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When I was growing up, our neighborhood was split neatly into families who were GM loyalists, Ford loyalists and Chrysler loyalists. Look around your neighborhood today and you begin to see why Washington sent the Big Three carmakers' CEOs back to Michigan -- in their corporate jets -- without $25 billion of Federal aid.
Loyalty to the American carmakers is low and getting lower. When it comes to cars, Americans have a long memory. We remember the Cadillac Cimarron (a Chevy Cavalier masquerading as a luxury car), the Ford Taurus (which languished as a rental-lot staple while Detroit focused on trucks) and the Hummer H2 (a symbol of Detroit’s myopia).
We remember the years of quality and reliability problems as well as the inept management decisions. We bristle because Detroit neglected fuel-efficient cars, gave expensive perks to the unions and even paid workers while production lines were idled.
Detroit has made great strides fixing its problems and designing better cars, but it may be too late. As Americans have fled to foreign makes, many of which are produced right here in the U.S., Detroit's market share has dwindled to 48%, compared with more than 60% five years ago.
Many people no longer think that the Big Three are too big to fail. According to a recent Gallup poll, more Americans (49%) oppose government assistance to the automakers than support it (47%). That's partly why a skeptical Congress, already skittish after handing more than $700 billion to the Treasury to right the economy and the financial markets, told the Big Three to come back in December with plans detailing how they would use federal money to make changes that would make them "viable."
President-elect Obama has said he supports aid to the automakers in return for the type of plans Congress has requested. But GM could be out of cash by Christmas, making Chapter 11 bankruptcy a strong possibility. Ford borrowed big a couple of years ago, so it has more cash to burn but ultimately faces the same problems. Chrysler’s parent has been shopping the carmaker around, but with no new products in the works and a lineup heavy on trucks and SUVs, no one is rushing to buy.
That leads to a couple of questions: What about customers? What are the risks of buying a vehicle from a carmaker that's on the brink?
Assuming the worst
When CNW Research asked people who intend to buy a new vehicle within six months whether they’d buy from a bankrupt carmaker, about 80% said they would abandon GM and Ford. More than 90% of shoppers with a Chrysler product on their list would go elsewhere.
That's a big reason that GM's CEO, Rick Wagoner, says that a Chapter 11 bankruptcy restructuring simply wouldn't work. Customers would stay away, and the capital markets in this credit climate wouldn't lend money to a carmaker on the ropes. Under this scenario, GM is forced into liquidation. Hundreds of suppliers and dealers also go under.
Another alternative: a "prepackaged" bankruptcy that the automaker, its unions and its creditors negotiate beforehand and present to a judge for approval. This might be less frightening to auto buyers, but it's still a big unknown. And of course, if one auto company goes through reorganization in bankruptcy court and emerges with a far lower cost structure, the other two Detroit companies will be unable to compete and be forced into bankruptcy to get the same agreements, says Aaron Bragman, an analyst with IHS Global Insight. It's hard to view any of these outcomes as positive in terms of attracting nervous shoppers.
Your Risks
Car buyers have reasons beyond wavering loyalty to avoid troubled automakers. Buying a ticket on a bankrupt airline may cause you little pain, but when you buy a car, you enter a long-term relationship. You have a warranty, you need service and parts, and you want a decent price when you trade in the car down the road.
The warranty is one of the biggest stumbling blocks. It's likely that foreign carmakers would buy assets of a failing automaker, and the sale of any car brand would have to include the warranties. Stronger nameplates -- such as Cadillac, Chevrolet and Jeep -- are more likely to survive (along with their warranties) than, say, Saturn or Dodge.
It's also possible that third-party companies would buy warranties without buying the brand or, if a carmaker declared bankruptcy, that the government would establish a warranty insurance fund to pay for repairs.
