Closing auto dealers: Dumb move

[Homeslice]

Did Obama's team of urban sophisticates even realize that auto dealerships are not owned by the automakers? I am struggling to understand why closing dealerships would have helped the automakers turn around. Let's see, the dealers buy the cars from the factory, in fact they pay interest on them after a certain # of days, and then there is the upfront money the dealer owner had to put up to have a franchise. Not to mention dealerships help sell a lot of OEM parts to the public. So the idea that the automakers saved a lot of money by closing dealerships seems........rather retarded? Yes I think so.


TARP auditor criticizes Obama administration's push to close auto dealerships

By John Hughes and Catherine Larkin
Monday, July 19, 2010; A03

The Obama administration's request that General Motors and Chrysler Group accelerate the closing of U.S. dealerships probably was unnecessary and may have added to unemployment, a government watchdog said.

The United States "should have at least considered" whether the benefits of speeding up the closings outweighed costs from a potential loss of tens of thousands of jobs, according to the report by Neil Barofsky, , special inspector general for the Troubled Assets Relief Program. The Treasury Department rejected the automakers' reorganization plans in March 2009, in part citing GM's "slow pace" in scaling back its dealer network.

"Such dramatic and accelerated dealership closings may not have been necessary and underscores the need for Treasury to tread very carefully when considering such decisions in the future," Barofsky said.

Treasury, which has committed $80.7 billion to the two carmakers under the TARP program, criticized the report and said that without the government assistance both companies faced failure and liquidation.

"We strongly disagree with many of your statements, your conclusions and the lessons learned," said Herbert M. Allison Jr., assistant Treasury secretary for financial stability.

The report prompted further criticism from Republicans in Congress, who faulted the government's role in making decisions about the business plans for Detroit-based GM and Auburn Hills, Mich.-based Chrysler.

"This sobering report should serve as a wake-up call as to the implications of politically orchestrated bailouts and how putting decisions about private enterprise in the hands of political appointees and bureaucrats can lead to costly and unintended consequences," said Rep. Darrell Issa (Calif.), ranking Republican on the House Committee on Oversight and Government Reform.

The report found that Chrysler, which made decisions on a case-by-case basis, followed the criteria for targeting dealers for termination. GM was inconsistent and retained more than 1,300 dealers that would have been shut based on sales, consumer satisfaction and profitability, according to the report.

Congress members had been complaining that the terminations were unfair and will cost jobs in their districts.

"There is substantial confusion, even among dealers themselves, as to how GM and Chrysler selected dealerships for termination," Sen. John D. Rockefeller IV (D-W.Va.), head of the Commerce, Science and Transportation Committee, said in the letter to Barofsky.

General Motors Co. was formed last year out of bankruptcy from the best-performing assets of General Motors Corp., while a group led by Fiat bought most of the bankrupt Chrysler assets, forming Chrysler Group. Taxpayers contributed a net of $49.9 billion for GM and $14.3 billion for Chrysler as of September, according to the Congressional Oversight Panel.

In the weeks before the audit was begun, the two automakers had announced they were shutting down about 2,100 dealerships to save costs and become more competitive. President Obama signed a law in December that required the automakers to offer binding arbitration to dealers whose outlets were being closed.

GM said in March that it planned to reinstate 661 dealers after the company began reevaluating the closing of 1,100 retailers.

Chrysler that same month said it was offering new franchises to 50 dealers who applied for arbitration, in addition to 36 previous offers or new agreements. Chrysler terminated 789 dealers last year and said in January that 409 had applied for arbitration.

-- Bloomberg News

[pauldun170]

Why was it a dumb move?

Should the automakers not take advantage of government involvement, sidestep all the legal BS associated with closing a dealership and have control over its distribution network?

Or should they keep dealerships open just keep sales jobs?

I don't know, I thought the point was to sell cars, not create sales jobs.

The report found that Chrysler, which made decisions on a case-by-case basis, followed the criteria for targeting dealers for termination. GM was inconsistent and retained more than 1,300 dealers that would have been shut based on sales, consumer satisfaction and profitability, according to the report.

[Homeslice]

Originally Posted by pauldun170

Why was it a dumb move?

Should the automakers not take advantage of government involvement, sidestep all the legal BS associated with closing a dealership and have control over its distribution network?.

How did selling some dealers allow them to "have control" (your words) over the remaining ones?

Originally Posted by pauldun170

Or should they keep dealerships open just keep sales jobs?

I don't know, I thought the point was to sell cars, not create sales jobs.

How did what they do help them sell more cars?

[pauldun170]

Originally Posted by Homeslice

How did selling some dealers allow them to "have control" (your words) over the remaining ones?


How did what they do help them sell more cars?

American automakers have had a problem with too many franchises.
Wasn't this all covered when auto TARP came along?
Does everyone have memory loss as to why things were done the way they were?

[Homeslice]

Again, how does it help them sell more cars?

Take 2 Dodge dealers that are within a reasonable driving distance of one another. First one sells 100 cars/year, the other one sells 200.

Closing the first dealer just because it sucks, doesn't automatically mean the other dealer is going to suddenly start selling 300+ cars.

[pauldun170]

Originally Posted by Homeslice

Again, how does it help them sell more cars?

Take 2 Dodge dealers that are within a reasonable driving distance of one another. First one sells 100 cars/year, the other one sells 200.

Closing the first dealer just because it sucks, doesn't automatically mean the other dealer is going to suddenly start selling 300+ cars.

Give me one good reason why you want two dealerships of the same brand close together?





I thought this was a nice way to put it...

