Posted by: David Kiley on May 13, 2009
For all the talk in the last six months about the billions being spent to cushion the U.S. auto companies and suppliers, very little has been said or done to consider the plight of the car dealers who are being told in this process that they will be run out of business with not too many people caring about soft landings.
On Thursday, GM is widely expected to send out termination notices to some 2,000 of its 6,000 dealers, letting them know that the company plans to stop distributing new cars to them in the near future. Chrysler, already in Chapter 11, is also expected to terminate more than 1,000 of its 3,100 dealer agreements. Some estimates put the job loss at around 200,000.
It’s no wonder that Congress has not had dealers on its radar as much as the car companies themselves. As bad as GM’s image is with many carbuyers, the image of car dealers with just about everyone falls below lawyers and even journalists when it comes to public esteem. Let’s face it. Most deserve the reputation. “How about the rust-proofing? The extended warranty? Of course we have to charge you the advertising fee.” Huh…you mean I have to pay for your newspaper ad that got me in here?
Dealers are already going out of business at a record clip in this recession. But it is going to get worse as Chrysler, for example, moves to trim over 1,000 dealers and General Motors, if it files for Chapter 11, is looking to trim more than that.
The problem is this: GM and Chrysler, as well as Ford, have dealer networks that were built for when the three companies had a combined market share of 90%. Today, it is about 45%-50%. Many urban and suburban markets have too many Ford and Chevy dealers. They wind up competing against each other on price, while there is typically only one Toyota or Honda dealer in the same market. It also makes the U.S. brand stores less profitable. Less profit means fewer and less frequent facility upgrades. That’s why some Chevy and Chrysler dealerships look older and shabbier than Toyota dealers in the same market area.
GM, Ford, and Chrysler have for years helped dealers buy out their rivals in the same market. But the process is slow. And for GM and Ford, the time is now for trimming costs, and that means the dealer network as well as headquarters head count, slow selling models, inefficient real estate, and under-performing brands.
Many dealers resist selling for a number of reasons. Many are second- and third-generation families that own the dealership. Even as sales of new cars plunge at these companies, these dealerships make most of their revenue and profit from selling used cars and in the service and parts department. Still, without a flow of new-car sales, most dealership targeted by GM and Ford will fold for lack of new customer traffic.
Usually, state franchise laws prevent a company from terminating a dealer except when the company can prove cause. But Chapter 11 allows GM and Chrysler to cut the dealers without much fear of the courts or cost. Back in 2000, GM embarked on a project to kill off the Oldsmobile network, and its cost the automaker by some estimates around $2 billion in payments to dealers. GM’s not going through that again…on the cost side, anyway.
On Thursday, Congress will get an earful from the auto dealers’ main lobby, as well as dealers themselves. More than 100 new-car dealers will meet face-to-face with members of the House and Senate to ask them to urge President Obama’s auto task force to slow down plans to rapidly reduce GM’s and Chrysler’s dealer networks.
“A rapid cut of dealers is a bad idea,” says John McEleney, chairman of the National Automobile Dealers Association, the trade group that organized the dealer fly-in. “This would have adverse effects on the auto industry and hurt an already struggling U.S. economy.
“It will result in another 200,000 Americans losing their jobs,” McEleney added. “State and local governments will lose millions of dollars in auto sales tax revenue that is essential for economic recovery.
“We’re not arguing against dealer consolidation,” McEleney says. “Our concern is with the accelerated time frame. Keep in mind that dealers are not a cost center for their manufacturers. Dealers are an automaker’s main source of revenue.”
NADA launched an ad campaign in the form of an open letter from McEleney to President Obama questioning why his auto task force is demanding drastic cuts in the number of U.S. dealers. Full-page print ads were published in The Washington Post, Politico, Automotive News, Roll Call, Chicago Tribune, and Chicago Sun Times.
For all the bad press car dealers get for their hardball tactics in the showroom, they are also the backbone of a lot of cities and towns when it comes to charity support, kids’ sports teams, etc. Chalk all that up to local marketing, but it is still significant.
My Little League baseball team was sponsored by Norris Chevrolet, which I heard just folded in Westfield, N.J. And I was a local and regional winner of Punt, Pass, and Kick, sponsored by local Ford dealers.
Up to now, dealers haven’t gotten much airtime in the debate over saving the U.S. auto industry, though several members of the black caucus expressed concern for minority-owned car dealers during the November and December bailout hearings. But that will change Thursday.
Why has Congress not shown much interest so far in the plight of dealers, despite the fact that many dealers are big political donors? Maybe too many of them paid for rust-proofing.
Want the straight scoop on the auto industry? Detroit bureau chief David Welch , Dexter Roberts and Ian Rowley bring daily scoop, keen observations and provocative perspective on the auto business from around the globe. Read their take on such weighty issues as Detroit’s attempt at a comeback, Toyota’s quest for dominance and the search for an efficient car.