Time to buy a Chrysler? You bet

By U.S. News & World Report

By now everyone knows the number: Chrysler is ending its association with 789 Chrysler, Dodge and Jeep dealerships. While many analysts say that number will result in thousands of lost jobs and millions of dollars in lost tax revenue for local governments, there's another number that deserves a closer look: 44,000.

The closing dealers have roughly 44,000 new Chrysler products sitting on their lots -- a situation that some say could lead to their bankruptcy and some analysts say could further depress new car prices.

The unsold inventory of the closed dealers, says Gerard Murphy, the president of the Washington Area New Automobile Dealers Association, is "the elephant in the room." Murphy says the affected dealers are facing few options, and none of them is very good. "It's a Catch-22," he says.

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As part of Chrysler's bankruptcy reorganization, the dealers have until June 9 to clear their inventories and stop selling new Chrysler, Dodge and Jeep vehicles and parts. To move the inventory, the dealers have two options: They can sell the cars to the public or sell the cars to a dealership that is continuing with Chrysler.

Though General Motors has announced it is ending its relationship with up to 2,000 of its dealers, those dealerships are in a different position. For many of them, GM is simply letting its franchise agreement expire, so they may have as long as 18 months to move their inventory. Also, some of the GM dealerships sell the Saturn and Hummer brands, which GM has placed up for sale, and could remain open with those brands under new ownership. Finally, GM isn't in bankruptcy court yet, making its restructuring somewhat less urgent than Chrysler's.

Relocate cars to other dealers?

Carrie McElwee, a spokeswoman for Chrysler, says the company is "facilitating the redistribution of products." She adds: "There is big interest with dealers that are continuing with the company" to buy other dealers' inventory. "We're the best option for (affected dealers) to sell their new products."

Though Chrysler is pushing its product redistribution program, some dealers still aren't pleased. Taking on other dealerships' inventories, Murphy says, isn't necessarily a winning proposition for dealers who are continuing with Chrysler. Those dealers have their own inventories to worry about, and with car sales still sluggish and consumers wary of buying cars from a company in bankruptcy, many continuing dealers may not have the space or funds available to purchase more vehicles.

Complicating matters is the fact that most car dealers don't own their inventories outright. They finance their inventories and repay the loans once they sell the cars to consumers. Many dealers have been paying interest on their inventory loans for weeks and worry that the prices they get for the cars they sell, either to the public or to other dealers, may not cover their obligations.

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Chrysler, however, says it has responded to those concerns. While noting that GMAC is the preferred lender for Chrysler dealers, McElwee says that the company is working with a number of banks to review the dealer-to-dealer transactions and that those banks have indicated the prices being paid for the inventory are "fair to all parties."

The banks "understand there's a need, so they're working with dealers to buy the new products," she says.

Still, Murphy says many dealers have come to him worried about meeting their loan obligations if banks come collecting soon after June 9. "I've talked to some dealers who have said, 'If that's the case, I'm going to have to declare bankruptcy,'" Murphy says.

Dealers hope for loan leniency

Murphy also reports that some dealers are hoping for leniency from banks with regard to dealer loan obligations, particularly from GMAC, which is owned by Chrysler and has received federal banking bailout money. In fact, federal regulators granted exceptions to GMAC on May 21, to allow the company to keep making dealer and consumer car loans.

While not unprecedented, the exceptions are part of a GMAC aid package that includes a second infusion of $7.5 billion in bailout funds. The exception allows GMAC to make loans to GM customers -- something that would normally be prevented by a rule that separates banking and commerce, because GM is a major GMAC shareholder.

Chrysler says it can't comment on the financial situation of individual dealers but that it is doing everything it can to ease the transition for dealers. McElwee notes that of the affected dealers, 83% sell more used cars than new, and 44% have franchise agreements with competing manufacturers. Those dealerships are likely to remain open even after their agreement with Chrysler expires. Chrysler is also continuing to pay those dealers for warranty work and incentives through the June 9 deadline.

Finally, while in bankruptcy, Chrysler has idled its factories and stopped making cars. Though sales are slow, the lack of production should give dealers some time to work their way through the excess inventory.

As for consumers, the list of closing dealerships is widely available online, and some dealers are offering what Murphy characterizes as "fire sale" prices to consumers.

"It's a heck of a time to buy a Chrysler product," he says.

This article was reported by Jamie Page Deaton for U.S. News & World Report.