What GM's bankruptcy means for you

By The Wall Street Journal

Price cuts, rebates and other incentives could make the next few months one of the best times in history to buy a vehicle. During the past year General Motors (GM, news, msgs) has lowered prices and offered attractive rebates, financing and lease terms as part of a plan to shrink inventories. But tight credit and overall economic uncertainty have kept many consumers away.

New-car deals

Now the auto giant's difficulties have helped push the average incentive on a GM vehicle, which includes cash-back offers and discounts, to about $4,200, said Art Spinella of CNW Research. He said that number could rise to $6,500 or more in the wake of a bankruptcy filing.

But the perceived risk in buying a vehicle from a company under bankruptcy protection is expected to scare away many potential buyers.

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"Uncertainty may wind up driving some remarkable deals for consumers willing to take those risks," said Paul Taylor, chief economist with the National Automobile Dealers Association.

Resale value

The resale value of GM cars is expected to go from bad to worse under bankruptcy.

The average residual value of a GM vehicle at the end of a three-year lease is about 58% of its original price, compared with an industry average of 63%, said George Magliano, an analyst with IHS Global Insight, a market research company in Lexington, Mass.

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GM's average is likely to fall by at least 10 percentage points in the immediate aftermath of a bankruptcy filing and will probably continue to sink in the long run, Magliano said, noting that the average for Chrysler, which also is in bankruptcy court, is "in the 30% range."

Warranties

The federal government has said it will back the warranties of GM and Chrysler vehicles as part of a plan to buoy consumer confidence and encourage people to buy cars.

Still, over the typical warranty period of three years or so, someone buying a GM car today could experience difficulty arranging and completing repairs under warranty, due to widespread dealership closings and potential shortages of repair parts as many parts suppliers struggle to stay afloat.

Service

Longer-term service for GM vehicles isn't expected to cause exceptional difficulty for consumers in part because many begin taking their cars to independent mechanics after their warranties expire.

Because GM vehicles account for a large percentage of cars on the road, the supply of parts and the number of technicians familiar with them are unlikely to wane quickly. However, customers who prefer dealer service may find themselves having to travel farther as GM continues to thin its dealerships.

Other automakers

Fallout from a GM bankruptcy could affect consumers who drive Fords (F, news, msgs), Toyotas (TM, news, msgs), Hondas (HMC, news, msgs) and other brands in part because carmakers are intertwined through their suppliers.

Hundreds of companies make vehicle parts and many work with several auto companies. Experts have long said a GM bankruptcy would significantly disrupt the supplier network, causing some companies to fail and leaving others reeling.

As parts suppliers reorganize to cope with difficulties related to a GM filing, other carmakers may have trouble getting the components they need to keep production moving and supply repair parts to their dealers.

While the current oversupply of vehicles from nearly all brands makes now a good time to buy, the deals may be fleeting. The supply of vehicles is likely to shrink, some experts say, as carmakers continue trying to align production with demand.

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Economic improvement will eventually drive an increase in demand, but car companies may not be as willing to boost production as they have in the past. If supply lags as demand rises, cars could become more expensive and harder to find.