Dear (former) 65 Chrysler Dealers,

You have asked for details on why your franchise was culled and we provided you with 22 criteria, including sales volume, market share, customer serivce and working capital. We also provided you with a scorecard for your dealership that has 13 factors, including minimum sales responsibility, customer satisfaction index and sales satisfaction index. You ALREADY know that we favored dealers who carried all three of our brands and who did not compete with other dealers of our brands in the same market area. An yet you say that our letter of explanation does not say which score was considered deficient by us as if we are keeping some big secret. When you were a young lad in school and you got a 65 on a test or an assingment the teacher didn’t have to explain what the score meant, you know it sucked. And you know if you kept getting 65’s your grade for the course was going to be D, F, or U and there would some ’splainin’ to do when your parents saw it. Do we have to spell it our for you, dear (former) dealer? Your rejection was based on one or more of the following: You didn’t have all three brands at your dealership; Your CSI was below par and your lousy performance was reflecting on the manufacturer; Your volume wasn’t high enough compared to other dealers in your area/in other areas similar to yours in population density, demographics, etc.; You were in the same market as another dealer who was much better in sales volume, or customer service, or better capitalization, or had a standalone store without products from rival automakers, or all of the above.

Now please, take your lumps like a (business) man or woman and stop bellyaching to the media and congress about how “unfair” this is. Life is unfair. Besides, if your dealership is really that good you should be able to attract another franchise like Toyota or Honda or Hyundai in no time. No? Well, I guess there’s always the Chinese or ZAP. But we sincerely wish you the best in all your future endeavors. All 65 of you.

Sincerely,
Chrysler

source
http://www.thetruthaboutcars.com/chr...llege-dealers/

[Homeslice]

Originally Posted by pauldun170

Give me one good reason why you want two dealerships of the same brand close together?





I thought this was a nice way to put it...

Sorry, none of that explains why they would magically sell more cars by closing dealerships. Nor does having two dealerships of the same brand close together magically hurt sales.

[pauldun170]

Originally Posted by Homeslice

Sorry, none of that explains why they would magically sell more cars by closing dealerships. Nor does having two dealerships of the same brand close together magically hurt sales.

2 dealers close together = Two dealers competing against one another.
Two dealers competing against one another = price competition
price competition = decreased market value of each car.
end result is that it reduces profits on each car sold, it hurts the market perception of the product you are trying to sell and negatively effects the bottom line.
Chysler and GM can only compete in certain market spaces and considering their individual market positions a large heavy onerous distribution network is counterproductive.

[pauldun170]

There are complaints now because some jerkoff is looking at how dealer closing resulted in job losses.
The point of closing the dealers was to help the car companies get out of shitsville and get into a position where they have a sustainable model. Not maintain retail positions or fluff up job numbers in the short term.

[pauldun170]

Complaining about closing auto dealers: Dumb move

explainer
Deal or No Dealership
Why is Chrysler closing 789 car dealerships?
By Christopher Beam
Posted Wednesday, May 20, 2009, at 6:20 PM ET

Chrysler disclosed in a bankruptcy filing last week that it plans to close 789 dealerships—about one-quarter of its total. General Motors, meanwhile, told the owners of 1,100 dealerships that it will drop them from its network. How does shuttering dealerships help car companies?

It saves them money. Car companies don't actually own dealerships—instead, they have contractual agreements that dictate factors like location, display space, signage, and service options. Nevertheless, Chrysler and GM and other auto manufacturers must maintain a large, costly field force of trainers (to train technicians to fix cars), salespeople (to persuade dealers to buy more cars), and auditors (to verify claims for reimbursement). The more dealerships, the more go-betweens a car company needs to employ and the more money it has to shell out.

Shuttering dealerships could also result in less intra-brand price competition. Car buyers will typically visit at least two different dealerships in order to compare prices before making a purchase. By playing dealers against one another, buyers lop an estimated 2 percent off revenues. But if there are fewer dealers, customers can't haggle as easily, and car companies make more money. There's a tradeoff, of course—fewer dealerships means customers have to drive farther. But at the moment, there are so many dealerships that the benefits of reducing price competition outweigh the harm of having fewer locations.

Another benefit: Shutting down dealerships weeds out weaker branches to help stronger dealerships stay viable. It also makes sense from a branding perspective, because when a dealership starts to fail, dealers resort to tactics that make the car company look bad. Think free hot dogs, "push, pull, or drag" sales, and giant inflatable gorillas on the roof. (Luxury car companies like Lexus explicitly forbid dealers from using the words price or sale in their ads.)

Finally, pre-emptive closings help car companies from getting saddled with tremendous amounts of debt. Let's say a GM dealer is just getting started: He'll buy hundreds of cars from GM with money borrowed from GMAC, the financing arm of GM. If the dealership collapses suddenly, GMAC may not get a lot of the money it's owed. So it makes sense for GM to shutter a dealership before it goes too far into the red.

When the auto industry first started expanding in the early 20th century, it made sense to have dealerships in every community. Much of the population was rural, and cars broke all the time, making proximity to the original vendor necessary. These days, with a more urban population and better auto engineering, it's not necessary to have so many dealerships. At the same time, people are willing to drive farther to buy or tune up their cars. As a result, more dealerships don't correlate with more sales. Toyota sells more cars than Chrysler with fewer than one-third of the number of franchises. (The average Toyota dealer sold 1,589 vehicles in 2008; the average Chrysler dealer sold 124.)

Got a question about today's news? Ask the Explainer.

Explainer thanks Glenn Mercer of the International Motor Vehicle Program and auto industry consultant David Stivers.
Christopher Beam is a Slate political reporter. Follow him on Twitter.