industry is characterized by a relatively small amount of customer
contact but with a high amount of spending per sale. Consumers show therefore a relatively highinvolvement during all decision-making phases (Duffy, 2003). Automobile producers and retailers therefore
run various customer loyalty programs and build professional customer retention systems.
The most important recent studies in the area of loyalty in the car industry have been provided by R.L.
Polk & Co. (2010), a provider of automotive information and marketing. They suggest measuring loyalty “on
a scale of 0 to 100 percent and reflects the proportion of owners who return to the market to acquire another
vehicle of the same model, make or manufacturer”. Producers should focus on three strategic decisions, in
order to manage and build owner loyalty—first, the management needs to find the right measurement in
order to track repurchasing behavior. This is necessary, as the impacts of communication-tools, incentives
and other aspects of owner experience on loyalty have to be analyzed. Moreover, it is recommended to
separate consumer satisfaction from loyalty as satisfaction in the automobile industry does not necessarily
relate to re-purchase behavior. Studies have shown that the validity of surveys to measure the satisfaction of
customers shows clear limits (Reichheld, 2000). Second, loyalty has to be transformed into a cross-cultural
focus, involving various parts of the organization (Marketing, dealership management, executive
management etc.). Third, automobile producers need to understand and act on the key drivers of loyalty.
Factors affecting loyalty are either product related (quality, fuel economy, safety, performance), customer
related (sales process, communications, maintenance) or financial (price, incentives, costs of ownership).
According to Progenium (2010), another research and consulting tank in the automobile industry, brand
experience, quality, reliability and design are the most important factors of loyalty to a producer. The
price/quality relationship ranks only 5th.
Loyalty in the automobile industry is also affected by macroeconomic factors. Changes in the price of
gasoline may greatly change the operating costs of vehicles depending on their fuel efficiency. A study
dealing with the impact of gasoline prices elasticity found that “the impact of a change in the gasoline price
on demand is mainly driven by a response in fuel efficiency and car ownership and to a lesser degree by
changes in the mileage per car” (Brons and Nijkamp, 2006). This conclusion means that when gas prices
become higher, consumers change their behavior by buying a more fuel efficient car. Brands which offer a
wider range of fuel-efficient cars would be expected to do better at times when gasoline prices are high. In
addition, the concept of income elasticity would also affect the choices of consumers on whether to stay with
their current brand or to switch to a brand that sells different price vehicles. During a crisis when average
income drops, it would be expected that brands which sell relatively cheaper cars would enjoy relatively
more sales than brands which specialized in more pricey models.
The cash for clunkers program in Germany
The German cash for clunkers program was introduced in the January 2009 and was phased out in
September 2009 after the demand exceeded the supply of funds reserved. Initially the program was initiated
by the head of the German Automobile Industry Association and was limited to a total budget of 1.5 billion
Euros. Since 2006 the sales of cars reduced from 3.47 million to 2.97 million units in 2008. The government
expected a further decrease in 2009 and 2010 and decided therefore to exempt newly bought cars for a period
of two years from the motor vehicle tax. The idea was to boost car sales and to bypass the classical car
cycles.
The main purpose of the program was to reinforce the sales of automobiles, which have decreased during
the global financial crisis significantly. According to the “Centre of Automobile-Management (CAMA)”,
there are mainly general economic conditions and automobile specific conditions (such as the operational life
span or the average mileage) which determine the sales of automobiles (Fojcik et al., 2009). The
Government has therefore indirect influence mechanisms (income taxation, social benefits) and direct
influence mechanisms (motor vehicle tax, taxation on corporate cars). As all reforms have not lead to an
increase in the sector, the government chose this drastic step of direct subsides for automobile customers.
This was meant to secure employment in the automobile and supply industry. Despite its name
“environmental premium” (UMWELTPRAEMIE), the program focused in-fact little on environmental
protection. No advanced environmental criteria were applied. However the government assumed that the
replacement of older cars would automatically lead to a more environmentally friendly vehicle fleet on
German roads. The government stated that the program would be an essential tool to reduce air pollution by
simultaneously supporting sales in automobile markets. The main idea therefore was to contribute to the idea
3of a Social Market Economy, whereby the state takes a leadership role to stabilize central institutions and
branches.
