General Motors files for bankruptcy

General Motors filed for bankruptcy this morning.

The Chapter 11 filing represents the largest corporate bankruptcy in history, and it was precipitated by federal government threats to cut off loans to the company if it didn’t meet specific restructuring goals. (Learn how bankruptcy works.)

With this move, the federal government now deems GM’s plan viable and will provide an additional $30 billion into GM to keep the company afloat through the bankruptcy process. The government is expected to own 60 percent of the new company. The governments of Canada and Ontario will lend $9.7 billion and take on 12 percent of the new GM.

As part of the further restructuring, General Motors will close 11 facilities and idle another three. However, GM is committed to building a new small car in an idled UAW factory, increasing the production percentage of American-made models sold in the United States from about 66 percent to over 70 percent.

Under the bankruptcy plan proscribed by the Treasury Department, GM is expected to emerge from bankruptcy quickly, in about 60 to 90 days, while some unprofitable GM divisions, including Hummer, Pontiac, Saturn, and Saab will be closed or sold off. The new, leaner GM expected to emerge from bankruptcy will include the Buick, Cadillac, Chevrolet, and GMC brands. The company will close about 18 percent of its dealerships.

Should the bankruptcy be similar to Chrysler’s Chapter 11 process, there may be concerns for consumers being left without recourse from the company for product defect, personal injury, or “lemon” claims. Consumers Union recently wrote a letter to the federal Autos Task Force urging the Treasury Department to make sure legitimate consumer claims do not become a casualty of the bankruptcy process.

To get answers to the most common questions and concerns about Chrysler’s and GM’s bankruptcy, check out our Auto Crisis hub.

—Eric Evarts and Jeff Bartlett

Ticking down to GM bankruptcy, announcement expected Monday

As the clock ticks down to an expected GM bankruptcy filing on Monday, the pieces for a potentially smooth restructuring process are falling into place.

On Saturday, a majority of GM bondholders, holding a little more than 50 percent of GM’s debt, agreed to a plan to exchange their debt for an ownership stake in the company, according to the New York Times. The bondholders will initially get 10 percent, but will eventually be able to increase the stake to 25 percent. This is expected to streamline the bankruptcy process, with expectations that GM could emerge within about 60 to 90 days. (See: “GM counts down to ‘B Day’” and “Concerned about GM’s bankruptcy?”)

Meanwhile, across the Atlantic, an agreement was reached for GM to sell a majority stake of its European operations, including the German Opel and British Vauxhall brands, to a group led by the Canadian auto-parts manufacturer, Magna International. With this plan in place, Opel is expected to be placed under a trust, which will shield it from the U.S. auto bailout and, again, help make the restructuring process go more smoothly. According to Canada’s Globe and Mail, Magna will become Canada’s first major automaker since 1918 and has said that it wants to build Opel cars in Canada.

While many Americans aren’t familiar with Opel, its cars have begun to trickle into our market in recent years as GM has been using them to develop new Saturn models. The current Saturn Astra and Vue, for example, are rebadged versions of the Opel Astra and Antara, respectively. (These links go to the model overview pages with ratings, road tests, and more, available to online subscribers.)

How have they done? In our tests, we found the Astra agile to drive with good steering and a composed ride, but its acceleration is lackluster and fuel economy is so-so for its size. The Astra scored midpack in our hatchbacks ratings, but is not recommended because we don’t yet have reliability data on it.  
While the Opel-based Vue is a big improvement over the previous version, with a comfortable ride and quiet, well-finished cabin, we found its braking and fuel economy disappointing. The Vue is not recommended because of poor reliability.

Meanwhile, elsewhere on the restructuring front, a U.S. bankruptcy judge is expected to issue an opinion on Monday on the sale of Chrysler to Fiat. This would clear the way for the new Chrysler to emerge from bankruptcy soon. (Read: “As GM bankruptcy looms, new Chrysler set to emerge.”)

