Autoline on Autoblog with John McElroy
Does Killing Off Dealers Really Help?
Thousands of GM and Chrysler dealers are getting wiped out as part of each company's bankruptcies. And while the surviving dealers will be much better off, GM and Chrysler are likely to see less revenue, lower market share and fewer service parts sales as a result of this action. Is it worth the trade off?
Actually, debating the pros and cons is now just an academic exercise. It was the Presidential Automotive Task Force which decided that thousands of dealers had to go, then set a quota they wanted met, and told the car companies to go out and do the dirty work. GM and Chrysler didn't have a choice, but in many cases they acted all too eagerly. Shutting down dealerships fit in beautifully with their long term plans, and now the government was telling them that they could do it for free!
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John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
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You see, it's very expensive for a car company to try and shut down a dealership. The automotive franchise laws in the United States are very much skewed in favor of the dealers. When GM closed down Oldsmobile nearly a decade ago, for example, it cost over $1 billion just to buy out the stand-alone franchises.
Obviously, this time, Chrysler and GM, with not a penny to their name, didn't have the funds to get it done. So the Task Force essentially gave them the legal cover to simply stop renewing franchise agreements. The de-franchised dealers are no longer authorized to sell new cars or "genuine" service parts, and have to immediately sell off all their existing inventory, either to customers or to the surviving dealers who they used to compete against.
They also hate the fact that some dealers were tipped off ahead of time as to whether they made the cut or not. "If they liked you but you were in danger of not making the cut," one dealer principle told me, "you got a call and were told to go out and make a deal with one of your competitors. But the others didn't learn they missed the cut until it was too late. They're being wiped out."
There were some internet reports noting that the dealers which are slated to close also donated heavily to the Republican Party, suggesting the cuts were politically motivated by the White House. But based on my experience I'd guess that 90% of all dealers are Republicans, so I'm pretty sure all the ones who survived the cut also donated heavily to the GOP.
Make no mistake about it, the dealer community is furious with what's going on. The way they see it, they buy cars from the factory, then turn around and sell those cars to customers. If they happen to sell a car at a loss, well, that's their loss, not the factory's. That's why they say that getting rid of dealers will not save GM and Chrysler much money.
Moreover, they point out that the remaining dealers are not going to automatically get 100% of their business. Many if not most of those customers will stray to other brands. So if Chrysler is getting rid of 25% of its dealers, which represent 17% of its sales, the net effect could actually be an overall 10% reduction in sales. In other words, the surviving dealers may not suddenly balloon into the big profitable stores that the Task Force's plans call for.
From the car company's view point, the stated justification for this action is that with fewer dealers the remaining stores will sell more cars, make more profits, invest in better facilities and do a better job of marketing. That sounds so altruistic. The unstated reason is that with fewer dealers consumers will have fewer choices, which will result in higher prices, which will improve residuals and that will make a brand more attractive.
The worst part of what's going on is that this is arbitrarily wiping out an entire generation of automotive retailers. Most of these stores have been with a family for decades and are now run by the grandsons and granddaughters of the men who started them. They are usually very visible in their local communities, sponsoring Little League teams, providing convertibles for the parade, and making donations to local charities. More importantly they are often the single major source of sales and property taxes for small and rural communities. That's the money that helps pay for schools, police, fire, and garbage pick-up.
Back last fall, after the pitiful testimony of the Big Three CEO's at the Congressional hearings, it became obvious that almost the entire country had turned against Detroit. "Let 'em die," became the common refrain, "we don't need 'em." Now many of those people are ruefully discovering that those far-away bankruptcies can have a devastating impact on them and their town.
The irony in this is that the dealers all know their ranks have to be pared. They don't object to there being fewer dealerships in the future. They just don't like the way this is being done. Every single one I've talked to would have rather have seen the market place take care of this issue in an orderly fashion over the next five years, instead of having the government come in and arbitrarily order it done.
Autoline Detroit
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Thousands of GM and Chrysler dealers are getting wiped out as part of each company's bankruptcies. And while the surviving dealers will be much better off, GM and Chrysler are likely to see less revenue, lower market share and fewer service parts sales as a result of this action. Is it worth the trade off?Actually, debating the pros and cons is now just an academic exercise. It was the Presidential Automotive Task Force which decided that thousands of dealers had to go, then set a quota they wanted met, and told the car companies to go out and do the dirty work. GM and Chrysler didn't have a choice, but in many cases they acted all too eagerly. Shutting down dealerships fit in beautifully with their long term plans, and now the government was telling them that they could do it for free!
