By on June 17, 2009

The automotive retail landscape has been dramatically reshaped as both Chrysler and GM together have terminated almost 2,000 dealers as part of their on-going restructuring efforts. They were able to use the bankruptcy process to circumvent strong state franchise laws to shed dealers. At times there appeared to be no rhyme or reason to the selection process, leaving both dealers and consumers perplexed. Last week, as new details and documents surfaced on thetruthaboutcars.com on why certain GM dealership agreements would not be renewed in 2010, Automotive Traveler took an in-depth look at the closing process.

Over the past three weeks, both GM and Chrysler informed many of their dealers that they are now redundant as the restructure. While it was expected that many small rural dealers would be among those cut loose, in Chrysler’s case, many dealers that sold just one of their three (Chrysler, Dodge, and Jeep) brands were shut down. In some cases this was unexpected given that some dealerships were in major metro areas and boasted modern facilities. The reason given? That the company was “overdealered” meaning that there were too many dealers and it was impacting all dealers profitability.

In the case of the reasons why that certain Chrysler dealers were terminated, it appears that five criteria were evaluated.

Financial Viability

Dealership Upkeep and Appearance

Competing Brands at the Same Location

Number of Units Sold

Customer Satisfaction Index Scores

Chrysler dealers who might question why they were targeted for elimination probably need only answer the following seven questions:

Did you try and combine your store with a Dodge or Jeep dealer (or sell out to them) if a standalone dealership?

Did you update your showroom and service facility to the franchise-specific plan?

Did you consistently exceed your quota, and strive to increase your market share, even at the expense of gross margins?

Did you support the manufacturer, and exceed your stocking requirements by taking on extra inventory?

Are you financially viable, and consistently profitable (while trying not to hide any excess profits)?

If you have a competing brand, is it at least in a separate location/showroom/facility?

And are you selling more used product than new?

If the dealer answered NO to questions one thru six and YES to question seven, then each dealer can surmise why they were eliminated.

Over at GM, the problem is more complicated given that the Pontiac brand is being eliminated after GM’s recent efforts to build its Buick-GMC-Pontiac sales channel, and that GM is in the process of selling its Hummer, Saturn, and Saab brands. GM dealers will be evaluated based on four criteria to judge their viability. These criteria include:

Profitability

Capitalization

Customer service

Sales effectiveness.

To be part of the new, post-bankruptcy GM, these dealers have to perform well in all four categories.

For those dealers being eliminated, GM is offering some dealerships from $20,000 to $1 million to wind down their businesses over the next 17 months, the payment based on factors such as brands carried, regional sales rank, and current inventory.

But this payment comes with a cost; if the dealer accepts the payment, GM will not buy unsold inventory, the dealer must agree not to sue GM until their franchise agreement expires, the terminated dealers also will not be allowed to order new cars from GM, and they must stay in business until January, 2010.

And what might be the most onerous condition, a gag order that prohibits terminated dealers to talk to anyone other than its employees without GM’s permission.

Some GM dealers are not accepting the decision without a fight. Some are appealing individual decisions, seeking reinstatement, while others have gone public.

No one has been as public than Gretchen Carlson, host of “Fox and Friends” on the Fox News Channel. Her parent’s dealership, Main Motors in Anoka, Minnesota has been slated to be closed. On June 9 she appeared on “The Glenn Beck Program”, also on FNC, to plead their plight.

To respond, GM had Susan Docherty, its North America Vice President Buick-Pontiac-GMC appear on “Fox and Friends” on June 12 to respond to Ms. Carlson’s charges. The exchange wasn’t pretty, calling into question just how fair and balanced Ms. Carlson and Fox News Channel are, who along with the Fox Business Channel has taken a very vocal and pronounced anti-bailout stance with regard to the auto manufacturers, including saying that the selection of some dealership closings was politically motivated.

[For additional details, including seven supporting videos, read the entire report on Automotive Traveler]

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24 Comments on “Editorial: GM/Chrysler Dealer Cull Explained. Ish....”


  • avatar
    agenthex

    its North America Vice President Buick-Pontiac-GMC appear on “Fox and Friends” on June 12 to respond to Ms. Carlson’s charges. The exchange wasn’t pretty, calling into question just how fair and balanced Ms. Carlson and Fox News Channel are

    Did the GM PR gal mention that ALL the dealers would’ve been closed had the gov not stepped in?

    Or is Foxy lady just pissed that HER dealer was closed?

  • avatar
    GS650G

    This is bigger than closing dealerships. What is at stake is rule of law and investment. This whole mess is a convenient shortcut for GM and Chrysler but the implications will be long term and far reaching.

