The Congressional Oversight Panel Report on Auto Bailouts: Dealer Closures
I’m reading the Congressional Oversight Panel’s report on the auto bailouts (COP is the oversight entity headed by Elizabeth Warren). I’ll have more to say in a bit, but I did want to point to one of the most coherent explanations for why the manufacturers had to shut down so many dealers.
First, the Chrysler details (footnotes removed):
Chrysler announced that it would retain an “overwhelming majority” of its suppliers and would close 789 of its nearly 3,200 U.S. dealerships. These dealerships employed more than 40,000 people. State governments heavily regulate the relationship between dealerships and automotive companies, usually claiming that close oversight is necessary to equalize the bargaining power of dealerships and automakers. Generally, states only allow an automotive manufacturer to terminate a dealer contract if it has good cause. However, the bankruptcy process provided the automotive manufacturers with greater flexibility in terminating dealership contracts. Congress is currently considering a number of bills to restore the terminated dealers‟ contracts.
Both Chrysler and GM maintain that their dealer networks were oversized and that downsizing was necessary to regain viability. Domestic brands in 2008 accounted for about two thirds of U.S. dealerships, but only 48 percent of new vehicle sales. Chrysler, for example, has less domestic market share than Toyota, but even after its intended closings will have many more dealers [Toyota has 1502 dealers].
In 2008, Chrysler‟s dealers lost on average $3,431. By consolidating dealerships, the companies argue, they can drive more sales through more profitable businesses that can afford to invest in their businesses. The remaining dealers may also be able to negotiate more favorable terms with their floor-plan financers. This may in turn help dealers acquire more stock and sell it to consumers at lower prices, thereby increasing sales and profits for the dealers and for Chrysler and GM.
And here are the GM details:
GM subsequently notified 1,300 of its approximate 6,000 U.S. dealers that they would be closing by year end 2010, aiming eventually to trim its total to about 4,000. GM provided approximately $600 million in financial assistance in return for the dealers‟ selling down their existing inventory over the subsequent twelve months. These payments could vary widely based on each dealer’s situation.
Now, the report misses one key element–the one that dealers complained about constantly when I was doing a US dealer consulting project for an American manufacturer in 2007. If you’ve got a GM dealer on Main Street and another GM dealer two miles away on Auto Parkway–and they can get the same product with little time lag (they do this through dealer trades)–then only two things separate those dealers: customer service, and price. This forces dealers into cannibalizing the sales of dealers of the same brand, driving down the price and with it, the profit margins of each dealer.
Not only does this make each of the dealers less viable, but it contributes to the cheapening of the brand overall. So to the extent you can cut down on these kinds of cannibalizing sales on price, you improve the overall health of the brand.
And, as this report notes, you can increase the overall sales of dealers that can invest in their businesses.
I suspect GM and Chrysler will have to continue to shed dealers over time (and I know Ford realizes it need to do the same to remain competitive). But within the context of the restructuring through bankruptcy described here, the report gives a fair explanation of the need.
Is congress planning to directly fund the dealerships it forces Gm/Chrysler to re-open? Didn’t think so. The move is likely political kabuki, I think every congresscritter knows that shedding dealers is essential for any hope of success.
Boxturtle (I sure hope the new cars take off)
however;
most people who shop aren’t shopping locality they are simply shopping, they can do that on the internet, they can do it by phone so the cannibalizing is still going to happen
when I wanted my car the local dealer was 5000 over list, Connecticut was list, I was going to buy it in Connecticut but by chance stumbled onto a dealer that wanted to get rid of a car they had on the lot so I paid less then list
the point is I didn’t shop location I simply shopped
Actually, perris, thus far you’re still not “most people.” Trust me–I’ve been in the dealers in precisely your area.
That said, you’d have to go further to get a differentiated price is there are 1500 dealers than if there are 4500 dealers. And more people are willing to go the smaller distance between 4500 dealers than are willing to go the longer distance between 1500 dealers.
Capitalism.
Isn’t one of its claims that it, infallibly, makes the best use of resources? Of all resources?
“Efficiency” is the essence of the claim, across the board …
And aren’t we told that “competition” is the “name of the game”?
Well …
Perhaps this problem of too many dealerships is not really “new”?
Perhaps, it was clear long ago (to any who might have cared to have taken a “look”) that there were systemic “problems”?
Perhaps that is true of the entire Capitalistic structure, from the famed Main Street all the way to the fabled and storied Wall Street?
Naw, couldn’t be.
As perris point out,”problems” will continue.
And frankly, if the last car our family bought is any indication, the “attitude” of the American dealerships toward their potential customers might just need to be examined.
Bluntly, we were treated most shabbily by the manager of a Ford dealership (hell, we felt sorry for the salesman with whom we were trying to work … as the manager knew “everything”, even if he did not!!! and behaved a perfect ass).
