Closing auto dealers: Dumb move
 

Did Obama's team of urban sophisticates even realize that auto dealerships are not owned by the automakers? :?: I am struggling to understand why closing dealerships would have helped the automakers turn around. Let's see, the dealers buy the cars from the factory, in fact they pay interest on them after a certain # of days, and then there is the upfront money the dealer owner had to put up to have a franchise. Not to mention dealerships help sell a lot of OEM parts to the public. So the idea that the automakers saved a lot of money by closing dealerships seems........rather retarded? Yes I think so.


TARP auditor criticizes Obama administration's push to close auto dealerships

By John Hughes and Catherine Larkin
Monday, July 19, 2010; A03

The Obama administration's request that General Motors and Chrysler Group accelerate the closing of U.S. dealerships probably was unnecessary and may have added to unemployment, a government watchdog said.

The United States "should have at least considered" whether the benefits of speeding up the closings outweighed costs from a potential loss of tens of thousands of jobs, according to the report by Neil Barofsky, , special inspector general for the Troubled Assets Relief Program. The Treasury Department rejected the automakers' reorganization plans in March 2009, in part citing GM's "slow pace" in scaling back its dealer network.

"Such dramatic and accelerated dealership closings may not have been necessary and underscores the need for Treasury to tread very carefully when considering such decisions in the future," Barofsky said.

Treasury, which has committed $80.7 billion to the two carmakers under the TARP program, criticized the report and said that without the government assistance both companies faced failure and liquidation.

"We strongly disagree with many of your statements, your conclusions and the lessons learned," said Herbert M. Allison Jr., assistant Treasury secretary for financial stability.

The report prompted further criticism from Republicans in Congress, who faulted the government's role in making decisions about the business plans for Detroit-based GM and Auburn Hills, Mich.-based Chrysler.

"This sobering report should serve as a wake-up call as to the implications of politically orchestrated bailouts and how putting decisions about private enterprise in the hands of political appointees and bureaucrats can lead to costly and unintended consequences," said Rep. Darrell Issa (Calif.), ranking Republican on the House Committee on Oversight and Government Reform.

The report found that Chrysler, which made decisions on a case-by-case basis, followed the criteria for targeting dealers for termination. GM was inconsistent and retained more than 1,300 dealers that would have been shut based on sales, consumer satisfaction and profitability, according to the report.

Congress members had been complaining that the terminations were unfair and will cost jobs in their districts.

"There is substantial confusion, even among dealers themselves, as to how GM and Chrysler selected dealerships for termination," Sen. John D. Rockefeller IV (D-W.Va.), head of the Commerce, Science and Transportation Committee, said in the letter to Barofsky.

General Motors Co. was formed last year out of bankruptcy from the best-performing assets of General Motors Corp., while a group led by Fiat bought most of the bankrupt Chrysler assets, forming Chrysler Group. Taxpayers contributed a net of $49.9 billion for GM and $14.3 billion for Chrysler as of September, according to the Congressional Oversight Panel.

In the weeks before the audit was begun, the two automakers had announced they were shutting down about 2,100 dealerships to save costs and become more competitive. President Obama signed a law in December that required the automakers to offer binding arbitration to dealers whose outlets were being closed.

GM said in March that it planned to reinstate 661 dealers after the company began reevaluating the closing of 1,100 retailers.

Chrysler that same month said it was offering new franchises to 50 dealers who applied for arbitration, in addition to 36 previous offers or new agreements. Chrysler terminated 789 dealers last year and said in January that 409 had applied for arbitration.

-- Bloomberg News

Why was it a dumb move?

Should the automakers not take advantage of government involvement, sidestep all the legal BS associated with closing a dealership and have control over its distribution network?

Or should they keep dealerships open just keep sales jobs?

I don't know, I thought the point was to sell cars, not create sales jobs.

How did selling some dealers allow them to "have control" (your words) over the remaining ones?

How did what they do help them sell more cars?

American automakers have had a problem with too many franchises.
Wasn't this all covered when auto TARP came along?
Does everyone have memory loss as to why things were done the way they were?

Again, how does it help them sell more cars?

Take 2 Dodge dealers that are within a reasonable driving distance of one another. First one sells 100 cars/year, the other one sells 200.

