These cars have got to go: Dealer cuts mean deals

DETROIT -- At 789 Chrysler lots across America sit 44,000 potential bargains, cars and trucks that are stuck between dealers and a troubled company that no longer wants their services.

The dealers have just a few weeks to sell the Chryslers, Dodges and Jeeps or risk losing thousands of dollars on them, giving people who want a car on the cheap a serious chance for a deal.

"You've got some very good negotiating power," said Dave Champion, director of automobile testing for Consumer Reports magazine. "[Dealers are] really looking to shift this inventory. It's just stacking up all around them."

On Thursday, Chrysler LLC asked a New York bankruptcy court to end its franchise agreements with the dealers, casting them aside so the automaker can move forward as a new company with a leaner network of about 2,400 showrooms.

General Motors Corp. took a similar step Friday, giving notices to 1,100 dealers that it no longer wants them. On their lots sit 65,000 Chevrolets, Buicks, GMCs, Pontiacs and Cadillacs, but at GM, the dealers' situation isn't as dire.

GM isn't in bankruptcy -- at least not yet -- so its dealers have more options to fight the move, which the company doesn't plan to implement until October 2010. They also have more time to sell the vehicles, plus GM's dealer agreements also require the company to buy back cars and trucks that meet certain requirements on age and mileage.

Both automakers say they have too many dealers for too few sales. For years they have wanted to get rid of underperforming showrooms to expand the market area of healthier dealers. The moves would give the stronger dealers higher profits and more money to spend on marketing, facilities and personnel.

But inside the 789 Chrysler showrooms to be cast aside, fear is starting to set in as dealers try to figure out what to do with expensive inventories that weren't selling well even before the Auburn Hills, Mich., automaker entered bankruptcy protection last month.

"They've told us that the inventory is our problem," said Keith Hollern, one of the owners of a Dodge dealer in Windber, Pa. "Want to buy one? We're having a fire sale."

Dealers borrow money to buy their inventories, then repay the loans and make a profit when the vehicles are sold. But Chrysler sales were down 46 percent the first four months of the year, so many dealers have been paying interest for months. Even if the vehicles are sold at cost, dealers still lose thousands in interest payments.

Chrysler doesn't have the money to buy back the vehicles, said company spokeswoman Kathy Graham, but it also doesn't want to leave dealers in a bind or see the inventory flood the market at bargain prices.

So it has signed a deal with GMAC Financial Services, Chrysler's new finance company, to float loans to dealers that Chrysler plans to keep can take on the 789 dealers' unsold inventory.

The deal, though, doesn't include about 4,000 2008 models still on the lots.

Remaining dealers likely will need to take the cars and trucks because all of Chrysler's manufacturing plants have been shut down since it entered bankruptcy on April 30, Graham said. Sales in May have been stronger than anticipated, so dealers will need to replenish inventories, she said.

"They're not building anything right now, so they're kind of creating a little bit of a product shortage," Hollern said. "So, surprisingly, a lot of the dealers who have gotten new contracts to go on with the new Chrysler will be looking for new inventory."

Graham said dealers to be cut from the company will get Chrysler warranty reimbursement and sales incentives such as rebates and low-interest financing until June 9. But after that, they won't be reimbursed for either.

That means the dealers have a big reason to get rid of the cars before their franchise agreements end. Incentives on some vehicles can run $6,000 or more, and without them, dealers who have been cut won't be competitive with remaining dealers who can still offer the discounts.

"They're not giving us a lot of time," said Michael Wolf, a Plymouth, Wis., Chrysler dealer whose franchise was among those that won't be renewed. "They're neglecting their liability of taking new inventory. They're not taking anything back."

Erich Merkle, an independent auto industry analyst in Grand Rapids, Mich., said he doubts that remaining Chrysler dealers will need more cars and trucks before June 9, so they'll be reluctant to take on more metal.

He said the resale value of Chrysler vehicles has dropped, evidence that it's losing the power to keep new car prices stable.

"What'll end up happening, if a dealer wants to stay in business, they'll probably end up just selling it below cost just to get rid of it," Merkle said. "You'll probably be able to find Chrysler vehicles perhaps at under the dealer cost."

Dale Horn, owner of a Chrysler-Dodge-Jeep dealership in Malvern, Ark., whose franchise was cut, isn't counting on any help from the company to unload his inventory of 34 vehicles.

"Right now, I don't have much confidence that they will do what they say. Nobody's called me yet saying they're going to try to help me," Horn said.

Still, he's determined to sell the cars and trucks before June 9, and he's not ruling out selling at a loss.

"It's not a matter of 'if.' We will sell them all," Horn said.

Champion said that before walking into a dealership, it's important to find out about incentives and holdbacks, which are payments the dealer gets when it sells a car.

"It's not a bad idea to go in there with a lowball price," he said.

Waiting until the closure deadline might give shoppers even greater power. But Champion noted that supply is drying up. So waiting too long could mean not getting the ideal color or features.

"The longer you wait, the less options you'll have," Champion said.