Does Killing Off Dealers Really Help? - Autoline on Autoblog with John McElroy
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.
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.
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.
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