To get answers to the most common questions and concerns about Chrysler’s and GM’s bankruptcy, check out our Auto Crisis hub. And follow the latest happenings in our Cars blog. Definitely more to come.

—Rik Paul

Concerned about GM’s bankruptcy?

GM has announced that it will hold a press conference on Monday, June 1, in New York City. While the company has not specified what will be discussed, many industry analysts believe it will announce that it is filing for Chapter 11 bankruptcy. (The U.S. Bankruptcy Court in New York is handling Chrysler’s bankruptcy.) Even while using a similar streamlined approach as that being used with Chrysler, the federal government has reportedly said that GM would need at least 60 to 90 days to emerge from bankruptcy. (Read: "GM counts down to B Day.")

In the meantime, a lot of car buyers and owners are unclear about how this will affect them. To help answer these questions, we’ve created a special Auto Crisis hub that looks at the common consumer concerns we’re hearing, from warranty and service questions to what you can do if your local dealer closes its doors.

The latter concern is becoming ever more relevant to current GM owners since, according to Automotive News, GM has also said that on Monday it will begin notifying hundreds of dealerships (beyond the approximately 1,100 it has already notified) that the company will not extend their franchise agreements beyond October 2010. This is another step in GM’s plan to reduce its dealerships from about 6,000 to about 3,600.

The next few days promise landmark events in the auto industry, so follow the latest happenings both in our Cars blog and in our Auto Crisis hub.

We’re also interested in hearing what your main concerns are with Chrysler’s and GM’s restructuring efforts. Leave a comment below.

—Rik Paul

Can you get a great deal on an orphaned Chrysler?

When Chrysler announced plans two weeks ago to shed 25 percent of its dealer network by June 9th, the 789 retailers affected had more than 44,000 new Chrysler, Dodge, and Jeep vehicles sitting on their lots. Chrysler’s move triggered some to immediately drop prices, as they tried to divest themselves of bloated inventories before the June 9 deadline.

Does that make this an especially good time to make a deal? As we’ve reported before, good prices can be found, though there are significant caveats to consider.

Chrysler considerations
The most significant caveat is that no Chrysler, Dodge, or Jeep models are recommended by Consumer Reports. Reliability has been below average for most, and others have scored too low in our testing.

That said, we understand that many people purchase non-recommended vehicles and car shoppers will be tempted by the aggressive pricing now available.

Those shoppers may be disappointed with the models left in stock. Harold Bendell is President of Major Auto World, a multi-branded dealership that sells Chrysler, Dodge, and Jeep along with other makes in Long Island City, NY. He pointed out that after months of discounts and rebates, buyers will likely find much of the remaining inventory to be increasingly made up of less-sought-after models, or those in unpopular colors or lacking popular features.

As for prices, Bendell says things can only get discounted so far. “There are some people coming in thinking they can get a super-duper deal, 50 cents on the dollar. They can’t.”

That may change, as the June 9 deadline fast approaches, particularly at smaller, single-line dealerships, if not big ones like Major World. Prior to the bankruptcy filing, Chrysler officials urged dealers to take additional inventory and said doing so would increase their good standing with the automaker. Some then lost their franchises anyway. According to Bendell, any cars that remain on dealer lots after their franchise is lost must be sold as used cars. Additionally, the Chrysler won’t extend rebates or incentives on those models.

Chrysler said it is helping to find homes for any unsold inventory at its remaining dealerships, but Bendell remains skeptical, particularly if those models are older inventory or less-popular models.

A quick Internet search found widely varying prices among Chrysler, Dodge, and Jeep dealers, but we did see some deep discounts, especially on 2008 models. We found a new 2008 Dodge Avenger SE listed for $15,542, a discount of $4,818. The same dealer was offering a 2008 Dodge Caravan SE discounted $7,425 to $21,900.

Good news for buyers looking to trade is that in spite of losing their franchises, many Chrysler and Dodge dealers are planning to continue in the used car business and are looking for used inventory.

