When a carmaker fails, its competitors may assume they will benefit from picking up customers. But they are more likely to be dragged down in a contagion effect, suggests research by Georgia Tech’s Ö. Cem Öztürk, Chicago Booth’s Pradeep K. Chintagunta, and University of North Carolina’s Sriram Venkataraman.
The researchers studied Chrysler’s April 2009 bankruptcy filing. After teetering on the edge of failure in every recession for more than three decades—and being rescued more than once by the federal government—the No. 3 US automaker finally succumbed during the Great Recession. The global economic downturn cost the US auto industry hundreds of thousands of jobs as car sales plummeted.
It was a challenge, the researchers acknowledge, to separate the Chrysler bankruptcy’s effect on competing automakers’ sales from the ramifications of the recession, the government’s “cash for clunkers” stimulus program in 2009, and a handful of other potentially confounding factors. They constructed a data set from 17 sources, including R. L. Polk auto registrations, the Bureau of Labor Statistics’ Consumer Expenditure Survey, and the Google Trends database on web searches. They accounted for the overall downturn in car sales through a statistical analysis and factored in what was going on with overall consumer confidence and sales of other big-ticket durable goods such as appliances.
Competitors’ vehicle sales fell by 28 percent on average after Chrysler’s bankruptcy filing. The researchers suggest that policy makers and managers should take heed: financial distress for one carmaker can have harmful short-term effects on its rivals.
The researchers focused on a sample of 850 car dealerships in 369 markets across the United States from January through August 2009, a 32-week window around Chrysler’s bankruptcy filing. The largest manufacturers in the sample besides Chrysler were Ford, General Motors, Honda, Hyundai, Nissan, and Toyota. The researchers limited their analysis to those seven automakers, which they say accounted for 98 percent of sales in the sample markets.
Sales of Chrysler’s six largest competitors were 16 percent lower in the three weeks after the bankruptcy filing compared with the three weeks before, according to the research. This analysis covered the period before General Motors followed suit with its own bankruptcy filing five weeks after the Chrysler failure. Car buyers’ actions might have been influenced by expectations of a General Motors filing, the researchers caution.
“That said, we provide an additional analysis on the relationship between GM’s filing and competitors’ unit sales,” they write. “In line with our previous negative spillover results, we find that the GM filing is associated with a 24 percent reduction in competitors’ unit sales.”
News headlines such as “US auto industry woes” provided anecdotal evidence that Americans generally weren’t in the market for new cars once Chrysler went bust. The researchers tested whether the sentiment of uncertainty about the auto industry was the basis for the dip in auto sales for Chrysler’s competitors.
Rivals with direct competitors to Chrysler models—for example, the Toyota Camry competed with the Chrysler 300 in the “upper middle” category—had bigger sales declines than those that didn’t, they find, comparing segment-by-segment sales. The finding helps validate the study’s hypothesis that consumers were uncertain about the viability of Chrysler’s competitors following Chrysler’s filing.
The researchers also examined the sales patterns of Chrysler and its competitors in Canada, where Chrysler didn’t file for bankruptcy. They find that rivals’ sales increased by more than 9 percent there. “The pattern in unit sales for the competitors of Chrysler in Canada gives more support to the view that Chrysler’s bankruptcy filing may have negatively affected the competitors of the bankrupt firm,” they write.