Persuading buyers to take a chance on the bankrupt automaker might turn out to be tougher than working Chrysler out of court
Now that Chrysler has done what was once unthinkable for Detroit's Big Three carmakers—filing for Chapter 11 bankruptcy reorganization—everyone from President Barack Obama to the automaker's own public relations department has tried to assure car owners and would-be buyers that the company is going to continue operating and that its warranties are safe. But the question for consumers is, should I buy a Chrysler now? And how about one of those Fiats I hear are coming to America?
Consumers can be spooked by the idea of buying from a bankrupt company; many equate bankruptcy with "closing the doors." Car-buying site Cars.com says 21% of consumers it polled said a bankruptcy would affect their decision on which company they would buy a car from.
So Chrysler and its dwindling army of dealers know that the job of selling cars just got a lot tougher. They will have to do a lot of advertising and communicating in the next 60 days to keep people coming into showrooms.
"They should shout from the mountain tops in ads and every other way they know how that they are here and not going anywhere," says Jason Vines, former communications chief at Chrysler as well as Ford (F), who has dealt with several public relations crises. "Now is not the time to be shy."
The Quality Problem
Even before this, talk of a bankruptcy filing had been hammering Chrysler's U.S. sales. They are down 46% so far this year, worse than the 38% decline for the industry. Part of that, of course, is the impact of the recession and scarcity of consumer credit. But it is hard to feel good about Chrysler's vehicles based on the independent data available on reliability and quality. Consumer Reports, for example, recommends no Chrysler, Dodge, or Jeep vehicles in its auto guide this year. Nor does J.D. Power & Associates (like BusinessWeek, a unit of The McGraw-Hill Companies (MHP)) have great things to say. It rates Chrysler's vehicles considerably lower on quality than rivals and industry averages.
Worse, J.D. Power also scores Chrysler very low in its Automotive Performance Execution & Layout Study, which surveys buyers on how well a vehicle is executed and designed after they have lived with it a while. All three Chrysler brands score well below the industry average. Several of Chrysler's key models—Chrysler Sebring, Jeep Liberty, and Grand Cherokee—score at or near the bottom of each category. All three brands also score well below average on Power's Vehicle Dependability Study, which measures how reliable vehicles are over three years of ownership.
Chrysler executives says that it takes time for any improvements in cars to be proven. "We have made great progress in the nearly two years we have been working at it, but it takes time for these improvements to be reflected in the scores," said Chrysler Vice-Chairman James Press in a recent interview with BusinessWeek.
One worry that automakers have about bankruptcy—that buyers will assume no one will be around to fix their car—should be allayed by the fact that warranties on Chrysler products have been guaranteed by the U.S. government since Mar. 31. That continues through the Chapter 11 bankruptcy process. Since the company is virtually assured to reemerge from bankruptcy as part of a new company combined with Italian automaker Fiat, warranties will continue to be honored by Chrysler and the new company that emerges from bankruptcy without the government having to be involved.
Bargain Hunters, Start Your Engines
If car shoppers are still interested, they'll find plenty of deals. The clouds of bankruptcy over Chrysler and General Motors (GM) have greatly reduced demand. As a result, leading car-shopping site Edmunds.com says the average discount being offered on Chryslers, Dodges, and Jeeps is about 23% off sticker, vs. an average of 16% for the rest of the industry.
It's not impossible to find discounts of more than $10,000 on Chrysler minivans and SUVs, as well as Dodge pickup trucks that dealers are trying to clear from their lots. Older car models, such as the Chrysler PT Cruiser and Chrysler 300, are also seeing discounts of more than $5,000 at some dealerships. But those heavy incentives may dry up soon as Chrysler idles its production plants while it is in bankruptcy reorganization.
"No one can blame car buyers who shied away from brands that were mentioned in the same breath as the word bankruptcy," says Edmunds.com consumer advice editor Philip Reed. "[But] now that their warranties are being guaranteed, Chrysler and GM vehicles are good deals that are worth considering."
Let's say, though, that a consumer is wowed by the design of a Jeep Grand Cherokee or Chrysler 300 and wants to take advantage of the huge incentives. The next question might be whether their dealer is going to be around to service it a year from now.
More than 1,000 Dealers May Disappear
Forty-five Chrysler dealers went out of business in April, and more will be shuttered in the weeks ahead. Under Chapter 11, Chrysler can cut dealers without worrying about repercussions from state franchise laws. The company has about 3,150 dealers and is said to want to cut as many as 1,200 to 1,500 of them in markets where too many are competing for too few sales.
So the dealer that is 15 minutes down the road might be gone in a matter of months, with a dealer 45 minutes away the closest to service a vehicle. Other repair shops can perform warrantied repairs, but many car owners prefer to have service done at the dealer where it was purchased.
Earl Hesterberg, CEO of Group 1 Automotive, a company that manages dealerships of several manufacturers, including Chrysler, says a lot of local dealer advertising, combined with the company's national advertising, will need to make the case that buyers don't need to worry about being abandoned. "The good news is that the brands have a future," said Hesterberg.
Is there an argument to be made for waiting to see what Fiat brings over to sell in Chrysler showrooms, or even longer to see what new vehicles the combined company comes up with?
Unfortunately, Fiat suffers from some of the same quality problems as Chrysler. Fiat models do not score high for quality and reliability in Europe and South America, where they are sold now. Fiats and Fiat-owned Alfa Romeos sold in Europe are near the bottom in reliability and "need to improve significantly to move away from the foot of the table, where they have languished for several years," says U.K.-based Which?, a consumer advice publication similar to Consumer Reports in the U.S. A survey of people who owned Fiat models in Britain, by J.D. Power and magazine What Car?, put Fiat last of 28 brands in a 2008 Customer Satisfaction Index for two-year-old vehicles. Quality and reliability count for 30% of the score.
For now, Chrysler has found refuge. But it's not clear how its new partner will make its future any more promising.