• Jul 19th 2010 at 10:59AM
  • 28
General Motors and Chrysler terminated the contracts of thousands of dealers while the automakers were in bankruptcy proceedings; a move that was required by the Obama Administration's auto task force as a condition of bankruptcy. The scheme was heralded as a way to save the struggling automakers millions or even billions of dollars, but special inspector general for the Troubled Asset Relief Program (TARP) Neil Barofsky claims in an audit that the dealer closings weren't "necessarily critical to the manufacturers' viability." Barofsky added in his TARP audit that the closing of dealerships would add thousands of workers to the unemployment lines "without sufficient consideration of the decisions' broader economic impact."

The U.S. Treasury, obviously, doesn't agree with Barofsky's assessment. The Detroit Free Press quotes an anonymous source who points out that it was well known in the auto industry that Detroit automakers have too many dealers. Toyota, for instance, has a much smaller dealer body than GM. And the dealers Toyota does have average much higher sales volumes than dealers of domestic products. That theoretically leads to dealers with more marketing muscle in their perspective markets. Not all automaker executives wanted to shrink their dealer networks, either. Some feared the loss of sales that would follow shutting down retail outlets, but the task force reportedly felt those lost sales would be recouped within a few years

But while arguments can be made for or against shrinking the pool of retail outlets around the country, one fact is hard to ignore. A reported 35,000 dealer employees lost their jobs in 2009 and 2010, or over three percent of all dealership employees around the country – roughly equal to the 32,000 jobs lost within the industry.

Barofsky also touched on the process which both Chrysler and GM used to determine which dealers should stay and which should go. The auditor claimed that Chrysler stuck to its plan throughout, which is evidenced by the fact that only 28 dealers won their arbitration cases out of 789 stores that were closed last year. Barofsky claims that GM wasn't so strict in determining which dealers to cut, and there wasn't much documentation to show how and why the General cut its dealers. GM has since restated 666 of the 1,454 dealers it cut, though the company gave dealers more than a year to wind down operations, while Team Pentastar cut off its under-performing dealerships almost immediately.

[Source: Detroit Free Press | Image: AP/Jeff Roberson]

I'm reporting this comment as:

Reported comments and users are reviewed by Autoblog staff 24 hours a day, seven days a week to determine whether they violate Community Guideline. Accounts are penalized for Community Guidelines violations and serious or repeated violations can lead to account termination.

    • 1 Second Ago
      • 5 Years Ago
      GM restated 666? GM is the devil!!!
        • 5 Years Ago
        [Insert snide political comment about current administration being devils here]
        • 5 Years Ago
        Typical government wisdom. This Neil Barofsky - how many automakers has he run? Another armchair quarterback with no stake in the outcome, but a lot of neat ideas about how others ought to conduct their business.
      • 5 Years Ago
      Reducing the bloated dealership network was the correction decision, although I would've rather seen it be a business decision and not a government decision.
      • 5 Years Ago
      sometimes when you have no good options, you go with the least worst and hope the greater good comes out of it. GM and Chrysler are still open and more than 3k dealerships are still open as well. The report makes a good point but if GM and Chrysler went bankrupt, the midwest would pretty much close down. And obtw, the taxpayers made interest when the bills were paid back.
      • 5 Years Ago
      I like how all the idiots can't figure out that saving GM was a HELL of a lot more important than saving some sales jobs and instead - in their typically short-sighted way - rather use this as some kind of political fodder.

      You can establish a new dealership rather "easily" - a couple of million for inventory, a building and hire some sleazy sales people.

      Not quite the same thing if you are trying to reestablish a car maker - you are looking at literally billions and billions of dollars worth of infrastructure. You need highly trained engineers, designers. Billions of dollars worth of factories and test centers. Many of orders of magnitude more complex, time consuming and expensive than essentially opening a retail store (which is essentially what a dealership is).
        • 5 Years Ago
        I don't understand the argument that Saturn should have survived to compete in the budget arena against the Japanese. In my eyes, the Cavalier, Shadow/Neon and Escort (not to mention the Excel/Accent from Korea) went after the entry-level buyer. Toyota and Honda enjoyed a higher asking price with their Tercel/Corolla and the Civic by making a better car (percieved, at least.)

