Cash for Clunkers: Some Simple Lessons in Timing and Value

If you live in Spain, Germany, France, Italy or the United States, or are following the automotive or economic news, you are probably aware of the government programs commonly referred to as “Cash for Clunkers”.  If you aren’t aware, here’s a simple view of how they work. Individuals that own older (but not too old) autos which get relatively poor fuel economy are encouraged to trade their car in for a new, more fuel efficient one.  The encouragement is in the form of a (presumably) inflated trade-in value paid directly by the government to the seller.  Buyers immediately get the benefit of the difference between the actual trade-in value of the auto and the government payment.  Over time, buyers and the environment both benefit from the improved economy of operation and reduced emissions of the new auto.  At least that’s the theory.  Public policy is outside our scope in “Negotiation and the News”, but these programs provide some simple lessons in negotiation timing and value.  Let’s use the program in the United States as an example, since it recently ended. I’m calling it “CFC” for short.

In the US, CFC went “live” on July 27th and, to qualify for the “encouraging” payment, the final paperwork was to have been completed by 8PM on August 24th.  Let’s look at some exercises in value and timing.  For simplicity, assume that any ownership transfer costs are always $0, and that we ignore any time value of money.

Lesson one: If we assume that the paperwork took an hour, and that backdating did not happen (bad assumption?), when did the last sale take place under this program?

  • Easy, right? 7PM, August 24th. Everybody gets this one. We can all see that the incentive disappears at that time, so sales under the program stop.

Lesson two: What happened to the value of a qualifying “clunker” auto on July 27th?

  • It became the greater of the actual trade-in value or the government payment.  Everybody gets it again. If the clunker’s trade-in value was $1000, but the incentive value was $4500, that $4500 can be “spent” on a new car in the same way the trade-in value could have been.  If the clunker’s trade-in value was already $6000, that value remained unchanged.

Lesson three: On what date did the clunker actually become worth the value of the government payment (assuming that the government payment was higher than the actual trade-in value)?

  • This one is a little harder, and a little less clear. Certainly the value changed on the day the program was approved, in anticipation of the actual start date.  The value probably moved upward as passage of the bill became more certain, and reached the incentive payment point at the moment passage happened.  If the bill had moved toward passage, and then away, the value would have slightly fluctuated in response to the uncertainty of the possible “reward”.

Lesson four: If a clunker-owner was interested in a new car, and was induced by the CFC program to walk into a car dealership at 5PM on August 24th, who was under more pressure to close the deal by 7PM?  The salesperson or the owner?

  • Tough one.  If you said the clunker-owner, we understand why.  The value of the car drops in 2 hours.  And of course, like all negotiation cases, it depends.  It depends on the salesperson’s quota, available new cars, and a bunch of other things.  But my vote is for the pressure to be on the salesperson.  Here’s the logic: the buyer lived with a clunker for a long time without acting.  They also waited until the last minute to look at closing the deal.  A buyer like this can make the transition back to the position they have been in for a long time fairly easily.  The seller recognizes that this is a one-time, short-term opportunity, and stability (which means the buyer is not buying) will set in again in a hurry.  The seller is under more pressure.  Now, whether the parties act like they recognize who is under greater pressure is a different question…

Here are the negotiation conclusions to take into your everyday negotiations:

  1. Value changes over time (or should):  If what you are selling or buying has value, that value is most likely not constant.  You should consider how the passage of time influences value.  Remember that in the CFC example we are dealing with a tangible commodity, and the value is more or less expressed by price.  In complex technology sales, value is often determined by business usage, and the price should be related to, but not equated to value.
  2. Decision-making is linked to time:  Remember the Y2K panic over potential computer program failures?  Relatively speaking, how many Y2K solutions were put in place in 2000 as opposed to the years approaching the end of 1999?  You should consider how time influences the decision-making process.  Regulatory dates, time to deploy (or fill out a form) and other factors will sometimes determine IF an agreement will happen.
  3. Things expire:  Sometimes the decision process can drag on forever.  And sometimes if you miss the expiration date, the opportunity is gone.
  4. Leverage Shifts: Where does the pressure and negotiating power exist – with which party?  It is variable, and influences each side to a different degree.  Think about who is under what pressure as you proceed, and how it might shift over time.

K&R is expert in the issues of why and when transactions close.  We call it “Negotiation Forensics”. Ask us about it.