If the GOP gains a majority in the U.S. House of Representatives on Tuesday, Rep. John Boehner of Ohio likely will assume the powerful post of Speaker, replacing Nancy Pelosi. In the election campaign’s final days he is chasing votes extra hard, championing the cause of General Motors franchises that are fighting termination as part of the bailout plan for GM directed by the U.S. Treasury.
Boehner and another GOP Congressman from Ohio, Steven LaTourette, wrote letters to key figures in the Obama administration, asking them to suspend terminations of hundreds of GM dealers, including three in Ohio. GM responded that it would proceed with reducing the number of its franchisees, with an October 31 deadline for those dealers who are being terminated.
The firing of hundreds of GM dealers across the U.S. has been a contentious feature of the administration’s automotive policy, sparking political debate and providing talking points for GOP candidates and Tea party insurgents. GOP candidates have criticized the government-sponsored bankruptcy of GM on a number of grounds, for example what they see as favorable treatment of the United Auto Workers union compared with GM creditors.
Yet Democrats assert that the GM bailout was initiated during the closing months of the Bush administration, with passage of the Troubled Asset Relief Program (TARP) that provided funds for GM and other shaky banks and companies. GM’s bankruptcy followed a few months later in June 2009. Why the new administration thought GM’s dealer network had to be reorganized, how many dealers the automaker actually needs, and why the company might be better off with fewer dealers are questions rooted in history, as well as in business theory.
In the heyday of automaking, from the 1950s through the early 1980s, the U.S. auto industry believed that more dealerships promoted sales of more cars. GM, Ford and Chrysler signed up more franchisees than they likely needed – but once they did, car dealers got organized, mostly on a statewide basis, and supported enactment of laws that blocked automakers from terminating them, except under the most extreme circumstances.
As foreign automakers grew and took market share from the domestic manufacturers starting in the 1980s, GM, Ford and Chrysler dealers lost sales. As the average number of sales per store fell, many dealerships couldn’t justify investing in new and larger showrooms, in expanded parts inventories, and in luxurious waiting lounges with features such as latte machines, which were becoming common at Toyota’s Lexus dealerships.
Trimming The Fat
One strategy for Detroit automakers was to pay underperforming dealers to close their doors or merge, a horrendously expensive and slow process. Bankruptcy was never in GM’s long-range plans, but once it happened, court-supervised reorganization did afford the automaker and the U.S. Treasury a chance for a one-time fix: Bariatric surgery for GM’s bloated dealer network.
At the time of GM’s bankruptcy in June 2009 the automaker had more than 6,000 U.S. dealerships, more than any other automaker and proportionately much more than its key foreign competitors in Toyota and Honda. During the bankruptcy GM agreed to drop about a third of its dealers and then reinstated about 700 as part of an arbitration proceeding ordered by Congress.
The dealers that Boehner is trying to save lost their bid to stay open as part of arbitration. One is Mark Sims, owner of Sims Chevrolet in Lyndhurst, Ohio. Sims told northern Ohio’s News-Herald newspaper that GM offered him a buyout but he “didn’t think it was the right thing to do."
Sims said he has been operating his store for 16 months without vehicle shipments from GM, buying cars from other dealers and reselling them. What would be the harm to GM if it allowed him to remain a dealer and keep selling, even if it wasn’t very many cars? GM executives explain that sales should be going to the GM dealers that survived the cut, helping them to build volume and profits so they can invest more in their stores and attract even more customers to the automaker.