        As for the too-big-to-fail GM nonsense...this company had a lot of tentacles in many different states/nations and many different companies. Still, I'll never believe its bankruptcy would have been the end of the industry.

        Buick...Pontiac...Chevrolet...Cadillac...GMC...Oldsmobile... Each was an independent manufacturer before there was a General Motors. Who knows? Perhaps a bankruptcy would have created more excitement in the US auto industry by spinning these into separate entities. Instead, we have a company that has one distinct brand (Cadillac) and three blurred brands (ChevruickMC?)

        The market should have run its course, unmolested and unmanipulated by the government.
        • 5 Years Ago
        "There was no problem with the number of dealers before the economic malaise"

        There ABSOLUTELY was a problem with the number of dealers even before the economic collapse. Saying that there was no problem is totally incorrect.

        Detroit (not just GM, but all US car makers) have been running on a dealer network that was created when Detroit OWNED the US market (80%+) decades ago. Now they hold less than 1/2 of the marketshare that they used to, but are essentially stuck with the same number of dealerships because of very strong local political power that dealerships have.

        That has artificially held Detroit car prices down... you'd have 3 or 4 Chevy dealers fighting for the same sale, versus 1 (maybe 2) Toyota or Honda dealers fighting against each other. That does not help transaction costs, nor resale value and ends up making the Chevy (as an example) dealerships resort to much more unscrupulous tactics to get sales... and not too surprising, Detroit has had lower dealer satisfaction than other makes for ages now.

        Letting those dealerships get killed off was a correction loooong time in the making. State dealership laws would normally not have allowed it to happen, but GM is still too high in it's dealer count, but much closer to what it should be.
        • 5 Years Ago
        @ ojfl

        The idea that if GM was allowed to die, then other automakers would have stepped up with higher production to make up the difference is a totally flawed argument.

        The car business is insanely inbred... a parts supplier that makes stuff for GM also makes stuff for Ford and Toyota or Honda. If GM went under, they would have almost guaranteed the failure of quite a few suppliers would have crippled the other automakers also. No way Ford would have also survived, and Chrysler would have probably been the same... even the Japanese car makers would have been very badly hurt if GM was shut down. You would not have gotten less, but stronger car companies, you would have ended up with many failed companies and an entire industry much weaker.
        Not saving GM was not even an option.
      • 5 Years Ago
      Starbucks closed 600 stores.

      I think it's appropriate to do the same when you're in bankruptcy trying to save the company.

      each dealer requires a ton of investment from the ma company.

      Right thing to do. I think the TARP guy is full of it.
      • 5 Years Ago
      Obama said just last week that he created 100,000 new jobs. Surely these folks are now working again after such wonderous job creation. Way to go Barry, your the best.
        • 5 Years Ago
        Has no one heard of "net"?

        Personally, I couldn't disagree more with this audit's conclusion. The number of dealers may not have been strictly a live or die problem but it was central to the domestics' decline. They wouldn't have kept Pontiac, Olds, Saturn (and some that should still be nixed) if they didn't have contractual mouths to feed. That was a multi-billion dollar waste of resources that reduced their competitiveness MASSIVELY. Ultimately, that costs jobs.

        Those dealers and the pressure they made to keep moving low-margin cr*p had to go.
      • 5 Years Ago
      Economics 101

      When the economy is booming, it is best to prepare for a downturn which inevitably will come. That means filling the coffers with lots of extra padding (ie. cash reserves).

      Then when the downturn does happen, you will be prepared to weather the storm; expand marketshare and/or increase the size and scope of the business.

      GM, Ford and Chrysler failed to do this. If they had done so, the minor players would have been almost erased from the equation and the major competition (Toyota, Honda, Nissan, VW) would have had to take back seats at the party.