Automobiles traded-in automatically qualified with a minimum age of 9 years, as long the applicant had
registered them for more than a year. New automobile trade outs had to be a maximum of one year of age
and had to fulfill the European Emission Standard “Euro 4”—a rather low standard. The program which
started in the first half of January 2009 with a budget of 1.5 billion Euro (600,000 cars) was planned to last
till the end of the year. Due to strong demand it was however expected that the budget will already be used
by May 2009. The Federal government decided therefore on public pressure to increase the budget to 5
billion Euros. In September 2009, the 5 billion Euro was entirely used up and the program was phased out.
Approximately 600,000 new and one year old cars were financially supported with a fixed sum of 2,500
Euros each. Due to the high demand, the program was extended to the end of December and increased to a
total sum of 5 Billion Euro. It was therefore the largest program of its kind in World History—both in
relative as well as in total terms.
From a short-term economical perspective, the results were disappointing (Haucap and Coenen, 2010).
Most studies show that the cash for clunkers program resulted rather in deadweight effects. Blum and Freye
(2009) see the deadweight effects as accounting for approximately 75% of all bought cars during the
duration of the program. Moreover, the demolition of assets (automobiles), which are widely regarded as an
investment—is an irrational economic target. The export of used cars consists of a yearly quantity of 500,000
units and is an important economic factor for the German economy. Intersectional effects took place, as
consumers reduced their spending for fast moving and durable consumer goods (appliances). Initially
planned to revitalize the automobile market, the program rather turned out to be barrier for a necessary
consolidation of a market, which has suffered structural problems for several years. The short-time increase
of car sales was impressive, but might result in lower sales in future.
Concerning the environmental purpose of the program, it is doubtful that any effects were achieved
(Haucap and Coenen, 2010). The substitution of older cars by newer and more efficient cars had a direct
impact on emissions. On the other hand, the average life-age of a car, which was traded in, was similar to the
ones that are usually exported in the used car market (14.4 years). Moreover, the environmental calculation
has to include emissions that incurred during the process of production. From a global perspective, the
balance might even be negative, as it jeopardizes the replacement of older cars in Eastern Europe. The
calculations provided by various authors show great differences, depending on the purpose of each study
(IFEU Heidelberg, 2009). Most likely, it would have been more efficient to use the 5 billion Euro subsidies
in another area. The switch to smaller cars due to the program incentives was not sustainable. The figures
after the financial crisis show that the producers of smaller and fuel-efficient vehicles decreased
significantly, whereby the ones of the premium class producers stagnated.
The cash for clunkers program in the United States of America
The CARS (Cars Allowance Rebate System) program was a fiscal stimulus program with several purposes in
mind. The first purpose was to stimulate the economy by increasing consumer purchases in the short run at
the expense of consumption in the long run. The second was to support the floundering US automobile
industry and thus save thousands of jobs. The third goal was to take polluting cars off of the road and replace
them with cleaner more efficient cars, which would have the double impact of reducing pollution and also
lessening America’s dependence on foreign sources of oil. The details of the program are as follows: “The
program provided $3,500 or $4,500 bonuses to buyers who traded in light motor vehicles with mileage
ratings of 18 miles per gallon or less, who purchased a new car or truck with an improved mileage rating,
and whose trade-ins and new purchases met certain other criteria” (CEA, 2009). In order to get the maximum
amount of $4,500, the mileage had to improve by 10 mpg for new cars and 5 mpg for new light trucks (there
were separate criteria for medium trucks).
Initially, 1 billion dollars was assigned to the program, which was expected to last from July until
November of that year. However, due to the unexpected popularity of the program the available funds were
used up in one month. The US congress quickly allocated another 2 billion dollars to the program, which
lasted until the end of August of that year. There were problems associated with the distribution of funds,which caused many auto dealers to drop out of the program. Payments took longer than expected with some
automakers even offering to advance dealers money until the government payments arrived.
In the US, the program, which lasted from July-August 2009, created an incentive for consumers to
switch in their old cars for new cars. Some of the consumers turned in a car of a certain brand and decided to
purchase a more fuel-efficient model from the same company. However, many customers opted to switch
brands. According to the CEA (Council of Economic Advisors for the President) most owners of used cars
would normally buy less old used cars in the future and this program would create the financial incentive for
them to instead purchase new, cleaner cars—resulting in more work for US factories (CEA, 2009). During
the program the number of hybrid vehicles sold naturally rose because of the incentive toward more fuel-
efficient cars. Interestingly, out of all of the hybrid models sold the Ford Company was the only domestic
brand, which even offered hybrid models for sale.
