Government ownership gets thorny, already

Posted by: David Welch on June 4, 2009

It’s obvious that government ownership of General Motors and Chrysler is going to bring up all kinds of thorny issues and unwanted pressure on how the companies will be run. But the feds haven’t even acquired their shares yet and already the two companies are getting heat from Washington.

At Senate hearings yesterday, GM CEO Fritz Henderson and Chrysler President Jim Press had to justify why they plan to cut 1,100 and 789 dealerships, respectively. West Virginia Democrat Jay Rockefeller said, “I don’t believe that companies should be allowed to take taxpayers dollars for a bailout and then leave local dealers and customers to fend for themselves with no real notice and no real help,” according to USA Today.

This whole issue is wrongheaded on so many levels. First and foremost, the advisors hired by the Treasury Department’s Auto Task Force told both companies that they had too many dealers. The outsize retail networks are expensive to support. By fighting over a shrinking number of customers, many of the dealers that some in the Senate hope to save weren’t profitable. Money losing dealers can’t keep top sales people and managers, nor can they go the extra mile for customers. Retail is like ground war and the Big Three (yes, Ford, too) have been losing it for years. A smaller but healthier retail network will make them stronger.

Even worse than that, with the opponents of government ownership crying “socialism” without the lease bit of prompting, we have members of Congress saying that the companies should preserve dealers that don’t fit the new business plan just because GM and Chrysler are getting government funds. Well, President Obama has been pretty clear. Helping these two automakers will preserve jobs, but not every job. Keeping dealers afloat because the companies received government funds is tantamount to putting them on the dole. It’s bad business.

If GM and Chrysler relent to Congress and preserve some of the dealers that they intend to cut, it will set a terrible precedent. What happens if they want to close a plant? Will senators and representatives complain to the White House or the carmakers to preserve jobs in their locales? It’s very possible. Having the government, union and bondholders all owning a piece of these companies is complex enough. The future boards and management teams of these two companies need Congressional interference in running their businesses like the government needs more debt. It’s time to back off.

Reader Comments

Paul (Vw)

June 4, 2009 11:22 PM

>>> West Virginia Democrat Jay Rockefeller said, “I don’t believe that companies should be allowed to take taxpayers dollars for a bailout and then leave local dealers and customers to fend for themselves with no real notice and no real help,” according to USA Today.

Unfortunately Mr. Rockefeller is right. He has a duty to represent the interests of his constituents. After all, their tax dollars are being used to bail out Detroit.

Likewise, Mr. Frank is no bad guy--to be frank--on this topic either (see link)...he's just taking care of his constituents as well...

http://briefingroom.thehill.com/2009/06/04/barney-frank-wins-delay-of-gm-plant-closing-after-ceo-meeting/

From now on it won't be the free market who decides the winners or losers in the Big-er-Detroit3 imbroglio. It will be who has the most effective politicians in congress.

The real lesson from this whole automotive tragedy is this: make sure you vote for local congressmen who can bring home more federal dollars than your state sends to Washington.

Roland Cyr

June 4, 2009 11:58 PM

I agree with the last paragraph entirely. I watched this Senate Commerce Comm. debacle on CSPAN and it was classic re: why the govmt can't get involved in micromanaging these companies. We (the govmt) have hired expertise in guiding and framing these recoveries and that is enough.
Bankrupcy and the restructuring process is hard and tough where many involved get hurt (fairly or unfairly), but that is the nature of things in this world. Let's give the taxpayers huge investment a chance to work with the experts and not with grandstanding politicians micromanaging.

David Casale

June 5, 2009 12:33 AM

Congress, very unfortunately, does an outstanding job at sticking it's nose into issues that are problematic and proceeding to make the situation even worse. The GM bailout and subsequent bankruptcy is a galactic mess, one that is going to offend and anger every individual in a different way, whether it be through government spending, jobs, the economy, socialism, capitalism, whatever. Couple all of these fears with the localized interests of Congressional officials and it gets even worse. Jobs will be, and should be, lost for those employed by the auto industry. Every US town doesn't need 10 car dealers separated by a stones throw, and UAW employees don't need or deserve 70/hr. We have to fix it, and it needs to be rational and make sense in the LONG TERM.

