GM, Chrysler Dealer Closings will mean Great Prices on New Cars for Consumers

By Brendan Moore

05.18.2009

2009-pontiac-g8-gxp

As the old adage goes, there’s a silver lining to every dark cloud, and that adage is going to be proven by low pricing for new cars over the next 18 months, as dealers close, whether it’s from their brand going under, or, their franchise not being renewed by either Chrysler or General Motors.

Yes, your local dealer’s financial Armageddon is going to be very good news for the astute new-car buyer. The dealers that get a death sentence from GM or Chrysler will be forced to liquidate their new-car inventory, and as their date with death gets nearer, the retail pricing at their lots is going to get lower and lower.

If those dealers are selling invoice or below because they have to make that inventory go away before they close up, that will put competitive pricing pressure on all dealerships selling the same product, resulting in a great deal of margin compression nationwide. So, even if you don’t have any dealers going under in your burg, the retail pricing is still going to drop because of this nationwide price deterioration.

There is also another major factor is this downward pricing, and that is the retail incentives that GM and Chrysler are expected to offer on discontinued models/brands. These incentives, paired with the desire by the dropped dealers to minimize their inventory losses, should make for an extremely potent combination vis-à-vis lower consumer pricing.

Wait, there’s more!

If you just can’t swing a new-car purchase right now, don’t despair. The pricing mayhem created by this unprecedented situation with the dealers is going to ripple out into the residual values of the affected vehicles for years to come; as an example, a 2009 Pontiac G8 (excellent car, by the way) is going to be sold new to someone at a very low price, which will make it’s residual value as a 2 or 3 year-old car correspondingly lower. Add in the fact that the Pontiac will be an orphan by then (no Pontiac dealers will exist by that time), and many consumers will shy away from it for that single reason, and you come to the inescapable conclusion that a 3 year-old Pontiac G8 should be an incredible bargain.

But even the models that won’t be orphans will still be very attractive buys as 3 year-old used vehicles. For instance, if a tremendous amount of Dodge Ram trucks sell for below invoice because a tremendous amount of Chrysler dealers go out of business soon, the residual price of those Ram trucks will be pushed downward in the secondary (used) market. This is not guesswork on my part; this is what happens, like clockwork, when new vehicles are heavily discounted. Their residual values go down faster than their competitors’ vehicles in the same segment. This is one of the reasons why a Toyota Corolla and Chrysler Sebring have dramatically different residual values as 3 year-old vehicles, even though their retail pricing as new cars was the same. The Chrysler Sebring is considered by most consumers to be a far less reliable car than a Toyota Corolla, and therefore is considered by far less new-car shoppers, so Chrysler has to put sales incentives (rebates, etc.) on the cars, and dealers have to discount the Sebrings to make those cars go away. As the Sebring ages, it’s lower (actual) purchase price, as well as the reason for the lower actual purchase price as a new car, its lower perceived value, compared to the Toyota Corolla, dogs it just about forever.

2009 Dodge Ram Laramie

The new Dodge Ram is a fine truck, so that issue of less perceived value is moot, but the purchase prices are going to be lower than a Ford or a Toyota truck in the next 18 months, so the value of the Dodge Ram will be a little lower than the Ford or Toyota full-size truck as a 3 year-old vehicle.

So, if you’re a buyer in this market, how do you work this situation to your advantage?

Let’s go back to the example of the Pontiac G8. You don’t want to go buy one now, as the pricing is not as low as it’s going to go. However, the production volume of the Pontiac G8 was small because it’s a niche product. So the longer you wait, the less selection you’re going to have, and you may not be able to get a car with the options you want in the color you want.

You want to time your purchase somewhere in the middle of inventory running out, and somewhere near the peak of the discounting activity. You’ll have to watch the market in order to hit that sweet spot, whether you’re looking to purchase a Pontiac G8, a Dodge Ram, a Hummer H3, a Saab 9-5, etc.

The summing up here is that recent events have made the new-car arena into a buyers’ market, and this new-car buyers’ market is going to show up later as a used-car buyers’ market, and that particular buyers’ market should last until somewhere around 2012.

COPYRIGHT Autosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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8 Comments

  1. Useful, thanks.

    I’ve been thinking about a Saturn Astra, which is actually an Opel Astra. Two years sold in America, and Saturn didn’t sell too many, I think, so if that isn’t an oddity later, I don’t what is. But, there will be the parts issue and maybe the service issue later, Where will that come from? I thought about a Saturn Aura because that’s just the Malibu, really, but I want something smaller. The Aura is probably a better bet longterm for service and parts though. Maybe I’ll just get a used Aura, that’s got to be cheap, right?

  2. I need a new truck so I hope this is true. I hope the GM dealers that are shutting down discount the Chevy and GMC trucks because I don’t want a Dodge truck because I think there no good.

  3. well, with the unsold lots of Camry and Corollas (as well as various Nissans, Hondas,…) http://japancarblog.com/car-makers-running-out-of-space-to-park-unsold-cars/ http://jalopnik.com/5161640/toyota-now-renting-shipping-vessels-to-store-unsold-cars http://www.autoblog.com/2009/03/16/former-ford-plant-home-to-thousands-of-unsold-hondas/ maybe they’ll have to discount (and also sold more and more of them to the rental fleet market like Avis, Tilden, Hertz, Entreprise…) and to keep the plants rolling.

    As for the resale value, Toyota begin to be hit as well, maybe there some hope to grab if you like an used Tundra as well for a bargain 😉 http://www.autoblog.com/2009/03/16/toyotas-falling-residuals-has-more-owners-seeing-red/
    http://forums.motortrend.com/70/7517715/the-general-forum/toyotas-residuals-take-a-dive/index.html

  4. Maybe they will just scrap them. (Honda and Toyota) Write the loss off and keep the prices up??? Would help everyones resale.

  5. So when my lease runs out in two years, that might still be a great time to buy? Not so shabby….

  6. From MSNBC:

    ****************************************************
    “Super-cheap new car prices automatically bring down the value of used versions,” says James Bragg, consumer advocate and author of the “Car Buyer’s and Leaser’s Negotiating Bible.” Toprak agrees that “GM and Chrysler resale values will be extremely volatile for the next few years,” while NADA’s Taylor sees a 20 to 30 percent reduction. They all agree, though, that buyers should be prepared to keep these cars for more than two or three years.

    ***************************************************
    Maybe you’re on to something here. Three days before MSNBC.

    Thanks, going to buy something in the 4-5 months.

  7. SS SILVERADO and IMPALA HERE I COME!!!!!!!!!

  8. I would like to subscribe to your post. I am in the market for a new or slightly used car but with less than great credit rating. How would this affect my ability to get a GM/Chrysler at this time? Al Thomas

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