The environmental impacts that program will have are also ambiguous. Knittel (2009) found that the
reduction in greenhouse emissions was achieved in an overly expensive way through the program. In
addition, the overall impact to environment will be quite small. The oil savings associated with replacing the
older cars with newer ones is expected to reduce oil consumption by 12,000 barrels per day in a nation that
consumes 9 million barrels of oil per day. In addition, there is also the worry that car drivers who have more
fuel efficient cars will consequently drive more miles as their cost per mile driven is reduced by the
increased fuel efficiency. There is also the question of the added pollution involved in the scrapping of the
traded in vehicles. Engine blocks from older vehicles that might have otherwise been recycled were required
to be filled with silicone and discarded.
As expected, the program dramatically increased the sales of cars in the automobile industry for both
domestic and foreign brands. However, some brands did better than others. Ford, Toyota, and Honda were
seen as the biggest winners of the program, all of which offered fuel-efficient models (CARS, 2011). In a
recent study by the National Bureau of Economic Research an investigation into the effects of the program
were investigated. According to Mian and Sufi (2009) the main impact of the cash for clunkers program in
the US was that it only pushed car sales forward. Meaning that overall, the results for the automobile
industry were ambiguous at best. The authors also found that there was a limited increase in employment in
cities where the automobile industry are located but could not be sure if these increases were associated with
the program or the government bail outs of the automobile industry, which were taking place at the same
time
Methodology
The research into the topic of consumer loyalty with relation to the cash for clunkers programs in the US and
Germany takes a systems analysis approach. Systems analysis is a method through which models of existing
real systems are explained and described in order to better understand them. The relationships between the
components of the system are described and mapped out (Kumar, 2005). This methodology was chosen over
a more analytical approach because the goal of this research was to understand the way that consumer
loyalty interacts with the automotive industry. A more analytical approach would have required the
measurement of specific levels of consumer loyalty.
As shown earlier, previous academic work relating to consumer loyalty has focused on issues relating to
specific brand characteristics, manufacturing, advertising, etc. We add to this general model the influence
that governmental actions have on consumer loyalty. The purpose of this paper is to construct a model of
consumer loyalty that includes the effect of governmental involvement in markets. This research seeks to
develop a better understanding of the factors that affect consumer loyalty which have not been developed so
far in the body of academic research.
The model for the system involving consumer loyalty begins with the factors, which affect loyalty, shown
in the squares with the dark arrows pointing towards consumer loyalty (Figure 1). Many of the factors that
affect loyalty have already been developed in the existing body of academic research. These include the
influence that business related factors, cultural factors, and macroeconomic factors. We include
governmental factors as a part of the factors which influence consumer loyalty and will attempt to show that
this influence had a real impact on consumer loyalty through the implementation of the cash for clunkers
5programs in the US and Germany. In our model we also include an arrow between consumer loyalty and
long-term effects which will be analyzed more so in the analysis section of this research.
Figure 1. Consumer loyalty in the Automobile Industry.
Source: the authors
This model gives a broader understanding of consumer loyalty than previous models, which neglect the
governmental aspects that affect loyalty. It is likely that other models do not include governmental policy
because governmental encroachment in the economy may be rare or because it is not something that can be
easily changed as, for example, a business strategy. In industries other than the auto industry where
companies are of smaller size, this model may be of less importance because small companies would not be
able to influence governmental decisions and policies as the companies in the auto industry are able to.
The impact of the cash for clunkers program on consumer loyalty
The figures below illustrate the market shares of the domestic brands within the German and the US market.
Figure 2 and Figure 3 provide a long-term overview of the market share from 2005 to 2010, where by Figure
4 and Figure 5 focus on the months when the CARS and the UMWELTPRAEMIE programs were offered to
consumers. The figures illustrate that the program had a significant impact on the proportion of domestic
brands sold throughout the period.Figure 2. Market share of domestic brands in the US Figure 3. Market share of domestic brands in the
Automobile Market (2005-2010) - Source: German Automobile Market (2005-2010) - Source:
(WardsAuto, 2011) (KFZ-Auskunft, 2011)
Figure 4. Market share of domestic brands in the US Figure 5. Market share of domestic brands in the
Automobile Market (Apr 2009 – Nov 2009) - Source: German Automobile Market (Oct 2008–Dec 2009)
(NADA, 2011) Source: (VDA, 2011)
The market share for domestic brands in both countries dropped during 2009, which was the year when
the cash for clunkers program took place. Initially, domestic automakers in both countries had been
supportive of the programs and the programs did increase sales for domestic brands. However, the sales of
foreign brands increased by much more. In the US the domestic firms had been steadily losing market share
for quite some time. The data shows that in 2009 there was a large drop in market share, which somewhat
recovered after the program had ended. In Germany the market share of domestic brands had been relatively
more stable but again, a large drop in market share in 2009 appeared followed by a recovery after the cash
for clunkers program was concluded.
