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At a conference the other day, I asked two women how they felt about the U.S. auto industry bailout. It was like watching the presidential debates. One said, "Yeah, we've gotta have it!" The other said: "Bailout? Why do they need a bailout?"
Well, here's why. You don't have to be an expert in P/E ratios to see Americans are shifting to foreign cars. If you just looked around and pay attention to the parking lots, you would have seen this. Three years ago, Ford's stock was at $15. Now, it's less than three dollars. Thanks to a sudden halt in spending and the overall financial meltdown, GM, Ford and Chrysler— the Big Three U.S. automakers—are close to running out of cash.
To help out, one $25 billion plan has been approved that would provide loans—don't worry, it's not free-money—for re-tooling plants to create more fuel efficient and competitive cars. But aside from this longer-term help, the real issue is that they need cash now.
Before we let the plug get pulled, let's stop and think carefully about how anyone who owns an American-made automobile will fare if the domestic auto industry doesn't get some financial help:
1. Plummeting Resale Value. Own a GM or Ford and want to sell it? Well, if there's no dealer network around to service the car, who do you think will buy it? Even if you can get it serviced, the brand value will have diminished. I mean, would you buy a GM product from your neighbor if the company wasn't around and had been trashed in headlines?
2. Warranty Risks. What would happen to the normal three-year, 36,000-mile new car warranties if the providing company is bankrupt? It depends on the nature of the bankruptcy filing and who the receiver would be (possibly the Federal government).
But there's a bad precedent here: in a 2001 case involving Outboard Marine Corporation, the court ruled that the company's first priority was its debt, not what it owed the customer. That doesn't mean the same thing would happen with a case of this magnitude, but you, as a consumer, should be concerned. (It should be noted that extended warranties are okay in a bankruptcy scenario because they are sold and serviced by third party firms, not the Big Three.)
3. Reduced Access to Parts and Service. So you need some parts? Or maybe you got in a little fender bender and need a replacement hood? The good news is that companies must make parts available for a certain period, so later model cars are covered. Chances are, parts for recent cars would continue to be available since someone would probably buy GM or Ford parts operations in bankruptcy. But customers with older models might be in jeopardy as automakers stop stocking older parts. Imagine what that would do to the value of your older car!
4. Insurance Cancellations. Auto insurance companies—already under financial stress of their own—will certainly be forced to re-evalute how, and at what cost, they are willing to insure cars with limited parts and service and a lower resale value.
5. Higher New Car Prices. If our three giant car manufacturers go away, what would that mean for competition? It would be easier for the remaining foreign manufacturers to raise prices on cars and do away with the modest incentives like cash rebates they offer now.
Jennifer Openshaw is co-founder and president of WeSeed, a fresh, fun, revolutionary approach to demystifying the stock market for real everyday people, and author of "The Millionaire Zone." The host of ABC Radio's "Winning Advice," she's been seen on shows ranging from Oprah, Rachel Ray and Dr. Phil to CNN, CNBC and Fox. You can reach her at jopenshaw@weseed.com.
