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Guess who's in the driver's seat now: Consumers
Auto-industry woes and fewer dealerships lead to good deals for new cars now
By Jennifer Waters, MarketWatch
Last Update: 5:50 PM ET May 15, 2009
CHICAGO (MarketWatch) -- If you've been hankering for a brand-new Chrysler Sebring convertible, a Ford Fusion or even a Lexus GS450, you're sitting squarely in the driver's seat: there are unprecedented deals now that probably won't last past summer.
Hobbled by a troubled economy, a credit crunch and an excessive number of unsold cars, the auto industry is all but giving cars away. Deeply discounted prices, coupled with cash rebates, creative incentives and/or reduced-rate financing plans are creating deals in which a new car might actually be less expensive to buy than a used car.
Chrysler's and General Motors' announcements to shutter dealerships across the country further fueled the fire sales, according to industry experts. But those decisions could mean higher prices in coming years as supply tightens. Read more on car dealerships cutbacks.
"The deals are so stupendous right now," said Jack Nerad, a market analyst for Kelley Blue Book. "People waiting on the sidelines are missing opportunities to score a great deal."
Manufacturers have seen sales fall off as much as 40%, Nerad said, sending "incentives through the roof." "There's no shortage of vehicles," he added. "It's really a buyer's market."
That's not just limited to Chrysler and GM cars. It's across all models and manufacturers who must compete for a relatively small number of buyers.
In the last several years, dealers have been able to sell about 16 million new cars a year, said George Belch, a marketing professor at San Diego State University. That's expected to fall to slightly more than 9 million new-car sales this year.
"Now everybody is competing for 9 million buyers versus 16 million," he said. "That's how severe the reduction has been."
That breakdown has pushed Chrysler into Ch. 11 bankruptcy protection while GM is teetering on the brink of bankruptcy, scaring some consumers away from those brands.
But industry experts insist consumers can rest assured with purchases of new Chrysler or GM cars. Worries that warranties won't be honored are "a bit exaggerated" said Edmunds.com market analyst Jesse Toprak, because the companies will still be in business. Should that change in coming years, the U.S. government has said it will honor those warranties.
"That doesn't mean you'll have to go to D.C. to get your car fixed," he said. "It would probably be a seamless transition. Warranties would be one of my last worries."
He does worry about resale values of Chrysler or GM cars. "If you're one of those consumers who buy and trade in cars every two or three years, I wouldn't strongly recommend" a Chrysler or GM car.
"The resale value on those vehicles will probably be minimal and extremely volatile," he said. "Bankruptcy has an impact on brand image. But if you tend to keep your vehicle for five years or longer, you will get a lot of car for the money."
Deals won't last
These great deals won't last forever. Every carmaker is slowing production while many are closing manufacturing plants too. Pulling dealerships out of business also will constrict supply.
"These manufacturers are saying we don't need that many dealerships but we need those that are there to be strong," Belch added. The carmakers want the dealers to battle the competition, not each other.
A better balance in supply and demand will undoubtedly lead to higher prices and little room for negotiation.
"Any time you reduce the number of suppliers in the market the basic economics come to play," Belch said. "Less competition could lead to higher prices.
For now, however, consumers can price shop and negotiate for the best deals. Here are some other tips:
Be wary of extras like extended warranties and fabric protection that can add up quickly. Every dealer is going to want to maximize the sale with extras and services.
Hold off on trade-ins. If you're trading in an older car, you might want to wait a couple weeks to see if Congress passes -- and most expect it to -- the Cash for Clunkers bill that will give consumers upwards of $4,500 to trade in those old cars for a newer, more eco-friendly version.
Be sure you're old loan is paid off. If you're trading in a car that you're still paying off, the dealer typically pays off the loan for you and tacks it onto your new car loan. But Toprak said there have been incidents of dealers going out of business who have not made those payoffs, leaving the consumer with two loans. He suggests asking the dealer to cut the check on the old loan and take it to the bank yourself.
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