Closing the first dealer just because it sucks, doesn't automatically mean the other dealer is going to suddenly start selling 300+ cars.

Give me one good reason why you want two dealerships of the same brand close together?





I thought this was a nice way to put it...

Sorry, none of that explains why they would magically sell more cars by closing dealerships. Nor does having two dealerships of the same brand close together magically hurt sales.

2 dealers close together = Two dealers competing against one another.
Two dealers competing against one another = price competition
price competition = decreased market value of each car.
end result is that it reduces profits on each car sold, it hurts the market perception of the product you are trying to sell and negatively effects the bottom line.
Chysler and GM can only compete in certain market spaces and considering their individual market positions a large heavy onerous distribution network is counterproductive.

There are complaints now because some jerkoff is looking at how dealer closing resulted in job losses.
The point of closing the dealers was to help the car companies get out of shitsville and get into a position where they have a sustainable model. Not maintain retail positions or fluff up job numbers in the short term.

Complaining about closing auto dealers: Dumb move

explainer
Deal or No Dealership
Why is Chrysler closing 789 car dealerships?
By Christopher Beam
Posted Wednesday, May 20, 2009, at 6:20 PM ET

Chrysler disclosed in a bankruptcy filing last week that it plans to close 789 dealerships—about one-quarter of its total. General Motors, meanwhile, told the owners of 1,100 dealerships that it will drop them from its network. How does shuttering dealerships help car companies?

It saves them money. Car companies don't actually own dealerships—instead, they have contractual agreements that dictate factors like location, display space, signage, and service options. Nevertheless, Chrysler and GM and other auto manufacturers must maintain a large, costly field force of trainers (to train technicians to fix cars), salespeople (to persuade dealers to buy more cars), and auditors (to verify claims for reimbursement). The more dealerships, the more go-betweens a car company needs to employ and the more money it has to shell out.

Shuttering dealerships could also result in less intra-brand price competition. Car buyers will typically visit at least two different dealerships in order to compare prices before making a purchase. By playing dealers against one another, buyers lop an estimated 2 percent off revenues. But if there are fewer dealers, customers can't haggle as easily, and car companies make more money. There's a tradeoff, of course—fewer dealerships means customers have to drive farther. But at the moment, there are so many dealerships that the benefits of reducing price competition outweigh the harm of having fewer locations.

Another benefit: Shutting down dealerships weeds out weaker branches to help stronger dealerships stay viable. It also makes sense from a branding perspective, because when a dealership starts to fail, dealers resort to tactics that make the car company look bad. Think free hot dogs, "push, pull, or drag" sales, and giant inflatable gorillas on the roof. (Luxury car companies like Lexus explicitly forbid dealers from using the words price or sale in their ads.)

Finally, pre-emptive closings help car companies from getting saddled with tremendous amounts of debt. Let's say a GM dealer is just getting started: He'll buy hundreds of cars from GM with money borrowed from GMAC, the financing arm of GM. If the dealership collapses suddenly, GMAC may not get a lot of the money it's owed. So it makes sense for GM to shutter a dealership before it goes too far into the red.

When the auto industry first started expanding in the early 20th century, it made sense to have dealerships in every community. Much of the population was rural, and cars broke all the time, making proximity to the original vendor necessary. These days, with a more urban population and better auto engineering, it's not necessary to have so many dealerships. At the same time, people are willing to drive farther to buy or tune up their cars. As a result, more dealerships don't correlate with more sales. Toyota sells more cars than Chrysler with fewer than one-third of the number of franchises. (The average Toyota dealer sold 1,589 vehicles in 2008; the average Chrysler dealer sold 124.)

Got a question about today's news? Ask the Explainer.

Explainer thanks Glenn Mercer of the International Motor Vehicle Program and auto industry consultant David Stivers.
Christopher Beam is a Slate political reporter. Follow him on Twitter.

