Fear of a worthless car warranty
Shoppers are worried about buying a domestic car for fear the company they bought it from will go under.
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| Warranty and resale value concerns are turning auto shoppers away from domestic cars. |
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NEW YORK (CNNMoney.com) -- General Motors has repeatedly said that "bankruptcy is not an option," largely because it's afraid no one will want to buy from a carmaker that might go under, leaving customers with a worthless warranty.
Bankruptcy fear was the single biggest reason car shoppers avoided buying GM cars, according to a survey conduced in the fall by CNW Market Research.
Among GM owners who bought their next car from another manufacturer, 32% cited a potential bankruptcy as the reason. The next biggest reason - dealership or pricing issues - pushed away only 11% of shoppers.
If GM (GM, Fortune 500) were to go bankrupt, 97% shoppers intending to buy a car within six months said they would stay away from the automaker, according to a different CNW survey. The figure for Chrysler was even higher at 98%.
Some bankruptcy supporters point to airlines like Delta that successfully emerged from Chapter 11 protection while customers continued to fly, but auto manufacturers present a special challenge.
A $300 plane ticket for a three-hour flight is one thing. $25,000 for a car you will drive for years is quite another. Consumers are concerned that the company might not be around when it's time for warranty work.
Car shoppers' concerns about automakers' survival are justified, said Art Spinella of CNW. "It's one thing when you hear about Circuit City," he said. "I can always get my TV fixed somewhere else."
But GM has given assurances their customers will be covered, no matter what. "We set aside funds to take care of our warranty obligations," said spokeswoman Janine Fruehan, "so we always have, and we always will, honor our warranty commitments."
"We understand those concerns," said Chrysler spokeswoman Lisa Barrow, "but, really, the economy in general and access to credit are bigger concerns for our customers right now."
Detroit automakers should do more to reassure customers their warranties will remain in effect even if the worst happens, said Phil Reed, consumer advice editor for Edmunds.com.
He suggested they could arrange for financially solid third-parties to back the warranties even if the carmakers can't. But that would mean directly presenting consumers with that unpleasant possibility. "They don't want to go there yet, publicly," he said. "They're not prepared to go there."
But for some shoppers, the fear of a worthless warranty is mitigated by big bargains. "The people that will be buying in today's climate are clearly people who are balancing the risk with what kind deals they can get," Reed said.
He recently advised a friend who was considering buying a Chevrolet Traverse crossover SUV to try to get the best deal he could. "If you bought a Chevy Traverse today and the company went out of business," said Reed. "it's not like there's a computer chip in it that's going to blow out on the highway." Whatever happens, parts will always be available for GM vehicles, he said.
Spinella of CNW was less sanguine. If a major U.S carmaker were to go bankrupt, dealerships would close and it would take some time to work out where cars would be serviced. "You're probably looking at two or three years just to figure out what's going on," he said.
A related, and possibly more serious, issue is resale value. It plummets for discontinued brands, even in cases where the manufacturer stays in business and fully supports the warranty, according to data from Kelley Blue Book.
After Chrysler's Plymouth and GM's Oldsmobile brands died, two-year-old cars with those badges suddenly had the value of five-year-old cars, according to KBB.
But even that kind of a financial hit could be covered by negotiating enough of a discount on the car when it's first purchased, said James Bell, publisher of the automotive Web site IntelliChoice.com
"It depends on whether you're a glass-half-full or a glass-half-empty kind of person," he said. 
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