The previous figures show market share in the industry including all car sales. Limiting the figures to
include market share of cars bought and traded in during the program, they appear to be even more extreme.
7Figure 6. Traded in/ bought vehicles within in the Figure 7. Traded in/ bought vehicles within in the
CARS program (USA) - Source: (CARS, 2011) UMWELTPRAEMIE program (Germany) - Source:
(BAFA, 2010)
Figure 6 and Figure 7 illustrate the share of domestic brands, which were traded in, and the ones that were
purchased in the program. These figures show that the majority of cars bought during the program were from
foreign brands and that the majority of cars that were traded in to be scrapped were from domestic brands.
This leads to the conclusion that the CARS and the UMWELTPRAEMIE programs in themselves were the
major causes of the shift in market shares and hence, consumer loyalty.
In the short run the effect was that many foreign brands that sell more fuel efficient cars had higher levels
of sales and saw less of their fuel efficient used cars turned in to be scrapped. The domestic brands also saw
a rise in sales but these sales were below average in terms of market share. The question for analysis is why
was the cash for clunkers program associated with a fall in consumer loyalty, and relatedly, market share for
domestic auto producers? And puzzlingly, why did consumer loyalty and market share increase for domestic
firms after the conclusion of the program?
In the US, there was a trend of falling market share for quite some time amongst domestic car producers.
Research into why this occurred has concluded that the loss in market share by domestic brands “can be
explained by changes in basic vehicle attributes, namely: price, size, power, operating cost, transmission
type, reliability, and body type” (Train and Winston, 2007). In addition, stricter fuel efficiency regulations
have been leading to an increase in price for larger cars and trucks. American car manufacturers had been
focusing less on fuel efficiency— compared to many foreign brands—which increased the operating costs
for their respective automobiles. Seeing as the cash for clunkers program rewarded car manufacturers who
offered vehicles with more fuel efficiency it is logical that relatively more foreign brand cars would be sold
during the program.
In the case of Germany, the figures indicate that consumers shifted as a result of the program from
premium products to smaller cars. For a country like Germany this trend is seen as a negative, as smaller cars
are either produced by foreign car manufacturers or by German carmakers abroad. The reason is founded in
the relatively expensive labor costs in Germany, which make up a relatively high share of smaller cars. The
big German car producers were therefore forced to shift the production to countries with lower income levels
(since 10 years ago). Premium cars such as Audi, Mercedes, BMW or Porsche had therefore relatively little
advantages of the cash for clunkers program.
The second aspect of the program deals with trading vehicles in. The overwhelming majority of vehicles
traded in during the program were domestic cars in both Germany and the US. This can be partially
explained by the effects of the high gasoline prices that existed during the running of the program. Less fuel-
efficient domestic cars were traded in for more fuel-efficient foreign brand cars. Research has found thatincreases in gasoline prices have a strong downward impact on the prices of fuel inefficient used cars
(Kiliany and Simsz, 2006). This means that it was relatively cheaper to trade in domestic brands during the
program because reselling them would have provided the sellers with less money. This incentive scheme
provided by the government altered normal consumer spending habits in favor of foreign brands. In the case
of Germany, foreign cars are by tendency cheaper than the domestic brands. During the Global Financial
Crisis, where consumers tend to focus on inferior goods, the price level might have been a major factor in the
purchasing decision of customers.
In the long run the model would expect to see a decrease in sales of domestic brands. During the program
a higher percentage of domestic cars were traded in for foreign brand vehicles, effectively being removed
from the market. First time buyers in any auto market often buy used cars when making a first time purchase.
When the time comes to buy another car there is a good chance that consumer loyalty would cause the
consumer to buy a car of the same brand. One of the side effects of this program is that there are relatively
now more foreign brand used cars than domestic, meaning that less first time buyers will purchase domestic
brands, leading to a long term drop in sales even though in the long term, brand loyalty has not been
significantly affected.
