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Dealerships are not the problem

Government is now the auto industry's #1 problem.

The Washington Times:

Dealers from across the country lobbied desperately on Capitol Hill on Wednesday on the eve of bankrupt Chrysler’s expected announcement that it will close 800 of its 3,200 dealerships. GM is expected to close 2,600, or 40 percent, of its 6,300 dealerships

As part of their plans to get taxpayer-funded bailouts from the Obama Administration, GM and Chrysler both had to promise to sharply reduce the number of dealerships across the country which sell their products. But this is mostly smoke and mirrors. Too many dealerships is not even one of the more serious ailments which afflict the two car makers.

GM spokeswoman Susan Garontakos claims that her company can’t maintain its current dealer network because of poor sales:

“If they are not ordering cars, we can’t thrive on that. Most dealers are unable today to borrow money to maintain their inventory.”

But stop and think about that one for a minute. How exactly is having fewer dealerships going to enable the remaining ones to order more cars from the manufacturer?

Garontakos counters by pointing out that dealer networks represent a cost to the manufacturers in administrative expenses, incentives and rewards programs, and technology infrastructure. But dealers pay a share of these costs, and one of the best-kept secrets in Detroit is that dealer-related expenses for manufacturers are a drop in the bucket.

Most of the administrative costs of dealerships to the car makers are tied up in district, regional and corporate dealer representatives. GM and Chrysler maintain that having fewer dealers will allow them to cut down on the number of these representatives. But most factory reps communicate with dealerships by telephone, fax and the internet. Many local dealerships have not had a manufacturer rep set foot in their facilities in years.

There are also delivery costs, but these are associated with sales. The costs of dealerships, while not insignificant, are a relatively minor part of the problem. Dealers are not the problem. Fixed costs are the problem.

One of the factors that has persuaded those consumers who buy domestic to do so is the number of dealers a given car maker has across the country. The more dealerships a car maker has, the more secure some consumers feel in buying that product. They like to know that wherever they travel, there will be a dealership there in case their car develops a problem. Even small towns have had Ford, GM and Chrysler dealerships for years, but if many of these are closed, there goes one more reason to buy a domestic car or truck. Another important factor in the decision to buy domestic is brand loyalty. Closing rural dealers may destroy what remains of long-time customer loyalty to GM and Chrysler products.

Consider the effect of dealer closings on Main Street America. The National Automobile Dealers Association (NADA) estimates that 150,000 employees could lose their jobs under current plans.

Dealers impact their local communities in numerous ways. They pay commercial property taxes on their real estate, and dealerships are important customers themselves for such local businesses as office-supply outlets and auto parts stores. The dealers also help raise money for charity and purchase advertising on local media outlets, billboards, school publications and even the signs on the fences at the Little League baseball field.

“Unlike some of the faceless corporations that are out there, dealers are a living part of the community,” said Vince Sheehy, whose family has been selling cars in the Washington area since the 1940s.

Sheehy says the market will reduce the number of dealerships without the auto makers having to lift a finger, and he points to a number of them that are already going bankrupt. This is how market forces weed out the worst performers in the dealer network and the weaker outlets which are credit risks.

The manufacturers, however, have convinced the Obama administration’s know-nothing auto task force that deep cuts in dealer infrastructure are necessary to make the industry more viable. They were willing to say anything to get their federal bailouts. Not being very knowledgeable about the auto business, the government overseers have bought into the myth.

Car dealers from around the county gathered on Capitol Hill Wednesday to fight the dealership closings. They say that the plan to eliminate thousands of dealerships is a bad idea that will cost jobs, hurt sales, and change some communities forever.

John McEleney, who owns a Toyota and a Chevy dealership in Iowa, and chairs the dealers association, opposes the government forcing closings. The Obama administration’s auto panel claims that fewer, stronger dealerships and less competition will somehow help the brands become stronger. While that may work for Honda and Toyota, which already sell more cars with fewer dealers, it’s not necessarily the case for GM and Chrysler:

“It doesn’t help. I think there’s a thought that closing dealerships somehow saves the manufacturers money. It’s just not true.”

Jack Fitzgerald, who has been selling cars for 43 years and operates 11 dealerships which employ over 1,000 people in Maryland, doesn’t believe that closing thousands of dealerships is the way to save Chrysler and GM:

“Has anybody on the task force been in the car business? They are modeling after Toyota, but the problem is GM doesn’t sell Toyotas.”

Meanwhile, Chrysler’s dealer network is already on the verge of collapse, as hundreds of dealerships have closed their doors this year. Uncertainty about the company’s future is driving consumers away, dealer spokesmen told a U.S. bankruptcy court in Manhattan this week. In a packed Manhattan courtroom Monday, James Arrigo, the co-chairman of Chrysler’s National Dealer Counsel testified:

“People are walking in front of the door, saying ‘I would be interested, but I have no idea if you’re going to be here in two to three years.”

Chrysler filed for bankruptcy Thursday under a plan to sell its best assets to a new company managed by Italy’s Fiat SPA and planning an emergence from court protection in as little as 30 days under the “guidance” of the Obama administration. While it waits for the bankruptcy court to make a ruling, Chrysler has shut down production at worst of times for its dealers, just as the typically strongest summer selling season begins.

Michael Bernstein, an attorney for the firm representing Chrysler dealerships told the court:

“The dealers are nearly the only source for revenue that Chrysler has.”

He said that dealerships are the public face of Chrysler, and continued failures could make it even more difficult to regain consumer confidence as customers are left behind with nowhere to service their cars.

But President Obama is from the government, and he just wants to help. One thing is for sure. Closing dealerships in large cities may send ripples through the local economies, but when rural auto dealerships are gone, the shock wave created in their wake will mean that life in small town America will never be the same.

How are you liking this economic fascism stuff so far? You ain’t seen nothing yet. It will get worse.

- JP

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