____________________________________________________________________________________
John McElroy is host of the TV program "Autoline Detroit" and daily web video "Autoline Daily". Every week he brings his unique insights as an auto industry insider to Autoblog readers.
____________________________________________________________________________________
You see, it's very expensive for a car company to try and shut down a dealership. The automotive franchise laws in the United States are very much skewed in favor of the dealers. When GM closed down Oldsmobile nearly a decade ago, for example, it cost over $1 billion just to buy out the stand-alone franchises.
Obviously, this time, Chrysler and GM, with not a penny to their name, didn't have the funds to get it done. So the Task Force essentially gave them the legal cover to simply stop renewing franchise agreements. The de-franchised dealers are no longer authorized to sell new cars or "genuine" service parts, and have to immediately sell off all their existing inventory, either to customers or to the surviving dealers who they used to compete against.
[Chrysler] was begging dealers to buy cars to help it generate desperately needed cash flow.
Even more devastating, in Chrysler's case, is that almost up to the last minute it was begging dealers to buy cars to help it generate desperately needed cash flow. Most of them did so, despite misgivings, out of a sense of loyalty and duty. Many of them now harbor a deep sense of betrayal because of what happened.They also hate the fact that some dealers were tipped off ahead of time as to whether they made the cut or not. "If they liked you but you were in danger of not making the cut," one dealer principle told me, "you got a call and were told to go out and make a deal with one of your competitors. But the others didn't learn they missed the cut until it was too late. They're being wiped out."
There were some internet reports noting that the dealers which are slated to close also donated heavily to the Republican Party, suggesting the cuts were politically motivated by the White House. But based on my experience I'd guess that 90% of all dealers are Republicans, so I'm pretty sure all the ones who survived the cut also donated heavily to the GOP.
Make no mistake about it, the dealer community is furious with what's going on. The way they see it, they buy cars from the factory, then turn around and sell those cars to customers. If they happen to sell a car at a loss, well, that's their loss, not the factory's. That's why they say that getting rid of dealers will not save GM and Chrysler much money.
Moreover, they point out that the remaining dealers are not going to automatically get 100% of their business. Many if not most of those customers will stray to other brands. So if Chrysler is getting rid of 25% of its dealers, which represent 17% of its sales, the net effect could actually be an overall 10% reduction in sales. In other words, the surviving dealers may not suddenly balloon into the big profitable stores that the Task Force's plans call for.
Hyundai and Kia are out cherry picking the best GM and Chrysler points they can find.
Moreover, many of these de-franchised dealers are now seeking out other franchises. Hyundai and Kia, for example, are out cherry picking the best GM and Chrysler points they can find. Others dealers are simply going to turn their locations into used car stores, and in many cases they'll manage to keep a number of their existing customers.From the car company's view point, the stated justification for this action is that with fewer dealers the remaining stores will sell more cars, make more profits, invest in better facilities and do a better job of marketing. That sounds so altruistic. The unstated reason is that with fewer dealers consumers will have fewer choices, which will result in higher prices, which will improve residuals and that will make a brand more attractive.
The worst part of what's going on is that this is arbitrarily wiping out an entire generation of automotive retailers. Most of these stores have been with a family for decades and are now run by the grandsons and granddaughters of the men who started them. They are usually very visible in their local communities, sponsoring Little League teams, providing convertibles for the parade, and making donations to local charities. More importantly they are often the single major source of sales and property taxes for small and rural communities. That's the money that helps pay for schools, police, fire, and garbage pick-up.
Back last fall, after the pitiful testimony of the Big Three CEO's at the Congressional hearings, it became obvious that almost the entire country had turned against Detroit. "Let 'em die," became the common refrain, "we don't need 'em." Now many of those people are ruefully discovering that those far-away bankruptcies can have a devastating impact on them and their town.