You are talking about long-term hypotheticals.
In the short term, inter-dealer price competition only hurts the dealers, not the manufacturer. The manufacturer gets paid the same amount for the car. Your hypothesis that it will hurt the market perception of the brand, and thus eventually force the manufacturer to reduce its price, is a longer-term hypothetical that may or may not be true. What if it also causes a customer to buy Chevy instead of Toyota because he was able to negotiate better at the Chevy dealer, while the Toyota dealer wouldn't budge? And flash forward to today, with fewer Chevy dealers around? Chevy customers won't be able to negotiate as well as they did before, therefore some of them might buy a Toyota instead.

Also, eliminating dealers causes a loss in brand awareness, since anytime you have new cars sitting on a lot somewhere, it is its own form of advertising.

Unfortunately for GM, Chrysler and Ford it is not "hypothetical"

I have provided the information you require. If you are unable to process this information then that it is beyond my control. The only thing I can recommend to you is to take some economics course to put you in a position where you understand markets and then follow that up with some readings on the state of the auto industry so that you can apply lessons learned to automotive sector.

If I had to guess I can come up with a few reasons. First they thought that too many dealers of the same brand too close together creates too much price competition for the same vehicle. If a customer can get two dealers to beat each other up over price it cuts profits. Of course that ignores that customers will do that with competing brands as well.

Another issue is more dealers also usually means more inventory which, when things get slow require more manufacturers rebates to sell. The manufacturer is more exposed to changes in the economy or market trends (customers running away from SUVs when gas got expensive).

One other issue is, as was mentioned in the quote paul posted, some dealers had pretty shitty customer service. This presented an opportunity for manufacturers to dump the dead-weight that played a part in dragging down their brands. In the dealers defense though it is hard to have good customer service when the customer is buying a dogshit Chrysler. A problem with that fake letter from Chrysler paul posted is Chrysler wouldn't have much reason to be snarky after building those same dogshit cars since the Nixon era and managed to screw up the company so bad the best option was being bought by Fiat.:shrug:

Too bad you only provided opinions from editorials, not proven facts. And too bad I actually worked in the industry (at a dealer as well as for a manufacturer).

Yes......however it may also result in the customer buying GM or Chrysler, instead of a Toyota.

Yet you seem to know nothing of basic economics nor do you appear to have any clue of the auto industries troubles over the past 20 years.

I know people who work at Northrop\Grumman and have flown on an airliner.
They haven't a clue on the aerospace industry and they don't even understand how airplanes fly.

Will someone pass the popcorn? This is getting good :lol:

You're grasping at straws, Paul.

The "explainer" claiming that cutting a few training jobs and dealer reps is going to save enough money to salvage the auto manufacturers is laughable.

Intrabrand competition may bring profit margins down but the loser in that deal is the dealership.

Dealer A may sell for cost + $500 while Dealer B will sell for cost + $100. Cost is constant, GM/Chrysler still get their price.

The best argument the explainer has is the loss of capital from failed dealerships. Unfortunately, that deals in the purely hypothetical and speculative world. It also deals almost exclusively with start up dealers.

If GMAC had called their loans due, few would have complained. If there had been a moratorium of new dealers, people would have applauded.

I knew several people at Ford who didn't know how engines worked. One chick didn't even know what V8 meant. But we all worked in Sales & Marketing, so we didn't need to. We weren't engineers.

Are you motherfuckers going make me put on my economics jacket on?
Am I seriously going to have learn you bastards on basic economics?


you assholes: "well economics is really just opinion like the rest of those fruity social sciences so we're sticking to our 'we can yap about the local dealer BS'"

I hate you all so much...

Before I respond to you guys...I must make sure I have the correct e-penis strapped on.

:lol:
Considering the condition the US automakers are in, this comment helps explain your responses.

Basic economics is fine but, at least in the case of GM, the reality is the structure of their dealer network had very little to do with the company's bankruptcy. Making shitty cars with a shitty cost structure, a lot of which was labor cost related, did. GM lost over $70 billion from FY2004 to Q3 of FY2008. For a frame of reference those losses are over $65 million for each dealer cut in less than 5 years. How much of that do you think was tied to the dealer network being unsustainable?

Your argument is that dealers were not responsible for for the automakers condition. Are you concluding that in pursuit of reorganization and creating a model that would leave to increased market competitiveness, it is unreasonable for manufacturers to sever contracts and obligations to existing under-performing dealers and pursue a distribution model that fits existing market conditions?