    Gretchen Carlson’s parents are but a grain of sand on this beach. The New GM and Fiat/Chrysler are probably NOT going to be able to stay afloat. More dealerships will close, not just on orders from the government but from a lack of profits and sales. At some tipping point the companies are not going to be able to support customers, advertise effectively, develop product, or even pay the bills.

    Bankruptcy delayed is not bankruptcy denied. The difference here is billions of tax dollars down a friggin’ rabbit hole that further weakens the country. And we complained about the cost of wars, this is a war on our future.

  • avatar
    agenthex

    What is at stake is rule of law and investment.

    I know this has been a big talking point recently, but I hope people realize parroting stuff like this only sets you up for embarrassment if any ever asks you what law is violated.

  • avatar
    Packard

    Actually, had GM gone Chapter 11 when it should have – and without the Obama administration dictating terms – it’s not at all the case that all the dealers would have closed. The decision process on who would and who wouldn’t be closed, however, within the structure of bankruptcy court supervision. Whether the bankruptcy court would have allowed GM management to be making these decisions in the same manner is, of course, conjectural – but, it does seem that the bankruptcy judge overseeing this case is, essentially, a non-entity, AWOL from his responsibilities to assure an ultimately profitable enterprise.

    What keeps striking me as so absurd about this process is that the Obama administration is letting the same people who ran the company into the ground continue running it.

    That makes it particularly bizarre that the GM dealers are now being cast by GM and the government as the bad guys. To hear GM tell it, it was the dealers’ fault that the company didn’t sell more cars. The problem was that they had too many dealers, so having all those dealers out there trying to do absolutely anything to move the metal ended up . . . selling fewer cars?

    I think GM’s finding their dealers a convenient villian – a fall guy they can blame to divert attention from the true culprits: GM’s UAW beholden management, and the UAW’s selfish and myopic management.

    Tip O’Neil famously said that “all politics is local,” and I have a sense that this dealer controversy is going to prove him correct, again. I suspect, in the end, that Congress is going to decide to protect the dealers and gut GM’s plans on dealer closings. The dealers are local businesses with employees and they’re prominent local businesses, too – and, after Barney Frank used his political clout to keep a GM facility in his district going, no Congressman or Congresswoman is going to want to appear so ineffectual that he or she can’t save a GM dealer in his or her district.

    Betcha, in the end, that GW Obama doesn’t veto whatever Congress passes, either.

    Besides, Government Motors will need all of these dealers. There’s always a nearby office for every government agency.

  • avatar
    Packard

    The law being violated was the bankruptcy law that says secured creditors are entitled to a priority in claims on the assets which are the security. The cost is systematic, because when the government can bully secured creditors into taking less than legally they are entitled to receive by the threat that they’ll receive even less, then the value of having a security interest diminishes.

    When that happens, the lenders in the future elect either to charge more for a loan, i.e., higher interest, to demand better and more security, or simply to not make loans – or some combination of the three.

    That, of course, dries up credit – the exact opposite of what the government claims its been trying to accomplish with all its TARP intervention.

    Long term, moreover, that’s a very bad thing, because it undercuts the ability of companies to raise investment capital by issuing bonds. So, productivity suffers because there is a reduced rate of investment in new producers goods and the cost of that investment, i.e., the cost of borrowing is greater than it otherwise would have been.

  • avatar
    agenthex

    Actually, had GM gone Chapter 11 when it should have – and without the Obama administration dictating terms

    This is assuming there were other offers, which there weren’t.

    What’s entirely hypocritical about this is the same people were complaining about too many dealers now change their tune.
    -

    The law being violated was the bankruptcy law that says secured creditors are entitled to a priority in claims on the assets which are the security.

    You’re going to have to be more specific than that, like which assets were not handed over to whom. PS, equity in newco is not an asset they owned.

  • avatar
    taxman100

    GM has a new master – Obama and his socialist cronies. Seeing how libs hate American cars, and now the conservatives and others who believe in the rule of law will not support them either.

    This is a complete mess.

  • avatar
    Martin Schwoerer

    Jim, thank you for this good and informative editorial. It illustrates the facts, which is a contrast to some insinuations from the wingnut corner about Republican dealers being targeted, or about the law being broken by some kind of conspiracy.

    What we need in addition, I would say, is an editorial explaining why a car maker needs an efficient, profitable dealership system. In most parts of the world, car makers can cull dealers that are underperforming without much ado, albeit with reasonable compensation. Only in the U.S. is it supposed to cost millions. And only in the U.S. is it made into a political issue.

    Does it cost millions to terminate a McDonald’s franchise?

