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Dealergate 7: Why were top-performing dealers closed?

Chrysler and the auto task force don't have an answer.

Since we last checked in on the Dealergate fiasco, the new media has been busy doing the work old media reporters should have been doing all along. Obama sycophants on the Left end of the blogosphere continued with their “nothing to see here, folks” defense of their beloved savior-president. And Chrysler dealers on the closed list offered evidence in court that most had sales figures and customer satisfaction ratings above the norm for all MOPAR dealers. But could all this just be trees, and could they be obscuring our view of the forest?

Zero Hedge, which had undercounted dealers who made political donations in their first stab at crunching the data, decided a new approach with less chance of misinterpreting the data was needed. Chrysler insists that it had established criteria for closing dealerships based on sales volume, price, customer satisfaction and service department performance. These criteria were incorporated into two Chrysler programs – Project Alpha and Project Genesis – for evaluating its dealers and deciding which ones would be terminated and which were allowed to hold on to their franchises:

“So in the event that retained dealers were not Genesis compliant while cut ones were, this would demonstrate that there was, in fact, more here than meets the eye.”

ZH researcher Marla is working on this right now. What got her interested in pursuing this particular line of inquiry? From the bankruptcy proceedings, the sworn testimony of a dealer in Little Rock, where she has connections:

On May 13, 2009, I received a letter from Chrysler notifying the Dealership that Chrysler had elected to “reject” our Dealer Agreement. I am obviously very familiar with the Little Rock, Arkansas dealer network and was surprised because both Cook and Crain, the only Chrysler dealers in Little Rock, were both rejected. Therefore, Chrysler’s action would, on its face, result in a complete lack of representation in a major American city. Since that would be a ludicrous result, one can only infer that Chrysler has a more sinister motive.

Because it is inconceivable that Chrysler will not have a dealership in Little Rock going forward, the only conclusion that one could draw is that, after review, the evidence in other markets in the region, that Chrysler now intends to “give” the Little Rock market to a Landers-related dealer.

Having reviewed the pattern of assumption and rejection of dealers throughout their region, I have detected a pattern: In every market where there is a dealership connected with former Penske Automotive executive Steve Landers, or his new automotive partnership with “Mac” McLarty (former Chief of Staff for President Clinton) and Robert L. Johnson (majority owner of the Charlotte Bobcats), the competitors are rejected.

In the Little Rock, Landers Chrysler Dodge Jeep is located far out of town in Benton, Arkansas. Nevertheless, the two Little Rock dealers, Cook and Crain were rejected.

In the Fayetteville, Arkansas area, Landers-McLarty Dodge Chrysler Jeep is located far out of town in Bentonville, Arkansas. Competitors Springdale Dodge Chrysler, Steve Smith County Jeep and Jones Brothers were all rejected.

In the Shreveport, Louisiana market, Lee’s Summit Dodge Chrysler Jeep (a Landers McLarty dealership) is located in Bossier City, Louisiana. Both competitive dealers, Claude de Beaux in Vivian, Louisiana and Greater Birmingham Dodge Chrysler in Shreveport were rejected.

In the Springfield, Missouri market, Tri-Lakes Motors (a Landers-McLarty dealership) is located in Branson, Missouri. Competitors Heritage Chrysler Jeep in Ozark, Missouri and Ramsay Motor Company in Harrison, Arkansas were rejected. A pattern seems to be emerging. Everywhere there is a Landers-McLarty dealership, Chrysler has rejected the competition.

In the Huntsville, Alabama market, Landers McLarty Dodge Chrysler Jeep, is located in Huntsville. Competitor Cloverleaf Chrysler Dodge Jeep was rejected.

Favoritism and cronyism towards preferred dealer group is not a valid exercise of business judgment.

Ah, Landers, Mclarty and Johnson — now where have we heard those names before? Joey Smith and Doug Ross had first found and exposed the favorable treatment RLJ’s dealerships had received, and now testimony has been given in a court of law that, as Doug says, “aligns almost precisely with the findings that Joey Smith and I championed.” Interestingly, it was ZH’s decision to include primary owners (such as Landers) and exclude those individuals who were not majority owners (such as McLarty and Johnson) which caused donors to Democrat candidates and causes to be undercounted in their first run through the data.