According to a white paper by (Polk &Co., 2010), the average level of corporate loyalty in the US auto
industry from 2001-2008 was 54.1%. This means that 54.1% of people with a used car will get a new car
from the same corporation when they decide to buy a new vehicle. During the cash for clunkers program the
average consumer loyalty dropped by 13% but rose again after the end of the program. They use a measure
of consumer loyalty derived through active surveying of potential customers. In this research paper
consumer loyalty was measured more indirectly, through the examination of market share data. The inability
to more accurately measure consumer loyalty is a limitation of this paper and many others in the same field.
Conclusions
Data shows that the cash for clunkers programs affected consumer loyalty to a large degree and illustrates
the validity of the decision to include government as a factor in the authors’ model of consumer loyalty.
Governmental programs can have many unanticipated consequences, which can produce results contrary to
those, which were originally intended. Therefore, it is important for companies to think about lobbying and
influencing government decision making as these governmental programs can have long lasting effects on
consumer loyalty.
The CARS and the UMWELTPRAEMIE programs were initially designed to support the national car
industry and to support environmental protection. The analysis in this paper has however shown that the
design of the two programs was not able to reach these aims. The renewal of the car fleets has indeed
resulted in more efficient cars on the roads. However, including emissions and energy use during car
production, these effects might be outweighed. From a national economical perspective the two programs
were neither sustainable nor positive.
The cash for clunkers programs in the US and Germany increased the sales of domestic brand
automobiles in absolute terms but as a share of the market decreased them. This research implies that
domestic companies should have focused more on the long run implications that this program would have
had on their own market share and consumer loyalty before pressing the government to go ahead with the
implementation of the program. At the very least, the domestic brands could have lobbied their governments
to construct the programs in a way that would not have negatively affected consumer loyalty to the extent to
which they did. The addition of the environmental aspect of the program gave an advantage to the many
foreign brands, which offered more fuel-efficient models. The timing of the program, at a time when
gasoline prices were fairly high, also contributed to the affect of rewarding foreign brands for the same
reason as before.
If the goal of the program had been solely to provide an economic stimulus to the economy through the
automobile industry, different strategies could have been taken. The authors would suggest that the following
policy implementations should have been enacted instead.
1- Instead of giving a fixed sum payment for trade in vehicles the government could have offered to
pay a percentage of the new car cost. Giving a fixed sum payment to new car buyers encouraged the
sale of cheaper cars, which resulted in success mostly for foreign car brands, which offered cheaper
9vehicles. This is because the fixed sum payment was a relatively bigger discount for cheaper cars
than for more expensive ones. A similar strategy would be to also have lowered sales taxes for
automobile sales, which would have had a stimulating affect on demand, without unfairly giving an
advantage to the producers of cheaper cars.
2- The government should not have included the scrapping of used cars in the program. Since a
majority of the used cars that were scrapped were from domestic brands it lowers the chance that
new consumers in the automobile market looking for a used car would be able to experience these
brands and they would not be able to form loyalty to these brands.
3- Since gasoline prices played an important role in the decision for many consumers to purchase more
fuel-efficient foreign brand cars at the time, the government could have devoted resources to
stabilizing or lessening the price of gasoline.
4- The government could have provided the automobile industry with support for workers so that the
companies would not have to lay them off during the tough time of the crisis. The government could
have offered to pay a portion of the salaries of workers who would have otherwise been laid off,
helping the unemployment problem.
5- In the long term, the government could have devoted much more money to the development of
cleaner technologies so that the domestic brands might become more able to compete in fuel
efficiency with foreign brands of automakers.
If the government had been convinced to go along with these suggestions instead of implementing the
cash for clunkers program then the change in market share and consumer loyalty for domestic brands would
not have been as intense as they ultimately were. To sum up, the programs were from an economical
perspective a rather expensive, inefficient and not sustainable tool for the German and American taxpayers,
and resulted in indirect subsidies to the Japanese, Korean and Czech automobile industries.
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Biographic notes
Assoc. prof. dr. Maik Huettinger has been teaching a variety of courses including: Social Responsibility & Ethics in Global
Business, Global Economics and Consumer Behavior, at ISM University of Management and Economics, Lithuania. His research
interests are in sustainable development, critical thinking in economics, and cross-cultural studies. Furthermore, he has a general
interest in the airline industry. His publication about Lithuanian and Latvian National Cultural Values (Hofstede) was included in the
hand-picked content of the Emerald reading list.
Aras Zirgulis is a senior assistant professor at ISM University of Management and Economics, Lithuania. He is teaching Macro- and
Microeconomics at ISM, and co-lectures a course of Global Economics emphasizing the economic theory involved. Aras is
interested in a wide variety of topics including international economics and historical topics in economics.You can also read