  • avatar
    CapVandal

    >The law being violated was the bankruptcy law that says secured creditors are entitled to a priority in claims on the assets which are the security. The cost is systematic, because when the government can bully secured creditors into taking less than legally they are entitled to receive by the threat that they’ll receive even less, then the value of having a security interest diminishes.<

    http://www.leveragedfinancenews.com/blog/your_take/-194063-1.html

    1. GM’s secured creditors were repaid at 100 cents on the dollar.

    2. The markets understand.

    “Lost in some of the discussion seemed to be the more pedestrian explanation: maybe Chrysler’s secured creditors only deserved 30%. “

  • avatar
    agenthex

    If anything, the government overpaid for the sake of expediency.

    I can already see the hypocrites thinking about realigning their claims to how the government wasted money paying the creditors too much.

  • avatar
    Kurt.

    Correct me if I am wrong:

    The dealer BUY’s the cars from GM/Chryco, correct? Under existing contracts to own a franchise, you have to “purchase” X number of cars (and probably of various models, to include slow sellers as well). That makes the dealer the customer – not you and I, John Q. Public.

    John Q then becomes the dealers customer, completing the food chain.

    So tell me again how having too many dealers is a bad thing for GM/Chryco?

    “IF I WAS GM/CHRYCO” and I wanted to get rid of dealers (customers?), I’d quit the incentives. Word to the dealers would be SELL OR DIE. You still have to buy our cars to maintain your franchise.

  • avatar
    Casual Observer

    agenthex: Did the GM PR gal mention that ALL the dealers would’ve been closed had the gov not stepped in?

    Or is Foxy lady just pissed that HER dealer was closed?

    The minute the government became involved, they invited the anger to be directed at it. If the government stayed out of it, these closings would simply be agreements between two businesses. Instead, every citizen is now involved, and now has a reason to direct his or her anger at the government.

    GM and the State are now synonymous, whether you like it or not.

  • avatar
    quasimondo

    What’s entirely hypocritical about this is the same people were complaining about too many dealers now change their tune.

    Somebody finally sees the light.

    So tell me again how having too many dealers is a bad thing for GM/Chryco?

    If you were to put each DW article on a wall and throw a dart at it, chances are that you’ll find at least one reason why excess dealers are a bad thing.

    Example 1 – They cost too much:

    Despite recent skepticism on the cost savings in reducing the number of dealers, the math was beautifully laid out over how much it costs GM to maintain their network.

    Example 2 – They promote excess inventories:

    A huge network means a lot of hungry mouths to feed. Which means a lot of cars to produce and ship. If all of these cars sold, this wouldn’t be a problem. But it is, because they don’t get sold. They collect dust for a year, get sent off to wholesalers and a new batch of metal is moved in. This is the justification for keeping underutilized plants open, and is unsustainable if the new norm is 10M cars sold annually versus 14-15 million. The excess incentives makes the problem worse because even if the cars are sold in large amounts, no money is made from the sale.

    http://www.thetruthaboutcars.com/four-reasons-why-2000-domestic-car-dealers-had-to-go/

    And these are just three articles that I found so far. I’d link more, but I’m already late for work.

  • avatar
    Nicholas Weaver

    The law being violated was the bankruptcy law that says secured creditors are entitled to a priority in claims on the assets which are the security.

    Actually, this statement is completely, totally, 100% wrong.

    Bankrupty law has a default distribution, but it can be overridden by a vote of the creditors. In the case of Chrysler, 90% of the secured creditors (it only takes ~2/3rds actually) approved the Chapter 11 settlement.

    True, they were pressured (by the government who had invested heavily in THEIR institutions), publically shamed, and also pointed out that, really, for all the talk of liquidation, who wants to buy secured assets at all (eg, would YOU pay for the PT Cruiser factory)?

    The federal payout to “go away” was, to the view of the majority of the secured creditors, preferable to a chapter 7 liquidation.

    As for GM, the secured creditors (what few there are) are getting full payout, and the unsecured creditors (except the union health plan) are getting screwed, but the unsecured creditors would be getting 0% in a Chapter 7 liquidation anyway: without the US government providing the debtor-in-posession financing and rescue package, GM would be dissolved.

    I don’t mean to say its a good IDEA (its better than most of the bank bailouts, mind you… AIG in the end will be a far bigger money pit, and the benefits of bailing out AIG were limited Goldman Sachs, etc etc etc…), but it is most definatly legal.

  • avatar
    200k-min

    This is interesting because I know the dealership that Ms. Carlson’s parents own. Went there with my father looking at a 1990 Lumina…we bought a Ford instead that year. The irony is that her brothers own a very successful Toyota dealer just down the road from the ill fated Chevy/Cadillac dealer her parents own.

