President Barack Obama made clear at his press conference on Monday that the U.S. government would stand behind warranties on cars purchased while the automakers restructure. "Let me say this as plainly as I can: If you buy a car from Chrysler or General Motors, you will be able to get your car serviced and repaired just like always," Obama said. "Your warranty will be safe. In fact, it will be safer than it has ever been. Because starting today, the United States will stand behind your warranty."
That surely boosted the confidence of prospective car buyers and sent a strong message to the United Auto Workers union and bondholders that the government is dead serious about implementing a major restructuring of both companies and won't wince at bankruptcy if that's what is required to get the job done. GM's new CEO, Frederick A. Henderson, basically repeated that message at his Tuesday-morning press conference, even going so far as to say that bankruptcy was now "more probable," though not desirable. (See pictures of the remains of Detroit.)
But for many current and future GM or Chrysler car owners and more than a few car dealers the government promise is a bit of a head spinner. For example, if you're the happy owner of a GM or Chrysler car now, does the new government backing pertain to you? (No.) If you purchase a GM or Chrysler car today, are you covered? (Yes.) Last week? (No.) And if you buy while either company is in bankruptcy? (Yes.)
Under the plan, called the Warranty Commitment Plan, both Chrysler and GM will contribute money to a special purpose company that will ultimately hold enough money to cover 125% of potential warranty claims. GM and Chrysler would contribute 15% of the required funds, and the Treasury would put in the rest. This special company would be separate from the automakers and would continue to pay for warranty service in the event of bankruptcy or liquidation. It does more: if Chrysler were liquidated in bankruptcy, for example, the warranty company would find a new service provider to oversee warranty-related body work. (See the 50 worst cars of all time.)
At this point, the promise is grand but vague. Warranty administration is a subspecialty in the auto business that relies on precise language. When carmakers say three years and 36,000, they mean exactly three years and 36,000 miles. Any changes or extensions, while not uncommon because of pressure from state lemon laws, are reviewed by senior management. Dealers get some leeway but not much, and taking a car to an unauthorized repair center can effectively negate the warranty. "None of this is clear," said one dealer, referring to the many nuances of warranty work that are yet to be defined in the government's plan. He also noted that if GM is forced into bankruptcy, dozens of dealerships could close and consumers would be left guessing as to where to take their vehicles.
Indeed, if bankruptcy occurs, many existing GM and Chrysler owners still under warranty face an as-yet-undefined level of support. So if you're sitting in your 2008 Chevy Tahoe and wondering where all this talk of bankruptcy and government-backed warranties leaves you, the answer is, nobody's quite sure. And that may not be the best place to leave a loyal GM customer who bought when few would.