So we went to a Toyota dealership where they were polite, attentive, and knew what they were talking about.
Partly what we are dealing with is a sense of “entitlement” that has yet to acknowledge that simply being American does NOT entitle one to $ucce$$.
Whether you are a car, a human person, or a corporate ‘person’.
(Who decides which dealerships get to survive?)
No doubt it will all come down to a question of money.
Whose and where?
We used to say, “Follow the money”.
Perhaps, we should, now, follow the tears?
You describe monopoly. It is the same thing that is closing every other type of small business. Amazon sells imported chinese pirated items, murkans flock to buy crap because it is cheap. You are now advertising a company on this site that sells imported products to bypass the jobs of murkans so they can sell it cheaper than anyone else and create monopoly. You have a cancer like wal mart selling small sizes of food so that they can directly take over any business a smaller chain might have in the community.
and we bailed out auto dealers. The people that are right near the bottom of the wrung of humanity. We allowed them to set the terms of the bailout, and now we wonder?
the bailout was a ridiculous governmental jock strap for an industry that does nothing but screw us all over.
Give up on cars that use gasoline and we can prevent this from happening again. The big 3 clearly aren’t going to make anything that doesn’t run on gas in murka. They are going to import them so we can pay foreign workers. I am really embarrassed that my fellow progressive thinkers got behind this boondoggle. It is hard to imagine anyone less worthy of a bailout than the same idiots that refuse to create a ride for the future.
Nice article, EW, and thank you for it. I do have a question and, knowing virtually nothing about this subject, hope it doesn’t sound too stupid. When they close down dealers do they do so with some sensitivity to people out in the boonies who would have to drive many more miles to get to those dealers that are allowed to survive? Thnx.
Well, they wouldn’t be if there weren’t a competitive advantage to it, but there is. Rural saturation is one of the competitive advantages the American brands have over the Japanese, and is probably one factor that keeps the Silverado and the F150 far more popular than the Tundra.
Plus, rural dealers have lower costs and the cannibalization–for precisely the reasons you cite–isn’t as bad.
So both GM and Chrysler have said they are keeping a disproportionate number of their rural dealers open.
The biggest problem in their selection is that a lot of the most marginal dealers are in urban areas–which happen to be owned by minorities. So while the business case makes sense it is true a disproportionate number of African American small businessmen got put out of business. (I also wonder if they were having floorplan funding issues bc of race, but I don’t know.)
Thanks so much, EW. Good to hear they are sensitive to folks in the boonies. Sad to learn about the African-American small dealerships, though. Very sad.
At least some dealers also sell imports – the Ford dealer where I was living in west Texas also sold Toyotas. And serviced them (but not necessarily well: sometime I’ll write about my mother, the dealer, and the fuel pump).
“My Mother, The Dealer, and The Fuel Pump.” What a wonderful title! Now, you must write the story that does justice to the title. Please.
Okay. It really isn’t very long. This was in west Texas, and we were living out in the country, on a farm-to-market road (meaning it was paved and had two – narrow – lanes).
My mother took the car (Toyota Tercel) in for servicing, and they replaced the fuel pump. Afterward, she went across the street, bought groceries, and started home. She got to the intersection by the dealer, and the car died.
A guy in a pickup pushed her out of traffic, and hse walked over to the dealer and had them collect the car. She said she could just see them thinking ’stupid woman doesn’t know she’s out of gas’. (Which doesn’t do my mother justice: we have the habit of logging gas purchases, including date, location, and odometer; been doing this since we had a VW truck with no gas gauge.)
They discovered fairly quickly that there was plenty of gas. It was the brand-new fuel pump that had failed.
She wanted to call home and have me come into town (twenty miles each way) and collect (at the least) the groceries, so the cold stuff would stay cold, but the service manager kept saying it would be just another ten or fifteen minutes. When they finally handed over the car – two hours later – she ripped him a new one. In the hearing of other customers, too.
Never had any trouble with them again.
(This was actually the second trouble with them. The first time, several years earlier, someone stole a set of tools from the trunk of the car, and no one would admit to it. Or pay for replacing them.)
Oh, I love it. I do just love anecdotes (being a Southerner and all, ya know). Thanks – thanks – thanks. And kudos to your mom.
Ah, Texas. So hospitable. Secession can’t happen soon enough.
That’s like one car every four years. It’s likely far less the bonus that the manager got for losing money…and far less than the regional Middle Managers got. It’s the cost of one health care plan…or the “inflationary” increase in costs of ten.
No, not for dealers.
Dealers are making a couple of hundred profit on a car. They make their profit off of service and parts.
Furthermore, remember the “regional Middle Managers” are not dealer employees–they’re manufacturer employees.
Finally, remember that’s an average. If you’ve got a dealer that’s not making money, it makes you a much less effective dealer. Obviously, a lot of dealers are making a lot of money, some not so much (and some are subsidized by other brands owned by the same people).