    The problem with the dealer cull is that it’s political. It seems if you have the right friends in Washington you can save your dealership. This is no standard Ch. 11 by any means. If every dealership had his time before a bankruptcy judge and the politicans kept their hands off, fine. The car czar and awkwardness of this bankruptcy does leave much to be angry about.

  • avatar
    Kurt.

    @quasimondo;

    The comments to the very articles you site support my argument. As far as I am aware, dealers have to purchase (or finance through the company ie. GMAC – either way, they have to pay for it) the cars on their lot. They MAY have a buy back option, but I tend to doubt it. If the car doesn’t sell, the dealer has to eat the cost.

    Please correct me if I am wrong. My question is legit; not sarcastic.

    Now granted, if their agreement is to recoup costs associated with advertising or warrenty work, then a lot of dealers could be bad. Of couse, if you made cars that didn’t need warrenty work….(there…there is the sarcasm.)

  • avatar
    RetardedSparks

    I still don’t fully get it. The “per rooftop” costs to GM for a dealer are pretty small, the dealer eats most of the hard costs. The “per vehicle” costs to GM have nothing to do with number of dealers – they go up or down as vehicle sales go up or down.

    Why couldn’t you just cut incentives and other inane support payments (starve the beast) to the point that the unsuccessful dealers die and the strong survive? That would have only taken 18 months anyway, and would have been accomplished through pure market economics….

  • avatar
    Pch101

    As far as I am aware, dealers have to purchase (or finance through the company ie. GMAC – either way, they have to pay for it) the cars on their lot.

    The main problem is that GMAC doesn’t have the money to lend. If your cousin wanted to borrow a million dollars from you and you don’t have the cash, you just don’t make the loan. That would be true, even if the terms seem good.

    A larger dealer network puts GMAC on the hook for more loans that they don’t have the capital to make. It’s like your cousin with his demand for a million — you can’t afford it, period. You need assets to make loans, and GMAC only exists today because of taxpayer support.

    There is a credit crunch and both GM and Chrysler are in bad shape. If the taxpayers weren’t lending GMAC the money and they borrowed from the marketplace, the interest rate that they would have to pay would exceed the one that they could charge to the dealers. There’s a loss built into every sale; the loss doesn’t show up, thanks to Uncle covering the gap with subsidized loans and grants disguised as loans.

    If the car doesn’t sell, the dealer has to eat the cost

    Not really. If the dealer doesn’t sell the car, the manufacturer will eat it by giving the dealer a larger incentive to sell it. Ultimately, slow sales cost the manufacturer money. This excess inventory is what helped to bankrupt GM and Chrysler in the first place.

    Understand something — if dealers stay open, the taxpayer will be propping them up by providing the financing that we can’t afford. Those additional floor plan obligations will be provided at taxpayer expense. The large dealer network is not free of charge, and is actually quite expensive.

  • avatar
    dlfcohn

    Probably going to get flamed for this… but here goes.

    Up here in Canada, one of the dealers on GM’s extermination list is a Pontiac-Buick-GMC shop near where I live. My wife and I bought a car from them in the last five years so we know a bit about the place and the people there. Along with their PBG outlet they also have a Japanese brand dealership at a different location and a decent sized used car operation on the same lot as their PBG store.

    The owner was featured recently in a newspaper article. He was obviously disappointed but not irate.

    -Pontiac is dead, his store is already at maximum size given the size of his lot and the size of his used car operation. Down the street is a Chevy store with room on its lot to grow, and maybe even add Buick.

    -GM is helping sell out his current inventory and with the closing costs.

    -He has a post-GM business plan to expand his used car business once the last of the new PBGs are off his lot and the space is freed up.

    As I said, we know the people at this dealership reasonably well and they always struck us as sensible business people. In that newspaper article the owner seemed to acknowledge that there was “business logic” behind GM’s decision, that they were being treated fairly by GM given the disappointing news, and that even though they were obviously facing losses, those losses would not be catastrophic.

    Maybe GM is treating its discontinued dealers fairly? Maybe those who only see financial ruin post-GM have to accept part of the blame for their current situation? GM has been in relatively continuous decline for at least 20 years. The dealers, more than anyone else, must have seen this. Given the company’s long-term decline: Why did so many GM dealers remain so dependent on the firm rather than diversifying their businesses or selling-out long-ago?

  • avatar
    Kurt.

    Thank You Pch101. Your answers were informative.

    However, I think it supports my thesis. Let’s make this discussion simple though and only discuss GM for a moment and in order to clear things up, we need to distinguish between GM (the automanufacturer) and GMAC (the finance company/bank). Eventhough, one “owns” the other, they are different “pockets” so to speak. The BOD is left to worry about GM “the whole pants”.

