This story by Jim Henry originally appeared on CBS MoneyWatch.com.
Chrysler and GM both recently emerged from bankruptcy with substantial help from the U.S. Treasury. As major shareholders in Chrysler and GM, U.S. taxpayers can applaud - and potentially gain from - their return to viability.
But there's also one inescapable fact: The incredible deals you're seeing now - zero percent financing, thousands of dollars back in rebates and discounts, etc. - are likely a thing of the past. Instead, when all is said and done, you'll probably see car companies charging consumers more - even though sticker prices might decline - and dealers holding more firmly on price negotiations.
"The deals that we have today, and will have probably for the next few months, are in our opinion the best deals consumers will see in the next two to three years," says Jesse Toprak, executive director of industry analysis for Edmunds.com, a car shopping and advice Web site.
Shrinking to Fit
For decades, market share has shrunk for Detroit's Big Three. But Chrysler, GM, and Ford didn't shrink accordingly. Union contracts saddled them with high labor costs, in some cases even when workers were idle. That meant huge pressure to keep the plants running, and U.S. car companies trapped themselves in a business model where supply consistently outstripped demand and extreme discounting was necessary to move cars off the lots.
But in bankruptcy reorganization, Chrysler and GM are radically shrinking themselves to fit the reality of lower market share. They have cut costs dramatically, substantially wiped out existing debt, eliminated jobs, closed plants, and handed off retiree health care costs to a UAW trust fund. While avoiding bankruptcy, Ford has done many of the same things.
In addition, Chrysler and GM took advantage of bankruptcy to circumvent dealer-friendly state franchise laws and terminate what the car companies claim are mostly small and underperforming dealerships. GM plans to cut 2,600 dealerships, or 40 percent of its total, by the end of 2010, while Chrysler recently moved to drop 789 dealerships, or 25 percent of the total, from its U.S. network. (The U.S. House of Representatives recently passed a bill that could reverse some of the dealer cuts by enforcing state franchise laws, but the U.S. Senate, which has been less sympathetic to the dealers, would still have to sign off before any dealers are restored.)
The bad news for consumers is that for the first time in years, all those factors mean less pricing and bargaining power. The domestic car companies are faced with less of an oversupply, and therefore less pressure to cut prices. And to the extent that Chrysler, GM, and Ford are successful at charging higher prices, foreign competitors can be counted on to follow suit.
So what can you do to prepare for these new car-buying realities? Here are three important steps you can take:
1. Buy before the end of the year
While they last, there are still big discounts on most 2009 and even some 2010 models - a near-record average of just over $2,900 per vehicle in June, according to Edmunds.com. The best deals will probably be on leftover 2009 models, or 2010 models that have been on the market since early 2009. For example, Ford is now offering zero percent financing plus $1,500 cash back on most of its 2009 models and zero percent financing plus $1,000 back on its already-released 2010 models. If you wait for deals to get better on new 2010s introduced in the fall, you might be disappointed.
2. Focus on the final, after-discount price
Don't get swayed by sticker-price reductions: With such heavy and pervasive discounting in recent years, the sticker price on a car, otherwise known as the manufacturer's suggested retail price (MSRP), has become almost meaningless. But as U.S. carmakers strive to become profitable again, they're likely to maintain or even cut sticker prices, while also scaling back on rebates and discounts to an equal or even greater degree. That means a potentially higher price for you, even as the car companies avoid looking like they've raised prices.
GM tried a similar system of reducing both sticker prices and discounts back in 2005-06 to become more profitable, calling the program "Value Pricing," but ultimately had to give it up when its competitors failed to follow suit and consumers clamored for more discounts. This time, with most carmakers in the same boat and fewer dealers competing with one another for business, the strategy has a better chance of succeeding.
Bottom line? Don't get sucked in by ads about how much you can save on the sticker price; focus on the real price after all discounts and negotiation.
3. Negotiate upward from dealer pricing
As dealers offer less in the way of rebates and discounts, the tried-and-true tactic of starting your negotiations around dealer invoice - or the price that the dealer pays - and working your way up to a fair price, rather than down from MSRP, has become more valuable than ever. This strategy allows you to set the parameters of the negotiation in your favor by forcing the dealer to justify his or her markup, rather than having you try to knock dollars off an arbitrarily inflated price. What you're looking to get is the least possible increase over dealer invoice, without regard to MSRP. You can look up dealer invoice prices for free on Web sites like IntelliChoice.com, Edmunds.com, and KBB.com.
Bankruptcy may have seemed like the ultimate disaster for Chrysler and GM, but in the long run, it could prove to be the best thing that has happened to the two companies, giving them the ability to make the fundamental changes necessary for raising prices and reducing production much faster than they could have outside bankruptcy reorganization.
"Production cuts mean fewer cars that will need to be sold, and that will directly impact the incentive levels," says Edmunds.com's Toprak.
Taking all these factors into account, it may be time to buy now, while the buying is good.