      In fact Honda would have stood a good chance of being gobbled up by Chrysler, and Toyota could have been forced to partner heavily with GM. Not saying that would have been the end result, but it was in the realm of possibility, if more sound economic policies were enforced at the Big 3.

      In a downturn economy you should be acquiring the bargain basement deals from other failing enterprises to expand your global reach. Your production should be increased to penetrate the market more aggressively to further weaken your rivals.

      Yes, GM, even though it was sinking, should have grabbed onto Chrysler when they had a chance.

      Now, the auto wars are going to get more dirty as the Big 3 reposition themselves in the shaky new marketplace. More trouble for the auto manufacturers is just around the corner. I have heard hints that few are paying attention the brick wall that is facing them. GM has a handle on it, but with a very limited idea on how to navigate past the broken bridge.
        • 5 Years Ago
        Nooo!! Spend like crazy when there's a boom, and then spend like crazy to get your self out of debt! It's the Keynesian way!
        • 5 Years Ago
        Funny, if memory serves, Dialmer used major Chrysler cash reserves to leverage the buyout and rape the one wise enough to create cash reserves. GM now...
        • 5 Years Ago
        dennchristen is correct. Chrysler had a huge wad of cash just for weathering an economic downturn without having to cut product development. Daimler helped themselves to it and gave Chrysler nothing but cut budgets and bureaucratic overhead to replace it.
      • 5 Years Ago
      whine whine whine, these dealers could had become used car dealerships so 32000 lost jobs could had been far less lost jobs. the dude on tarp is wrong..Also you won't find my tears for car dealers any ways as their all theifs , coma is a bitoch , I wonder how many people those dealerships scam out of their hard earn money !
        • 5 Years Ago

        I heard a rumor that dealerships sometimes employ technicians, collision techs, receptionists, title clerks, porters, detailers and security guards. People whose jobs aren't directly tied to the car buying process.
      • 5 Years Ago
      "You don't grow a business by cutting off arms and legs!!! "

      How exactly were they in a position to grow the business? If anything they probably could have dumped one more brand. They got lucky they were saved. Otherwise more of their brands may have been bought off by Chinese companies.
        • 5 Years Ago
        GM had a choice.
        Aggressively pursue a larger share of the market, or cut costs anyway they could to survive.
        There wasn't anyone in the company willing to stand up to the challenge, so GM did what GM always does...a half a**ed response.

        GM eliminated Saturn, Pontiac, Hummer and Saab from the portfolio. This did help Chevrolet to some degree.

        However, by only axing Pontiac instead of the entire BPG group, GM weakened Buick and GMC considerably (especially the dealerships). I seriously doubt half the 1800 BPG dealers will survive through next year.

        If GM wanted to cut Pontiac then they should have cut Buick and GMC as well. This would have strengthened Chevrolet and Cadillac even more so. But now Buick is overlapping Chevrolet and so is GMC. When will they ever learn?

        The proper plan would have been to improve the marketing of all 5 brands:
        1. Chevrolet mainstream autos and light duty trucks.
        2. Pontiac would build sporty versions of Chevrolet cars.
        3. Buick would build near luxury versions of Chevrolet cars.
        4. GMC would build medium and heavy duty trucks.
        5. Cadillac would build world class luxury automobiles.
        Every brand has its place and purpose in such a simple plan with no overlap.
        Nothing is lost, but the brands remain a constant reminder of the strength and resilience of GM products. Sloan had the program right, but GM messed with it and look what happened.
      • 5 Years Ago
      One thing about having a lot of dealers, is that you are more visible to the public, and if there happens to be any service related problems, well, your local dealer is right there to help.

      Try that with a Lamborghini.
      • 5 Years Ago
      The dealership closings have been a bit much. The dealership photo that Autoblog used actually happens to be one of the dealerships near where I live. Century Dodge is located in Wentzville, MO and apparently is possibly opening back up. Interesting choice of photo, that's what got me into reading the story.
      • 5 Years Ago

      Killing all those dealerships is one of the key reasons that GM is getting more money for each car than it ever was before... and even more than the likes of Honda and Toyota.
    • Load More Comments
    Share This Photo X