The Car Dealer Mess

A scheme hatched in Detroit and Washington, D.C. early this year to close over 3,000 GM and Chrysler dealers will be second-guessed hundreds of times in places like Aurora, Nebraska; Silver City, New Mexico; and Sugarcreek, Ohio. With congressional legislation expected to be signed into law this week, since it is tacked on to a must-pass appropriations measure, GM and Chrysler are required to hold hearings with retailers around the country in arbitration panels that will revisit their decision one dealer at a time.

GM and Chrysler, encouraged by the Obama administration's Automotive Task Force, continue their ineptitude -- ranging from steadily-declining market share due to stubborn adherence on making products people don't want to this year's snap-decision to close 3,000 dealerships. This latest sorry chapter came to a close with Senate passage of legislation that will enable arbitration hearings that presumably will be held in bland hotel meeting rooms across the country with manufacturers, retailers, and their lawyers.

GM, Chrysler, and the Automotive Task Force decided it was best to close what they deemed underperforming dealers under the legal cover of bankruptcy. Their rationale was that these dealers hurt the industry by competing with one another on price and marketing incentives which cost, in the case of GM, an estimated $2 billion a year. The manufacturers and the Auto Task Force neglected to mention -- or failed to understand -- that the $2 billion comes from variable costs that are standard industry practice to move cars off lots. That money is paid only when cars are sold per automobile, not per existing dealer. This factual oversight prompted the trade publication Automotive News to characterize this as GM's "$2 billion lie." As for Adam Smith's invisible hand theory, it vanished into thin air when it came to dealers purportedly cannibalizing each other's sales because of proximity to one another.

This came to a head in June. Dealers around the country, slated for closure using undisclosed criteria, received a FedEx letter stating their operations would cease to exist. A GM dealer in New Jersey, interviewed on a local TV station, expressed shock upon receiving the letter. His father started the dealership; his daughter is employed there. "We were loyal to the brand, loyal to the community, and loyal to our customers," he said to the camera. One employee on the showroom floor who had worked there for over twenty years discussed how he would have to find a new job.

Dealers slated for closure employed 169,000 such people soon to be out of a job: salespeople, mechanics, and office clerks, according to the Committee to Restore Dealer Rights. In the case of the New Jersey auto dealer, who acknowledged that sales had declined recently, he explained that the business had the capital to continue operations and ride out the storm. Who didn't experience slow sales since the recession started? And what gives government-owned GM and Chrysler the right to decide who should have their businesses taken away?

Questions like these prompted the formation of the above-mentioned Committee to Restore Dealer Rights, which lobbied the administration and Congress to restore dealers. The organization pressed hard to enact legislation that would reopen the dealers. They labored through the summer and fall to negotiate with GM and Chrysler to disclose the process leading to the termination letters. They worked to secure a bipartisan group of cosponsors in the Senate and the House to pass legislation to restore the franchises. They were then told to drop a legislative remedy because it was politically too difficult, what with the health care debate dominating the agenda. Then they were told the legislation may be unconstitutional.  They went back and negotiated with GM and Chrysler some more. They negotiated with the Auto Task Force. They advocated that key senators push the TARP inspector general to investigate GM's and Chrysler's criteria for closing dealers. As this year comes to a close, the legislative strategy arose to add the arbitration remedy to the appropriations bill. It is likely that the cost of arbitration will outweigh costs -- variable or otherwise -- associated with maintaining dealers.

The dealer rights committee cites industry analyst sources that show if all the dealers closed under GM and Chrysler's plan, there will be 9,500 domestic outlets and 9,900 import outlets. Dealers derive revenues from service and sales. Nearly two out of every three cars on the road are domestic. The fewer dealers there are, the more likely it is the public will become loyal to brands that sell and repair vehicles near where they live. Many of the dealers slated for closure are located where domestic models still outsell imports -- the heartland, Middle America places like Ohio, Nebraska, and New Mexico. Close these dealers and bleed market share in areas with historically strong sales.

And that is precisely what is missing in the rationale to close the dealers: the market. The dealer rights committee compares what happened here to McDonald's selling Big Macs. The more McDonald's restaurants there are, the more people will likely buy fries, a coke, a Happy Meal, or a Big Mac. That sounds reasonable enough. Instead, the inept management of GM and Chrysler and their government enablers follow the example of the Trabant -- a product that doesn't compete and whose distribution and sales are stifled by the government and the quasi-public manufacturer.

Little is remembered of, and less is cared about, the sales and distribution channels of an East German state-produced automobile noted for generating the horsepower of a lawn tractor manufactured before 1991. The outcome is remembered; it took an average of fifteen years to make delivery. Called the Trabant, the car is still desirable -- as a collector's item, much like fragments of the Berlin Wall. The Trabant is central planning on four skinny tires, and both the car and the economic model that produced it ceased to be relevant the minute people could buy Volkswagens after the wall came down.

Substandard products and micromanaged sales and distribution lead to irrelevant automobiles and failed business models. Junkyards are littered with the rusting carcasses of dozens of failed domestic models over the years. One is the Chevrolet Chevette. Obsolete the day it hit the showroom floor, the rear-wheel drive, compact car lingered for ten years until being put of its misery when import sales washed over it in the late '80s. Dealers around the country made up for poor models like the Chevette by selling pick-ups and SUVs in the '90s, thereby continuing sales to loyal customers. The days of the truck and SUV craze, fed by cheap gas prices, market trends, and a strong economy, have faded into the background of the central-planning-inspired cash-for-clunkers era. But the domestic dealers hung in there, despite products like the Chevette, as they adapted and made money on service, parts, used cars, and occasionally, desirable new vehicles.  

The mismanagement in Detroit is legendary. If top management isn't capable of making vehicles that grow market share, how are they capable of picking winners and losers in the retail sector that supports them? 

Let us hope that the Chevette and Trabant won't share the same exhibit as relics in the museum of failed enterprises.