Is it improper for the auto manufacturers to control their distribution using the strategy they desire?

US manufacturers have a legacy dealership network that does no longer fits their market share. More dealers do not equal more sales and when a manufacturer has a brand equity problem (in some cases aggravated by points in your distribution network) in addition to pricing issues due to internetwork competition there is a valid case to redecorate your map.

They can do whatever they want. They aren't even a public company anymore so they don't have any shareholders to answer to. Either way their dealer network structure may have been loosing them money but it couldn't have been more than a drop in the bucket. Farting around with their dealer network while essentially transferring ownership to the American and Canadian governments and most ridiculously to the UAW is like re-carpeting a house that fell in a sinkhole.:shrug:

I'm going to have to put some serious thought as to why terminating franchise agreements with dealers that don't meet the standards set by the manufacturer is a good thing.

Maybe get some powerpoint presentations on why having too many dealership is a bad thing when your are trying to build brand equity and increase profit margins.

I tried seeing it from the other side, that keeping an abundance of overlapping franchises benefits the automaker by increasing exposure but since we're not talking about fucking starbucks I can't get that simplistic

drop in the bucket yes.
the point isn't about expenses.
Its about generating revenue.

I've gone on one my tangents again.
Damn...i got problems

Brand equity, you say? Let's take the extreme case, if there was only one Chevy dealer every 500 miles. What kind of brand equity are you going to have then? Chevy isn't Ferrari, people don't worship their cars, so they can't get by with as few dealers as Ferrari can.

And yes, the manufacturers do regularly review dealers for standards and such, and do often threaten them with the loss of it, but.........When I was at Ford, it was mostly due to customer service issues, as well as lame attempts to get them to order more cars :lol:......Not due to costs of doing business. The amount of time spent on each dealer is not as much as people think. When I was with Ford, the small rural dealers were treated to maybe 2-3 phone calls a month. Does having fewer dealers make things more efficient, yes, but for you to say that it will automatically help sell more cars?? Jigga pleaz....... that's where I called bs.

And when this is a Democrat administration that is allegedly supposed to care about jobs........

Seems like the only jobs Democrats understand are factory (union) jobs......Not dealership jobs, which are small businesses that the average big-city Democrat doesn't appreciate, other than spouting off a few pandering soundbites during election time. BOTH parties are sacks of shit that are just guessing WTF they are doing.

Glad you finally get the point


Oh yeah...here is where I said that

Dumbass

Except those efficiencies are very minor, since the manufacturer doesn't own the dealer, and only helps him with a teeny bit of his expenses.

Oh yeah...here is where you said that:

GM had a lot of revenue. In 2008 GM had almost $150 billion in revenue (over $175 billion in 2007, their worst year ever). Their problem for the better part of the last decade is that they had even more expenses. Again in 2008 GM had almost $180 billion in expenses (almost $220 billion in 2007).

There are two ways for a company to get out of the red, increase revenues and decrease expenses. Obviously they all need to do both and that holds true for GM as well, but GM's expenses have been way out of control for way too long. Instead of dealing with that when they had the chance they decided to close dealerships to give the appearance of "doing something" rather than actually doing something. It is a shame really because as the organization is currently set up it is no more sustainable than it was 2 years ago.

I can see how you could interpret it that way.


My point is that the government helping Automakers get around all the legal bullshit concerning dealers in was assisting automakers in restructuring efforts.
The point of those restructuring efforts is to help automaker shed legacy bs and focus on selling cars.
Not focus on retail jobs, the focus of the original article.

Reread my posts and hopefully you will see that.

Dealerships purchase the franchise rights and represent the automaker in the market place. It is the right of the automaker to control that arrangement.

My perspective on dealer saturation is from an economist standpoint.
Are you going to standby your assertion that consumers cross-shop between GM products and Toyota products?

What value is it to GM to maintain franchise arrangements with dealerships that had poor scorecards? What value is it to GM to have two similar franchises within 3 miles of each other? what value is it to GM to have multiple dealers, each with excess inventory and possible low sales, including any financial arrangements with the individual dealers for vehicles and parts inventory?