“Most of the Chrysler dealers I know are buying at auction” said Bendell. “There is a ready market for used cars, prices are astronomically high.”

Be especially wary of buying a “new” car once it must be sold as a used model. The U.S. government agreed to back warranties on new cars sold during the Chrysler bankruptcy, but if the model is sold as used the compelling “Lifetime” powertrain warranty protection is not available, as the warranty is non-transferrable. Plus, financing rates are also likely to be higher for a used car than a new one.

While it may be tempting to save big on a new car now, remember the risk you may face bigger losses later in depreciation and increased repair costs. (Should you intend to keep a vehicle longer than five years, depreciation may not be a factor, though reliability should given even higher priority.) Purchasing a vehicle from an automaker going through bankruptcy exposes the consumer to further risks, as there may not be the traditional lemon law and product liability protection.

No matter what vehicle you desire, be sure to do your homework to ensure you are buying a good, safe, reliable model with average or better project owner costs. In this economy, it is best to minimize the surprises, and the research can be done in minutes using our interactive new car selector.

We will continue to monitor the news from Chrysler and GM, reporting here in the Cars blog and also updating advice and news on the Auto Crisis hub.

—Jim Travers

Bankruptcy 101 - How bankruptcy works

With Chrysler in bankruptcy and GM most likely entering into bankruptcy within a few days, there are a number of questions surrounding bankruptcy law. Here is a primer on what it is and what to expect.

What is Chapter 11 bankruptcy?
Chapter 11 bankruptcy is a form of corporate restructuring in which a company puts together a plan to eliminate some of its debt so it can survive after it reorganizes. Professor Robert M. Lawless from the University of Illinois, College of Law calls this a re-contracting of obligations and says it allows companies to change the terms of the debt with the creditors, including reducing the principal.

Filing for Chapter 11 bankruptcy helps the company get rid of financial baggage and get its productive assets working again. Companies continue to function as they have been and many consumers will not see a change. Most changes occur behind the scenes.

During bankruptcy proceedings, a judge keeps a close watch on the company and any decisions are subject to review and approval through bankruptcy court. Through this process it is determined whether a company can successfully reduce its debt, sell assets, and emerge stronger.

Chrysler (and GM, it is anticipated) is doing what is called a “363 sale” after the section of U.S. bankruptcy law that allows a quick sale of assets to a new company, with a court hearing. In Chrysler’s case, that company is Fiat. The Chrysler sale is happening within about a month after it filed for bankruptcy.

After the new company emerges, the old company continues in bankruptcy court to liquidate, sell assets, and adjust claims. That process can take months or even years to settle. The creation of a new company and the selling of good assets is done before the end of that part of bankruptcy case.  

How are liabilities paid off?
There are three groups of investors in a company and that generally determines the order of who gets paid back first. First, secured creditors with collateral get paid up to the value of the collateral. Next comes  creditors with priorities, which include professional and legal fees. After these groups are paid off, the next in line are unsecured creditors including other banks and bondholders without collateral or to the extent their claims exceed the value of their collateral, suppliers,  and some consumers with claims against the company. Shareholders are the last to get any money back. Most take a significant loss on their investment and are likely to leave court empty handed.

What is the difference between Chapter 7 and Chapter 11?
Chapter 7 is a liquidation of assets to pay off debt, while Chapter 11 is a reorganization that reduces debt and allows the company to continue operations. Companies who enter Chapter 7 are past the stage where they can reorganize and have a profitable future. They must sell off what they can to repay creditors. However, a number of companies who file Chapter 11 have to liquidate remaining “bad” assets which they can do either within the Chapter 11 or by converting what remains to a Chapter 7 bankruptcy.

We will continue to monitor the news from Chrysler and GM, reporting here in the Cars blog and also updating advice and news on the Auto Crisis hub.

—Liza Barth

What do the automakers have against their dealers?