The irony in this is that the dealers all know their ranks have to be pared. They don't object to there being fewer dealerships in the future. They just don't like the way this is being done. Every single one I've talked to would have rather have seen the market place take care of this issue in an orderly fashion over the next five years, instead of having the government come in and arbitrarily order it done.
Autoline Detroit
Airs every Sunday at 10:30AM on Detroit Public Television.
Autoline Detroit Podcast
Click here to subscribe in iTunes
Follow Autoline on Twitter for ongoing updates every day!
Reader Comments (Page 1 of 2)
xtasi 7:45PM (6/02/2009)
I've always wondered how less dealers benefited a car company....
since people don't want the cars at rock bottom prices, they will want them at higher ones, now there is less competition?
Reply
Al Beck 8:45PM (6/02/2009)
Stupid. Anti-competitive practices won't work, and the government will be on the hook for two American auto companies that will continue to dwindle to mere shells of what they were. In 5 years, it won't be Hyundai and Kia that fill the void left by these departed dealers. It will be a host of Chinese and other foreign manufacturers that most Americans never heard of that will step in to fill the void, and they'll drive the relative price of automobiles down--way down. Anti-competitive practices may produce some short-term gain, but in the long run, it will nip the GM and Chrysler in the butt. Without the dealership presence in mid to small markets, these companies have opened up a gaping opportunity big enough to drive your BYD through.
Chad 12:14AM (6/03/2009)
The more dealers you have, the more incentives you need to put on vehicles as they try to compete with each other. Fewer dealers costs the manufacturers less money in incentives. Toyota frequently complains that GM's incentives are too high.
Clay Garland 7:35AM (6/03/2009)
Well, when you have someone running a company who doesn't care about the wellbeing of that company, this is what you get.
DayShifter 8:43AM (6/03/2009)
Didn't Toyota have like half the dealer network GM had when they caught up to them in sales? One of the main complaints of the Big 3 is that they have too many dealers.
K 7:46PM (6/02/2009)
Why can't we have a sales system similar to ordering a computer for Apple, Dell, IBM etc.
You go on line, and pick the base model, with the exterior color and interior color combo you want, and add the optional items.
Once you place the order, and the car is delievered to the local dealership for you to pickup. They are also there for service.
Now the wait time for the car will all depend on when the color combination and optional items are produced on the factory floor. Common combinations will be ready a lot sooner than odd combinations.
If you want the car created and delivered earlier, then you pay a extra fee on top of the MSRP. Have a coupon code system so people will still get their employee discount, or what ever corporate discount they have, or any rebates that is valid for that period of time.
I know the planning department for all car manufactures know exactly what is being produced on the floor. The exact number of this color exterior to this color interior. With option package XYZ. It should be pretty easy to setup a Database for the planning department and the on line car sales and create the Buy your car the way you want on line system.
Yes that means there is no need for car sales men. But who in the US likes to deal with car sales men.....
Reply
John 7:59PM (6/02/2009)
Agreed. I've been wishing for a system like this for years.
imirk 8:00PM (6/02/2009)
"Yes that means there is no need for car sales men. But who in the US likes to deal with car sales men....."
That's why i always ask for the women....
andy 8:04PM (6/02/2009)
i agree,that would be great , but they would have to have some demo models available so you could drive the car before making a purchase.
Rogue_G 8:11PM (6/02/2009)
Good idea, but won't happen. That virtually eliminates the 'market competition' that drives the capitalism band-wagon. If you think Republicans hate what's happening now, it pales in comparison to what a s**t-storm it would be if dealerships were completely marginalized out of existence like that.
Andrew 8:33PM (6/02/2009)
simple - cars are incredibly large purchases that require thorough research including test drives. with a computer, you simply test drive the OS, and more or less, you have 2 choices. there are many, many more cars from which to choose.
sure, the audi TT is nice, but I barely fit in the damn thing. now how do you suppose I would find that out except for physically interacting with the car itself?
i wouldn't, and upon the hypothetical purchase of the TT, i'd find out that i just spent $40,000 on a car in which i don't fit. great idea, right?
Randy 11:05PM (6/02/2009)
@K
Ford has that system! I order a 1996 Mustang GT Convertible that way back in 1995/6. You can "Build Your Ford" on their site! Search local inventory and if it's not in stock anywhere, order it that way. No kidding! You just have to put down a $100 deposit and sign for it.