If you have a market that supports 20 sales a month yet have two dealers with inventory to for 30 sales a month sitting down the block from each other (resulting on cars sitting idle on the lot resulting on pricing pressure as dealers try to offload inventory...resulting in market perception that your cars are worth less than MSRP) what is the benefit to GM?

I don't know what the value is, but considering GM (the government and unions) originally planned to close over 600 more dealerships based on those factors then reversed the decision apparently GM sees some value.

ETA: As I said it doesn't matter anyway. GM isn't doing what is necessary to be a viable concern so without some major future changes all GM's dealers will be SOL.

Lets just recap
Automakers wanted to dump underperforming dealerships and also reduce saturation.
Franchise laws made this an expensive and onerous task.
Gov\Tarp came along and said 'we'll make it easy for you'
Automakers jumped on it.

BenefitsThere isn't much else that I can add.
This auditor complained that closing the dealerships added to unemployment rolls and the government didn't add as much weight to that when it offered the automakers help in getting around franchise laws.
The point of helping out the automakers was to help the automakers...not the dealerships. Its better to have some great franchises than alot of shitty ones because the shitty ones drag your brand down. Having em close together devalues your product because now you have pricing nonsense as two crappy dealer compete, both dealers with excess inventory screwing up your forecasts because now you gotta deal with multiple dealers instead of one all trying to sell product that just wont move.

Its called litigation.
Dealer sued
politicians screamed

There are probably some cases where dealers got there shit together and improved their scorecards but a lot of cases are dealerships calling lawyers.

What should GM be doing to be viable?

Actually it was arbitration not litigation, but you have hit on wher GM sees the value of keeping them open.

In my view the most important thing they need to do is scrap their labor agreements. As I understand it they have only dealt with pensions so far. That they dealt with them by giving the UAW pension fund 17.5% ownership doesn't make this likely. This is also the primary reason why I don't see the new GM as viable in the long term.

They also definately need to improve their quality. This avoids warranty claims which directly cost them money. It sounds nice that domestic manufacturers are touting their reductions in warranty claim expenses from the first 90 days of ownership. It is not so nice that those reductions track with similar reductions in new car sales. Quality goes beyond those direct costs though. The high NVH levels I have experienced in domestic cars will not result in warranty claims, but I have to wonder how manufacturers in the 21st century can find it acceptable. Practically every domestic I have been in, including newer cars, has NVH levels that you don't find in a 100k mile Honda or Toyota. In my experience domestics also have an annoying level of squeaks and rattles that aren't found in most foreign vehicles. Sure, the new GM is talking about increasing quality, but so was the old GM. They need to actually do it, not just talk about it.

The argument goes back and forth on this one but I think they should rely less on outside suppliers. Bringing more production inside would allow them to cut costs and put them in a better position to control quality. That does depend on GM actually controlling quality which, as I stated above, I need to see in order to believe.

That is just a sampling but compared to those three issues, which I am not conviced have been fixed, their dealership structure is a drop in the bucket.

Pauldun I think you are pretty misguided in this thread. I have alot more experience with auto OEMs and dealerships than many here. I have spoken about buisness practices with many dealer principles (owners) over the years. The fact of the matter is this: While GM takes in alot of cash, it was shelling out more. The main reason was too many like products with too much inventory, so plants had to be closed and personall had to be reduced. Now...if you do this, you simply do not have enough inventory to support 4,XXX dealers, so the bankruptcy protected GM from getting sued.

More dealers = more revenue for GM. Period, especially if the dealers are hungry. Also, don't forget GM has fixed costs with its IT, Service support, sales support that the dealer pays GM per month. If you cut the dealer body in half, you loose half of this revenue, while still having to provide the same level of service to the remaining dealers. Also, in most cases GM will jack the monthly fees per month to compensate for the reduction in the dealer count.

The advantage for dealer reduction is at the dealership itself. Less competition and less vehicles produced will ensure a steady steam of revenue, but because of this, these dealers are no longer "hungry' and will be content with selling only slightly more vehicles or servicing slightly more vehicles than before.

Isuzu is going through the exact same thing...550 truck dealers (GM/Isuzu) down to 300 (Isuzu). Vehicle sales WILL decrease and it will be loose for Isuzu and win for the remaining dealers.

ok

Did Homeslice wear you out?:lol