All three domestic manufacturers have been ending franchise agreements and effectively closing dealers. In particular, Chrysler and General Motors have been making headlines for their massive shutdowns, while Ford has been quietly negotiating closures for the last four years.

Chrysler Vice-chairman Jim Press has said that Chrysler’s bankruptcy allows a “once in a lifetime chance to accomplish a right-sized, realigned dealer body.” It seems sensible to ask, then, why any automaker wants to choke off parts of its own distribution channel. After all, the dealers are independent businesses. Since the automakers don’t own the stores, why should they really care if some of them are losing money?

The answer, it turns out, has more to do with long-term business strategy than with an immediate crucial need. Turnover lies at the heart of the problem. Ideally, both dealers and automakers want the maximum volume possible to go through every store. High-volume stores have a rapid sales rate, and product turnover multiplies whatever slender profit they make on each car sold.

With the Detroit Three’s declining market share, these diminished corporate giants find themselves with too many dealers and not enough customers to support them all. Consequently, unsold cars pile up on dealer lots. Those unsold cars tie up capital that could be used productively elsewhere. The current deep recession only magnifies the problem.

Automakers may provide life-support for low-volume dealers in the form of special discounts or other financial help. They also maintain a network of field representatives and other employees devoted to serving the dealers. All those costs impact an automaker’s net earnings. Making a better match between the volume of cars they produce and the number of stores needed to sell them should result in corporate savings and a healthier dealer group. In the end, it’s not that automakers will earn more per car, it’s that they will spend less trying to sell them.

Another consequence of a dealership glut is that those stores compete against each other for whatever customers are available in any given region. And consumers are pretty good at figuring out which dealer has the lowest price. Anybody who has bargained hard for a new car in the last few years knows how effective it is to get up and make for the door if the dealer doesn’t seem interested in offering a good deal.

How dealership closings affect the consumer?

In some ways, it’s good for the consumer when the dealers are willing to battle each other to sell you a car. And with multiple dealers fighting for your business, that’s what can happen. Such competition can inspire some dealers to resort to high-pressure selling of dubious add-ons like extended warranties, VIN-etching, and absurdly high “conveyance” fees. Then again, dealers shutting their doors can be a real inconvenience. Much of the time, inconvenience is all it will be. If your local Ford or Chevrolet or Chrysler dealer closes, there is often another one 10 or 15 miles up the road, or on the other side of town. For those in more rural areas, the dealer proximity may be a much more significant issue.

The new landscape promises to be a mixed blessing. For instance, you may have to travel further to get your car serviced. However, fewer, stronger dealerships in theory can provide more inventory to choose from and have the resources to provide better facilities and services.

But if you have had five Chevrolet, Dodge, or Ford dealers in your area and now suddenly you have just one, what’s to prevent those survivors from jacking up prices?

The answer is that they can try, but only to a degree. However optimistic some car dealers may be, they can’t just raise their prices at will because they still have to compete with other brands. The three domestic automakers will remain rivals, plus they face seven Japanese, one Korean, and about a half dozen European makers, and their assorted brands. So, however grandiose Detroit Three dealers’ dreams may be, the hard reality is that in practically every car category consumers still have lots of worthy alternatives. If you don’t like the deal you’re offered, forget about brand loyalty and head for the door.

The bottom line

Dealer cutbacks are tough on local communities and their economies, though they remain an important element in restructuring the struggling domestic automakers. Hopefully, the long-term benefits outweigh the current challenges and impositions.

We will continue to monitor this fast-moving story, reporting here in the Cars blog and also updating advice and news on the Auto Crisis hub.

--Gordon Hard

GM counts down to "B Day"

As the auto industry, and consumers await the fateful decision on whether General Motors will file for bankruptcy protection, several ripples have coursed through the auto industry recently. And, as ripples often do, they are heading in different directions. (Read "Failing to reduce debt, GM bankruptcy looks inevitable.")