The Auto Task Force was assembled to help make the critical decisions, because of the experience and aptitude required. Not Congress, and definitely not right now when it's most critical to act quickly.

John Gibson

June 5, 2009 7:30 AM

Hi:

Who owns the new autos on the dealer showroom; the manufacturer or the dealer. That is, who has the cost of carrying that inventory? If the manufacturer owns the inventory, then less dealers would also mean less inventory costs. This would translate into lower costs and retail prices or more profits for the mfrs.

Comments?

Katie Bien

June 5, 2009 11:55 AM

I couldn't disagree more. GM CEO Fritz Henderson said in the Senate hearings on Wednesday that they brought a plan to the Automotive Task Force in March and the Task force told them that GM had to be more aggressive in the area of dealer cuts. The government is definitely already involved and I would argue that this was highly inappropriate for the government to make that recommendation.

These companies are looking to break contracts with many profitable dealerships, leave them with their real estate, their employees, unemployment costs and completely devastate them, in Chrysler's case, in the matter of weeks. There are laws that protect these franchises and require that their business be wound down slowly if manufacturers would like to close them. Using bankruptcy to break contracts and devastate businesss while the company goes on to thrive, is not right and not a good precendent to set. If the companies want to close dealerships, that's great. But they should do so by following the laws that are in place to protect the dealers from total devastation and bankruptcy.

The Chrysler decisions were made in two weeks and they aren't allowing an appeal process and aren't allowing any chance for the businesses to wind down operations or repurpose their land for another business. That is against the law. Bankruptcy may trump some laws, but it should not trump a basic sense of ethics. One could argue that it would be in the best interest of Chrysler to copy Honda's car designs exactly, but violating copyright is also against the law. Bankruptcy law shouldn't overcome that law any more than it should overcome laws protecting franchisees.

In many of these cases, Chrysler and GM admit that they will close dealerships in a city and will later re-open franchises in that city with different owners. That should appall us! No one can take our property away from us and give it to someone else with no compenation. That is against the 5th amendment.

These companies are in bankruptcy, but they are not liquidating, they are reorganizing. So they have the responsibility to their customers to behave in an ethical manner.

We are setting a powerful precedent here. Can the government (through the auto task force) recommend closing thousands of businesse and then walk away and say "the government shouldn't be involved"?

What is next? Are there too many pizza shops in your town? I bet some of them aren't profitable. Maybe a task force should recommend that they be closed and be given to pizza hut...

Don't look now. But I think the government already got involved. And when there are basic ethics involved, you bet the government should play a role. That's what our congressmen are for: to be representatives of their communities.

Katie Bien

June 5, 2009 11:58 AM

Re-submitting because I corrected two spelling errors:

I couldn't disagree more. GM CEO Fritz Henderson said in the Senate hearings on Wednesday that they brought a plan to the Automotive Task Force in March and the Task force told them that GM had to be more aggressive in the area of dealer cuts. The government is definitely already involved and I would argue that this was highly inappropriate for the government to make that recommendation.

These companies are looking to break contracts with many profitable dealerships, leave them with their real estate, their employees, unemployment costs and completely devastate them, in Chrysler's case, in the matter of weeks. There are laws that protect these franchises and require that their business be wound down slowly if manufacturers would like to close them. Using bankruptcy to break contracts and devastate businesss while the company goes on to thrive, is not right and not a good precendent to set. If the companies want to close dealerships, that's great. But they should do so by following the laws that are in place to protect the dealers from total devastation and bankruptcy.

The Chrysler decisions were made in two weeks and they aren't allowing an appeal process and aren't allowing any chance for the businesses to wind down operations or repurpose their land for another business. That is against the law. Bankruptcy may trump some laws, but it should not trump a basic sense of ethics. One could argue that it would be in the best interest of Chrysler to copy Honda's car designs exactly, but violating copyright is also against the law. Bankruptcy law shouldn't overcome that law any more than it should overcome laws protecting franchisees.

