IE 11 is not supported. For an optimal experience visit our site on another browser.

Consumers wary about automaker bankruptcy

The headlines about the Detroit Three's dire situation may already be keeping buyers away.
/ Source: The Associated Press

Cash-strapped General Motors insists declaring bankruptcy would be disastrous because it would scare away customers. It's unlikely Chevrolet and Cadillac owners would be left with worthless warranties and no replacement parts, but the headlines about the Detroit Three's dire situation may already be keeping buyers away.

"If GM is under the imminent threat of bankruptcy or actually declares bankruptcy, I would not consider a GM product," said Kevin Ketels, who might replace his family's 2004 Toyota RAV4 late next year. "I just don't know if the company will be around to fulfill their warranty obligations. Will they be there for me? There are too many unknowns and a car is my second biggest investment next to my house."

The 38-year-old from Grosse Pointe Woods, Mich., would be among the 80 percent of Americans who General Motors Corp. insists wouldn't even consider a GM brand such as Buick, Saturn or Saab if the company was in bankruptcy. Chief Executive Rick Wagoner brought up the statistic from a CNA Research survey last week during his congressional plea for $25 billion in federal loans.

The concerns are intensifying as the Detroit company burns through tens of millions of dollars a day. It has warned that by year's end, it could reach the minimum amount of cash it needs to stay in business.

Chrysler CEO Bob Nardelli gave the same warning for his company, but Ford Motor Co., also suffering under the worst sales environment in 25 years, says it should have enough cash and untapped credit lines to get through 2009.

Some lawmakers, who want to see the companies' plans to become competitive and profitable before doling out aid, say bankruptcy should be on the table. A prearranged run through Chapter 11 would give GM more latitude to postpone payments to creditors, renegotiate contracts, raise capital and reorganize to stay alive. But with credit markets frozen, finding the financing to do it without government help may be impossible, and the company may be forced to liquidate.

Warranty obligations would likely be fulfilled by what remains of GM after a reorganization, although the bankruptcy court would have the final say. If there's a Chapter 7 liquidation, a third-party, like another automaker, could potentially step in and assume warranty obligations as part of a deal to acquire part of GM's assets.

And the company would still have to address safety recalls, regardless of its financial or operational status.

"Bankruptcy wouldn't discharge your obligations for recalls," said Rae Tyson, spokesman for the National Highway Traffic Safety Administration. "We would go to bankruptcy court and argue that they have a responsibility to use a portion of assets to satisfy whatever consumer issues there might be."

But obtaining certain parts would be an issue. Independent collision repair shops get 80 to 90 percent of their parts directly from original equipment sources.

"It's the area most impacted if there's disruption in the supply chain of replacement parts in the repair industry," said Ron Pyle, president of the Automotive Service Association, a Bedford, Texas-based group representing 10,000 independent facilities.

"If you can't get original equipment manufacturers parts, there could be a huge impact," said Sean McCall, owner of Hatch's Auto Body in Denver. "Aftermarket (collision) parts are definitely not of the same quality, they're not as strong, don't fit properly, and your vehicle wouldn't be considered in pre-accident condition."

A shortage of mechanical parts would take longer to bear out, Pyle said, because general repair shops often use aftermarket parts.

The fear of bankruptcy may exacerbate the loss of market share that has helped push the U.S. automakers to their weakened state to begin with. GM, which held 35 percent of U.S. market share in 1990, captured 24 percent of sales last year.

As gas prices rose, Consumers started shopping for smaller cars and hybrids, and ended up turning to foreign brands, said Mark Guarino, senior automotive analyst for Chicago-based Mintel Group Inc.

"The Big Three have been really hesitant to invest in those alternative-fuel technologies," he said. "Instead, they've done everything they can to wring all they can out of the market through their luxury and SUV lines."

Darlene Blount, 33, a human resources executive in Los Angeles, drives two luxury cars, including a BMW convertible. She said when she thinks of GM, she thinks of Cadillac, "and when I think Cadillac, I think of my dad's car."

"Considering I and many others don't have a lot of faith in the GM brands, I would be concerned with a bankrupt GM cutting corners in the manufacturing and design of future vehicles to save a buck, especially in a time where they should be spending more money to research fuel efficiency and other things to enhance their brands and make them competitive."

But there are GM loyalists, such as Stacey Startzel and her husband Norman. The couple recently purchased a 2008 Pontiac G8 sedan after selling a GMC Envoy and trading in their GMC Sierra pickup.

"Even with GM facing bankruptcy, I would not hesitate to buy one again," said Startzel, 33, who lives in Germany where her husband serves in the Air Force. "We have the factory warranty, but I'm confident that even if they file bankruptcy it won't mean that their doors will be shuttered, and the warranty will be honored."