GM IPO: What the Bailout Means for Car Buyers Today

Last Updated Nov 18, 2010 11:10 AM EST

Eager investors have boosted the offering price of General Motors' initial public offering this week even before it went on sale. That's good news for taxpayers, who are getting partial payback on the $50 billion federal bailout. But if you want to buy a car instead of stock, how does the bailout look now? Overall, it is mostly pluses -- except for buyers looking for huge year-end discounts.

Two big industry changes will have an effect on consumers: First, in the desperate financial situation in early 2009, the Obama administration pushed new mileage rules through Congress requiring automakers' fleets would have to average 35.5 mpg by 2016. Second, as part of GM's quick trip through bankruptcy court, the company renegotiated onerous union rules that helped determine how many cars were produced. It's no coincidence that GM has just reported strong third-quarter profits.

Here's what happened with other two of the original Detroit Big Three:
  • Chrysler The government propped up Chrysler and helped engineer a takeover by Italian auto maker Fiat. As a result, Fiat models are coming to the U.S. -- starting with this week's introduction of the tiny Fiat 500, sort of a mini Mini Cooper. As for Chrysler, "New management will introduce some desperately needed new models," says Karl Brauer, senior analyst at Edmunds.com.
  • Ford The company declined a government bailout, burnishing its image with many shoppers (but also leaving it with a debt load that GM does not carry). Helped by its strong lineup of new models, Ford gained market share this year when Toyota's recall troubles presented an opportunity.
If you are shopping for new or used cars today, here are some of the changes you will see as fallout from the bailout:

More Good High-Mileage Models If you care about saving on gas, your choice of models is much wider than a few years ago. The need to meet the tougher mpg standards sped up the introduction of new small cars like the Chevrolet Cruze pictured at right (See 6 Cars that Will Save GM) as well as the Ford Fiesta and Focus. But bigger vehicles are boosting mileage as well. Ford's redesigned 2011 F-150 pickup is expected to get 23 mpg in highway driving -- a high number for a pickup -- in its thriftiest version. The Explorer SUV pictured at left will get an estimated 27 mpg highway. Ford Motor is boasting that its lineup will shortly have four vehicles that get over 40 mpg in either highway or city driving (The Fusion and Lincoln MKZ hybrids, the Fiesta SE and the Focus). But the just-released EPA rating of 42 mpg in highway driving for the Chevy Cruze Eco model may be the current champ.

Fewer Big Year-End Discounts If you are a bargain car shopper, one strategy has always been to wait until October after a new model year started and reap huge discounts on the leftovers from the last model year. That reality has changed with the renegotiation of union rules and the resulting ability to control inventory. "Before you had to pay workers if they were making cars or not," notes Jesse Toprak, vice president for industry trends at TrueCar.com. "So they would keep plants open and make cars and figure out a way to sell them later." That meant those big discounts plus sizable sales to rental companies and other fleets. Both those factors hurt future resale value and the model's image with consumers. Not to mention U.S. car companies' financial health.

Used Cars Cost More The limited supply of new cars at big discounts plus tough economic times has pushed more people to buy used. But paradoxically, that demand combined with a limited supply of late-model trade-ins from the 2009 auto sales slump has pushed used car prices up by 10% over a year earlier -- with some used SUV prices rising 30%, according to Edmunds.com. In a virtuous circle for Detroit, rising used car prices have meant higher resale values for many models.

Good Lease Deals are Back Auto companies have always liked to promote the low monthly payments associated with leasing. But after losing money on reselling returned lease cars in 2008 and 2009, they backed away in uncertainty. Leasing fell to a low of 9% of new vehicle transactions in September 2008. Now it's back to 25% with a combination of rising residual values and low interest rates letting companies offer low-payment deals, says TrueCar.com's Jesse Toprak. (See Low-Cost Car Leasing: It's Back). Word of warning: As a shopper, don't get seduced by a low-monthly payment. Crunch the numbers to make sure you're really getting a good deal.

Some of these trends -- such as the demand for higher-mileage cars after gas hit $4 a gallon in 2008 -- would likely have happened even if there had been no financial crisis and bailout. But the combination of tougher mileage standards and more flexibility with union rules has had a big impact on anyone shopping for cars today.

Photos courtesy of the manufacturers

More from MoneyWatch
Used Cars: Avoid these Most-Stolen Models

Electric Car Smackdown: the True Cost of Buying a Volt
Toyota Offers Free Maintenance: Is it a Good Deal?
Diesel Engines: How Quickly do they Pay Off?

Car Safety: New Systems Could Save Drowsy Motorists
  • Jerry Edgerton On Twitter»

    View all articles by Jerry Edgerton on CBS MoneyWatch»
    Jerry Edgerton, author of Car Shopping Made Easy, has been covering the car beat since Detroit companies dominated the U.S. market. The former car columnist for Money magazine and Washington correspondent for Business Week, Edgerton specializes in finding the best deals on wheels and offering advice on making your car last.

Comments