Theoplex 11:40PM (6/02/2009)
Yes, indeed Ford does have a very similar system.
Although they do have a traditional system as well, I have purchased my last two cars this very way.
I was able to logon, pick colors, all options and have it delivered to the dealer of my choice for testing and final approval.
Sure there is room for improvement, but Ford has a good system.
DayShifter 8:51AM (6/03/2009)
Didn't they all have that same system???
dwaltr 7:46PM (6/02/2009)
When you ask the government to come in and run your business........?
Let's hope Ford makes it on it's own.
Reply
jpm100 11:32PM (6/02/2009)
Firing the CEO and half or more of the board is a sure sign they asked the government to run them and were going to be cooperative.
geez.
It was Obama's way or Liquidation.
notYou 9:40AM (6/03/2009)
dwaltr: "Let's hope Ford makes it on it's own."
Not to be too pessimistic, but do you really think the Administration is going to let that happen? I mean, if Ford does better than GM and/or Chrysler without taxpayer money, then the question is - what value is the Fed adding?
Just like the Fed manhandled the banks to take Fed funds whether they needed it or not in order to level the playing field, Ford will rue the day they walked away from the table without Fed money. If they do well at GM or Chry's expense, it makes Bambi look bad by comparison. Ford is already being "careful" not to appear to be stronger than the competition, that's just the tip of the iceberg (shhh - we have to make sure our cars aren't too much better than GMs or Chry's).
Let me try it another way - instead of putting 50bn of free money into GM, why didn't we put 50bn into Ford? They could have picked up all the pieces - labor, plants, suppliers, and run with it. There's a reason why we didn't, it's just coming into focus.
Scott 10:48AM (6/03/2009)
Notyou is spot-on here.
As much as I sincerely hope Ford comes out on top after this, they are toast. The Feds will not let them succeed at the expense of GM/Chrysler, this is just a simple political reality (which is what detroit has become, nothing more than one political decision after another). It is a massive race to the bottom and exercise in punishing success.
Ford is now competing with firms that have had most of their debt removed and are financed by an entity who can literally print all the money they need. The Feds have made it clear they will continue to dump money into these two no matter how inept/insane the mgmt and union behaves.
I admire Mulally, but don't forget he went up to congress and jumped on board the bailout wagon. Pick your poison; they will regret that decision. At some point Ford will realize BK is just much easier and will fall in line.
Mike 11:52AM (6/03/2009)
Guys,
As long as Ford continues on it's path to make a good portfolio of products from small, efficient cars to large trucks that are needed for work, the government won't be able to stop them.
There are people who are choosing Ford for the simple fact that they see them as the lone American company who didn't take bailouts. The sense of patriotism is coming back into effect too. All this publicity has shown the American public that there is a chance they will lose their biggest industrial base. It scares some people and some regret they choose foreign (though too many still don't care). It shows in the fact that they lost 15% less sales over the last two months compared to Toyota and Honda, especially when GM did it too last month, showing that the market share gain isn't all from GM and Chrysler. Plus now that the quality is on par with the best, people will be happy that their new Ford is as good as their last Toyota and is way ahead of their last domestic car (from 20 years ago). This rebuilds brand loyalty.
Once the economy comes back to a level state, auto sales will go up, Ford will be profitable, a profitable company will stay in business and there's nothing the government can do to stop it short of giving GM and Chrysler some secret alien technology that will leapfrog current auto tech.
Esbey 8:08PM (6/02/2009)
Auto dealers are hugely protected by special state government laws that give them non-market based rights and privileges that other businesses don't have. Chief among these socialized privileges is that it is very difficult for the manufacturers to get rid of them. It is really weird to argue that the federal government is "taking over the market" when it works (mostly via bankruptcy law) to remove these socialist privileges.
The article says that dealers "would have rather have seen the market place take care of this issue in an orderly fashion over the next five years." Really??? Because an *unregulated market* would have resulted in these dealers closing *decades* ago. What the dealers really mean is "if you let us keep our special socialist privileges we could have gone on dragging down these companies for many years to come."
The government didn't *force* GM to close these dealers, GM loves it and is using the Fed. Gov't (and bankruptcy law) as political protection against ridiculous anti-market state laws.
Reply