Another continuing line of investigation into the dealer scandal involves dealerships owned by individuals who are members of minority ethnic groups. Tom Lamb, who blogs at It’s a Kwazy Life, began working on this aspect of Dealergate last month and found that of the minority-owned dealerships in the Chrysler dealer network, Hispanic-owned outlets were closed at a higher rate than were African-American-owned dealerships. As Doug observed, “When dealerships had to be closed, it would appear political correctness trumped merit.”

But what is being obscured by all of this is one basic question, and I still have not heard a satisfactory answer to it. Is it really necessary to have to close all these dealerships? A Bloomberg report indicates that may not be the case:

“There’s the school of thought that if [GM and Chrysler] want to emulate the success of brands like Toyota and Honda they should emulate their dealer structure,” said Jack Nerad, an analyst for car-pricing company Kelley Blue Book in Irvine, California. “That certainly seems to be the view of the automotive task force.”

Nerad was referring to President Barack Obama’s car task force, which steered Chrysler into bankruptcy on April 30 and set a June 1 deadline for GM to finish restructuring outside of court. The panel said it wasn’t involved in the dealer cuts.

[...]

Dumping dealers isn’t part of the cuts in costs and debt at GM and Chrysler. Instead, “underperforming” stores, as GM put it, were targeted to ensure the automakers’ future retail networks will be stronger for when the companies reorganize.

Both GM and Chrysler, as well as Obama’s auto task force, have maintained that the automakers needed to shed dealers because the outlets have been costing the companies too much money. Mark LaNeve, GM’s North American sales chief, whether wittingly or unwittingly shot that excuse full of holes:

“Too many dealers, in actuality, is not the problem,” LaNeve said on a May 15 conference call. “We’ve got too little industry and too little sales we have to contend with.”

Whoa, wait a minute. We’ve heard dealers say that, but this is the first time to my recollection that a member of the corporate management team has admitted it. The man in charge of GM sales in North America says that too many dealers is not the problem, while the government panel directing the dismantling of both companies and the official line being spouted by the companies maintains otherwise. Who has it right here? A car guy or a committee of people who don’t know anything about the auto business and the companies who are subservient to it?

To answer that question, we need to know how much dealers cost the car companies. Watch the video of this report from Chris Cotter of Fox Business, as he relates that closing the dealerships “will do absolutely nothing to affect Chrysler’s bottom line”:

“These dealerships are all self-contained. The buildings they own are leased. The vehicles are essentially owned by Chrysler Financial. They pay on the note. All their marketing expense, parts, service, all contained within the dealer. So there’s a lot of misunderstanding out there of what good that will actually do, and in some cases, many people feel like it will even do harm.”

Yesterday we reported on some of the harm that closing the dealers is causing.

Let’s review. Dealers pay for the franchises, training, special tools and equipment for the shop (the mechanics pay for their own tools), etc. So we see that dealers actually cost Chrysler relatively little money, and closing them will not, as the dealer in the report said, affect the corporate bottom line.

So why close any dealers at all? The answer is that some dealerships have to be closed so that the ones remaining will be more profitable. But if that’s the case, then why, as evidence presented to the bankruptcy court clearly shows, are many very profitable dealerships which fit Chrysler’s own profile for staying open, being closed instead?

So far, Chrysler hasn’t been able to answer that question. When you ask the Obama administration the same question, they refer you back to Chrysler. The anecdotal evidence overwhelmingly says that there is no good answer to the question, which leaves only bad ones.

As a number of bloggers and Chrysler dealers who are having the rug pulled out from under them have maintained all along, the appearance is that politics is playing a major role in determining which MOPAR dealers are being shut down and which ones are being allowed to retain their franchises. The administration’s apologists at HuffPo and other Obama fan sites dismiss this, but they won’t address the facts which have been brought to light by a relatively small but dedicated group of bloggers. We eagerly await the results of Zero Hedge’s test of Chrysler dealerships to determine if the ones being shuttered fit the criteria laid out in the company’s Project Alpha and Project Genesis programs. If they do not, there will be hell to pay.

- JP

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