In many of these cases, Chrysler and GM admit that they will close dealerships in a city and will later re-open franchises in that city with different owners. That should appall us! No one can take our property away from us and give it to someone else with no compensation. That is against the 5th amendment.

These companies are in bankruptcy, but they are not liquidating, they are reorganizing. So they have the responsibility to their customers to behave in an ethical manner.

We are setting a powerful precedent here. Can the government (through the auto task force) recommend closing thousands of businesses and then walk away and say "the government shouldn't be involved"?

What is next? Are there too many pizza shops in your town? I bet some of them aren't profitable. Maybe a task force should recommend that they be closed and be given to pizza hut...

Don't look now. But I think the government already got involved. And when there are basic ethics involved, you bet the government should play a role. That's what our congressmen are for: to be representatives of their communities.

Katie B.

June 5, 2009 7:37 PM

John Gibson: the dealers own the cars, they hold loans on the cars and pay interest on them. They own the property, they build buildings to satisfy Chrysler, then spend their own dollars marketing and advertising and used their own life savings to purchase the business. These aren't just contracts to be voided, these are businesses that someone purchased and now owns. Chrysler may save some money by cutting dealership - by eliminating the need to train individual dealers, to travel to see dealers, etc. but the amount of money that they save does not compare to the amount of devastation that is created by these cuts. States have franchise laws to protect them because they are put in such a vulnerable position if a manufacturer lets them down. Those laws require that manufacturers buy their cars and tools back and give them time to close so that they have a chance at creating another business. As it is now, they have no chance.

GM and Chrysler are cancelling some dealers because those dealers sell competing brands in the same location (particularly Honda or Toyota). But the problem with these manufacturers is not too many dealers or being in the same location as Honda and Toyota... the problem is that GM and Chrysler don't make as high quality of cars. It is purely a corporate problem and they are making the dealers pay for their mistakes while they have scheduled millions of dollars in bonuses into their bankruptcy plan for Chrysler executives.

While more Toyota and Honda cars are sold than GM and Chrysler these days, there are many more GM and Chrysler cars actually on the road. So the dealerships depend on the revenue from servicing those cars under warranty... which they can no longer do as GM/Chrysler dealerships.

I'm sad that more people in this country don't fully understand what is going on.

The manufacturers are using this bankrutpcy as an excuse to break contracts and create devastation in their wake and the government task force guided them to do it the whole way...

nyongesa

June 9, 2009 2:45 AM

Management by committee, congressional or otherwise, is a sure business killer. Even if the funds have come from the taxpayer via the government, once the approval was given, the input of congressmen became less than irrelevant, and frankly dangerous. Your bank gives you the loan based on the plan you present, they don't get to micromanage what you do with the money.

As to ethics, that has nothing to do with it. This is capitalism, and you have benefited mightily from it. But like anything else in life, you also have to be ready for the bill when it comes. The alternatives, may seem appealing at times like this, but you pay that piper every non recessionary year with higher structural un-employment and a stagnant less dynamic economy.

All day every day businesses go bankrupt and suppliers, clients and stakeholders get burned. We as tax payers are bailing these automotive companies out due to their importance to the manufacturing base of the country and the current fragility of the economy. We do not owe these dealers anything. Their suppliers the auto companies were de facto bankrupt and would have liquidated without the bailouts. The fact they did not does not obligate the taxpayer to chip in more money to bail out non-essential dealers. If these dealers cannot enforce their contractual rights in bankruptcy court than that is the law of the land and that's the end of it. I've known plenty of people who have been on the receiving end of business failure, and the sad truth is none of these dealers warrant special treatment in comparison to anyone else in this economy.

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Want the straight scoop on the auto industry? Our man in Detroit David Welch, brings keen observations and provocative perspective on the auto business.

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