Today’s highlights of the carpocalypse:

Bonds – Following direction from the U.S. Department of the Treasury, GM offered bondholders a debt-for-equity exchange, essentially trading $27.2 billion in debt for a 10-percent stake in the company. The deadline expired late Tuesday, without the bondholders accepting the offer, signaling bankruptcy was inevitable. However, today, the Treasury sweetened the deal, offering bondholders the rights to buy an additional 15-percent of low-price GM stock, according to a Securities and Exchange Commission filing. The major bondholders have accepted this revised offer, though GM could still be headed for bankruptcy. Under the new plan, the U.S. and Canadian governments would own 72.5 percent of New GM when it emerges from bankruptcy, according to the Detroit News.

New Cadillacs – Cadillac will replace the current SRX crossover vehicle with two models, a new, more SUV-like SRX and a CTS wagon. (Read: "Pricing: 2010 Cadillac SRX.")

GM pays early – To ease bankruptcy concerns, GM has paid about 90,000 employees three days early. Likewise, it plans to pay about 1,500 suppliers today, ahead of its scheduled June 2nd date, according to Reuters. This last gesture could be seen as a strong indicator of imminent bankruptcy, and also good will toward its valued business partners.

Suppliers file for bankruptcy – As feared, major and minor suppliers are suffering during the recession and some are moving to bankruptcy. Visteon today announced that it was pursuing Chapter 11. Spun off from Ford Motor Company in 2000, Visteon has failed to make a profit in the 21st century, according to Automotive News. Today, it supplies Ford as well as other automakers. The interior, climate system, and electronics producer joins Metaldyne, Delphi, Federal-Mogul, and Dana, among others, in seeking bankruptcy protection.

We will continue to monitor this fast-moving story, reporting here in the Cars blog and also updating advice and news on the Auto Crisis hub.

—Jeff Bartlett

Luxury hybrids - Can they Fit all sizes?

A close friend of mine loves to drive his in-law’s Honda Fit. No, not because of the performance – his Porsche Boxster S is more than a bit quicker and nimble. What he likes about the Fit is its amazing cargo room. He brags about putting his road bike, sans front wheel, upright in the Fit’s cargo area with the seats folded flat. He cites the storage capacity and good mileage as big pluses.

But he’s an upmarket type of guy, willing to spend a little extra for niceties. He claims that he’d be the first on the list if Acura had a version of the Fit, a concept similar to how the Canadian Acura CSX sedan relates to the Honda Civic. A spruced-up interior, high-tech features, Civic Si motor, and a six-speed manual or automatic would do the trick, he says. But the pricing couldn’t work. This Acura Fit would be too expensive for the fuel-sipping crowd, and probably still to small or crude for the traditional upmarket Acura buyers. (For discussion, the Acura CSX base price translates to $25,462.)

But what about a hybrid version for Acura?

Automotive News reported on May 27 that, according to the Nikkei business daily, Honda is going to bring out a gasoline-electric hybrid Fit by fall 2010. This would be one of the three hybrid vehicles Honda plans to launch by 2012. The report didn’t indicate which markets will receive the hybrid Fit.

But if you put hybrid batteries into a Fit, would it still have the cargo utility that my buddy loves? After all, you still need the under-the-front-seat gas tank. There are always trade offs...

As Toyota is introducing small and efficient hybrids to the luxury market this year with the Lexus HS 250, Honda could enter the market with a Fit-based Acura hybrid. The premium paid by luxury buyers might offset the hybrid costs, and the weight that comes with making the Fit more luxurious could be countered by the hybrid powerplant. Fuel economy wouldn’t necessarily plummet with the addition of leather seats, more sound deadening, and other Acura-like touches. If it doesn’t happen with the Fit, rest assured, other models will take this approach as all automakers struggle to meet the more stringent 2016 fuel economy standards.

Perhaps my buddy should start finding some room in the driveway.