Parts could be in short supply temporarily as the manufacturers most closely allied to Detroit shake out. Part suppliers sell to both domestic and foreign brands, which could lead to a shortage of parts for their vehicles, too. But other suppliers would pick up the slack. Likewise, dealers would go out of business, but plenty would remain open and prepared to service vehicles -- especially because the service operations are the profit centers of dealerships.
You'll get a generous discount when you buy a discontinued car, but you'll also take a big hit on its resale value. When GM announced it was shutting down the Oldsmobile brand, people still bought them, sometimes at firesale prices. But the cars quickly depreciated. A year after Olds went out of business, two-year-old models had the value of other brands' comparable five-year-old cars, according to Kelley Blue Book.
Bottom Line
I wish the U.S. carmakers and the industrial Midwest all the best. No one wants to see the pain associated with job losses. But although I'd love to play the patriot card and recommend that you support the American carmakers, why take the chance? You have enough problems with your retirement and college funds to risk another hit on your personal finances.
If you need a car now, you're going to get a sweet deal on any number of foreign makes. If you'd rather buy American, at least wait and see what happens before you commit. If the Detroit carmakers can raise enough cash to keep operating until 2010, when concessions on health care and labor contracts kick in, they have a good shot at surviving long term.
Got a question? E-mail Mark at cars@kiplinger.com
POSTED BY: Aaron Layman (November 28, 2008 07:52 PM)
The Big 3 and the UAW are relics caught in a paradigm shift. The rule of business is that you adapt or you cease to exist! For some reason the CEO's in Detroit think they are immune to this fact of life. GM, Ford and Chrysler have been pushing the same gas-guzzling monsters for decades, deepening our addiction to oil with every monster SUV and hot rod they can imagine. It's time for Detroit to wake up. The future is not muscle cars; It'low emission, fuel efficient hybrid and electric cars. For anyone suffering from a case of nostalgia, pick up a copy of "The Corporation". It's an eye-opening documentary that unveils the greed and callousness that are the fabric of all corporations. I certainly feel for the people who are losing their jobs, but change is a way of life. It's time for the Big 3 and the UAW to make some really hard sacrifices or head for the exits.
POSTED BY: Angel (December 05, 2008 02:37 PM)
I just (this past week) bought a new vehicle. And yes, it was one from the Detroit big-3. My "personal experience" is that their engineering is better than the imports. The quality is of what I just purchased is as good or better than anything else out there. I know, I looked.
They do have labor issues, and dealer issues. They also have not had the luxury of 0% money from Japan like Toyota and Honda for the past 20 years. But, contrary to what has already been posted; they have some very fuel efficient vehicles; and some not so fuel efficient vehicles. No different than Toyota with a prius and a Tundra truck. The big difference is historical...Dealer franchises, organized labor, and pensions. None of the imports have those issues. But then again, none of those imports have supported a middle class either...Buy American.
POSTED BY: Rich (December 31, 2008 02:26 PM)
I predicted this trouble with the big three auto makers a couple of years ago. I am proud to say however that all my new vehicles have been purchased from General Motors. Why because they build a better product than the other two, their vehicles last longer and they have come a long way since the 50's-90's. Let's look at the other side of the picture...whose fault is it that many people buy foreign cars? Who sells them? Do the foreigners come to this country and sell them? American Citizens sell them, Americans create Foreign Vehicle advertisement and mostly Americans service them. Hey, the competition is rough. Years ago it was GM, Ford, Chrysler, AMC and maybe VW, MG or Fiat. Now it's GM, Ford, Chrysler, Toyota, Nissan, Mercedes Benz, VW, Audi, Kia, Hyundai, Lexus, Acura etc. setting off this huge competition. It's crazy and there are more foreign cars then there are American made cars. Let's look at the price of a car...let's get real...do they really need to be so high in price and out of touch. Before you could get a 3 year loan now they're 5, 6 and 7 year loans. Look at the interest rates and all the hidden fees....For a closure, remember this, we are the most heavily taxed people in the world and we are still are in debt? Go figure....
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