Cash for VW clunkers: diesel buybacks boost car demand

Jamie Butters
Bloomberg News

Scott Nichols was happy with his 2013 Jetta SportWagen TDI and planned to keep it for years. Then it surfaced Volkswagen AG had been breaking emissions laws, souring him and his wife on the brand and thrusting them back into the market for a new Honda.

“We were really disappointed, because it was in fact too good to be true — this car with really good gas mileage and all the pep that it has,” said Nichols, who works at a private high school east of Los Angeles with his wife. “We researched this, we wanted something that was going to last a long time and now we have to go back and buy another car.”

VW must buy back or fix as many as 562,000 diesel vehicles in the U.S. into 2019. This will lead the German automaker to essentially mimic the U.S. government and its cash-for-clunkers program, which lured Americans into buying cars during the recession. Just as the feds doled out $3 billion to get Americans trading in gas guzzlers, VW could spend about $10 billion subsidizing new-vehicle purchases to replace diesels spewing excessive emissions.

The buybacks may extend a streak of U.S. auto sales gains that cash for clunkers started. Already, VW has repurchased or terminated the leases of about 96,000 vehicles, more than last year’s annual increase. The industry will use all the help it can get — in January, sales probably slowed to a seasonally adjusted annualized rate of about 17.3 million vehicles, down from 17.9 million a year earlier, according to the average of11 analyst estimates.

“That is certainly one of the reasons we expect vehicle sales to continue to grow this year and next,” Jeff Schuster, LMC Automotive’s senior vice president of forecasting, said of the buybacks. Without the “VW Effect,” sales probably would start to slide a little, he said.

VW diesel owners who wouldn’t otherwise have been in the market may purchase about 210,000 additional new vehicles, 60,000 this year and 150,000 in 2018, LMC Automotive estimates. Automakers sold a record 17.55 million cars and light trucks in the U.S. last year.

Honda Motor Co., the automaker benefiting from the Nichols family’s decision to replace their Jetta, may join Volkswagen as the lone major automaker to boost sales in January from a year earlier. Analysts project gains of about 4 percent for Honda and 20 percent for combined sales of the VW and Audi brands.

Sales may fall about 2.4 percent at General Motors Co. and 2.8 percent for Ford Motor Co., while Fiat Chrysler Automobiles NV may see a 14 percent drop, according to analyst estimates.

The Nichols originally traded in a Honda Fit subcompact for the VW in 2013, when they had only one child. Ahead of an appointment to sell their Jetta in March, and with two kids now, they’ve already bought a new Odyssey minivan.

VW’s settlements prohibit the company or its dealers from encouraging consumers to buy a new VW over any other brand. The automaker overcame its diesel scandal to dethrone Toyota Motor Corp. last year as the world’s best-selling automaker for the first time, propelled by surging demand in China.

VW has hired about 1,300 contractors to process its diesel program-related paperwork and staff call centers, shortening the average hold time to less than 5 minutes, said Hinrich Woebcken, who became VW of America’s CEO last April. More than 1,000 cars have been fixed and returned to the used-car market, he said.

Alec Gutierrez, an analyst with Kelley Blue Book, has a 2013 Jetta SportWagen TDI, just like Nichols. Gutierrez bought his new for about $27,500, or $2,000 off the sticker price, and has driven it for about 40,000 miles.

Rather than stick with his VW for another year or so, Gutierrez bought a Subaru Outback for more space to haul around two kids. While the Jetta probably has a market value of $12,000 or less, he said he’s projected to get about $25,000 through the buyback program.

“It really doesn’t make sense not to take advantage of the offer,” he said.