    Granted, I support what you are saying about having too many dealers having too many backlog cars. It makes sense.

    Granted also, the condition of the credit crisis and GMAC. This is not the forum to discuss the credit crisis or taxpayer funded bank bailouts. Suffice it to say, GMAC is getting the cash it needs to finance the dealers.

    But this is where I get confused. Why does GM give the dealer incentives to sell the cars? They (GM) have been paid (albiet by GMAC thus taxpayer money). The incentive to the dealer should be – uh food on the table? Licence to buy more cars from GM and the (really stupid law) ability to sell them as “new”? Did I just stumble upon the entire auto industries “big mistake”?

    Without bringing up the fact that these companies are losing market share (the industry is across the board -40% more or less) the excuss is:

    Credit crisis>customers can’t buy cars they can’t afford>dealers can’t stock cars they can’t afford>GM can’t afford to make cars.

    So the fix is to solve the credit crisis by bookcasing the problem by giving the banks and the automakers the money thus eliminating and all the while taking it away from consumers AND dealers.

    Now I think I get it. We’re fucked.

  • avatar
    Wolven

    “Now I think I get it. We’re fucked.”

    Aye… now you’ve got it.

  • avatar
    Pch101

    Why does GM give the dealer incentives to sell the cars?

    Because the cars won’t sell without them.

    They (GM) have been paid

    No, they have not. They made a “sale” and they declared the “revenue”, but they got almost no money for it. GM doesn’t get paid until the sale is made by the dealer.

    Did I just stumble upon the entire auto industries “big mistake”?

    It wouldn’t be a mistake if the cars could be sold without discounting them drastically.

    The problems are that there is too much inventory, and what there is of it is overpriced, given their current quality and brand value. They need to sell less stuff at higher prices, and cut the burn rate.

    To get higher prices, they have to make better cars, so that people are willing to pay those prices. Right now, GM and Chrysler are the K-Mart of the auto industry, and they need to improve above that if they are going to make money.

    Getting rid of dealers will help to cut the burn and the capital burden. Ultimately, they will need to make better vehicles that people want to buy in order for this to work, but the cull is a necessary step in getting there.

  • avatar
    ihatetrees

    dlfcohn:
    GM has been in relatively continuous decline for at least 20 years. The dealers, more than anyone else, must have seen this. Given the company’s long-term decline: Why did so many GM dealers remain so dependent on the firm rather than diversifying their businesses or selling-out long-ago?

    Many good ones did diversify – into import and transplant brands.

    But there were also some absolutely atrocious, brand-mutilating, POS dealers in the mix. They made their nut with a combination of borderline fraudulent sales tactics, captive UAW/GM employees as customers, toe-tag credit and used cars.

    If GM gave them crap, they’d always have their local state dealer protection racket law to fall back on. They knew GM would have to pay (see Oldsmobile) to make them go away.

  • avatar
    agenthex

    The minute the government became involved, they invited the anger to be directed at it. If the government stayed out of it, these closings would simply be agreements between two businesses. Instead, every citizen is now involved, and now has a reason to direct his or her anger at the government.

    GM and the State are now synonymous, whether you like it or not.

    Every citizen is involved in the running of the country anyway. That includes businesses whose failure has wide repercussions.

    Crony men would love nothing more than everyone to look the other way (that way being “government”, which is us, instead of them). The abdication of this duty helped create the mess we find ourselves in.

    -

    This is no standard Ch. 11 by any means.

    It actually was. There was a BIG LIE created that it wasn’t, and gullible people are helping to propagate that lie.

    -

    Bankrupty law has a default distribution, but it can be overridden by a vote of the creditors. In the case of Chrysler, 90% of the secured creditors (it only takes ~2/3rds actually) approved the Chapter 11 settlement.

    This is not accurate either. S363 sales do not require a vote. However it’s 100% correct that the creditor had no legal case, which is why they lost so badly, and have stooped to spreading lies and taking advantage of ignorant people.

    -
    So the fix is to solve the credit crisis by bookcasing the problem by giving the banks and the automakers the money thus eliminating and all the while taking it away from consumers AND dealers.

    Does doesn’t make any sense. Without intervention, the banks and automakers basically fail immediately, and then liquidate. Their failure, despite what conservatives may want you to believe, don’t have all that much to do with consumers and dealer per se. They either build sh1t cars or created toxic assets.

    They’ve become extremely high external costs to our system. The deed is already done. There is no one correctly solution now. The preventions should’ve been to either price in the costs in the first place, or just forbid the activities that lead to them.


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