—Jon Linkov

Pricing: 2010 Cadillac SRX

Cadillac announced pricing on the new SRX crossover, which will go on sale this summer.

The base front-wheel-drive model will start at $34,155 with a 265-hp, 3.0-liter V6 engine. The SRX is a midsized, car-based SUV, with optional all-wheel-drive and an optional turbocharged, 2.8-liter V6 engine. A six-speed automatic transmission will be standard. This five-seat SUV boasts available technologies such as a pop-up navigation screen with three-dimensional display, adaptive lighting, dual-screen rear entertainment system, and power liftgate with adjustable height settings. Bluetooth connectivity is standard, as is OnStar with turn-by-turn navigation.

Standard safety features include front, side, and curtain air bags, rollover sensors, and stability control.

In addition to the SRX, Cadillac has announced that its new CTS wagon will go on sale about two months after the new SRX.

The new SRX marks a big change, as it moves from the rear-wheel-drive CTS platform to a new front-wheel drive architecture. From what we've seen from car shows and a brief drive of a prototype, the new SRX looks like a strong competitor. The interior is much improved, just like the stunning Cadillac CTS cabin. This time around, there is no third-row seat. but the outgoing SRX wasn't that efficiently packaged, anyway.

—Eric Evarts

Behind the wheel: Mini E

We recently had a chance to drive the all-electric Mini E at a local press event. The car is not for sale yet, but in what amounts to an extended market test, a selected group of customers in the Los Angeles and New York City areas will pay $850 per month to lease one for a year. (See our Mini E preview.)

The Mini E is a two-seater with a large, 35-kwh lithium-ion battery pack occupying the space where the back seats would be. The electric motor running off that battery produces the equivalent of 204 hp and 162 lb.-ft of torque. To put that in perspective, a gasoline-powered Mini Cooper S produces 172 hp and 177 lb.-ft. So this electric Mini has oodles of power. The claimed range of the E is 150 miles. A full recharge is said to take about four and a half hours if you have access to a 240-volt power source, but almost 24 hours if you have to use standard 110-volt power. (See our Mini Cooper ratings and reviews, available to online subscribers.)

We took turns driving the electric Mini around a hilly, curving, five-mile loop in Bear Mountain State Park, along the Hudson River north of New York City. Driving it was a hoot. With the electric powertrain’s instant torque, it’s easy to light up the front wheels at launch or even while accelerating out of corners. The motor pulls strongly, eagerly, quietly, and effortlessly. Power delivery to the wheels is similar to a Cooper S—right down to the torque steer. Handling is similar, too, with go-kart like agility. The regenerative braking system, which recaptures braking energy to recharge the battery, lets you descend hills without touching the brakes. It’s a pretty aggressive system that we think a lot of people will find strange at first. The only noise from the powertrain is a muted electric whine. That’s too bad in a way, since the regular Mini’s exhaust note is quite exhilarating.

Similar in appearance to its gasoline-fueled brethren, the Mini E adapts subtly to the electric format. For instance, the instrument cluster does away with a tachometer, substituting a gauge that shows the state of the battery’s charge. Open the fuel flap and you find an electric receptacle instead of a gas cap. One thing that can’t be hidden is the lack of luggage space. Behind the battery is room for a carry-on bag, but not much else.

After a group of heavy-footed journalists had taken turns pushing the Mini E hard around the park’s hilly terrain for a few hours, it became clear that the car wasn’t going to achieve anything close to its 150-mile range in these extreme usage conditions. The point was freely conceded by the BMW/Mini representatives on hand, and it came as a surprise to no one.

The Mini E may still need some work, such as less intrusive regenerative braking, but it proves that green and fun-to-drive are not mutually exclusive. It also shows both the advances in battery technology and the need for those batteries to get a lot smaller. At this point, electric mobility still demands tradeoffs: You can get high performance, good range, and adequate interior space. But you get to pick only two.

—Gabe Shenhar

Learn about driving green in the Consumer Reports special fuel economy section.