Although Judge Gonzalez has so far given Chrysler-Fiat just about everything it has asked for, approval of the dealer cull still isn’t a done deal. The AP reports that: “U.S. Judge Arthur Gonzalez will hear arguments Thursday on the Auburn Hills, Mich.-based automaker’s motion to eliminate the franchises. Chrysler executives are also expected to testify. The motion was expected to be heard Wednesday.” In parallel actions, the Senate is holding hearing today on the very same issue. Again from the AP : “Lawmakers contend the dealership closings will put thousands of people out of work and offer few savings to GM or Chrysler, which have received billions in federal aid as they attempt to restructure and return to profitability.”
The justification for these dealer culls is weak at best. Last week during testimony, lawyers for the targeted dealers had the opportunity to question Nardelli on the rationale for these forced closures:
Amy Brown, an attorney for the Committee of Chrysler Affected Dealers, which represents more than 330 dealers, asked why it was necessary to eliminate the franchises when neither the government or Fiat asked for it to happen. Nardelli said that the 789 dealers, which represented 14 percent of Chrysler’s 2008 sales, also represent ‘a host of expenses’ for Chrysler related to things such as tooling, service training, advertising and sales incentives. But when asked to quantify how much those things cost the automaker, Nardelli said he could not and wasn’t sure if the automaker had determined those exact costs.
We may yet see at least one surprise out of the Gonzalez court.
John…
Help me understand how dealers cost manufacturers money.
In fact, I thought they were independantly owned and opperated.
And the more dealers, the higher sales and distribution.
I purchased a domestic just because it allowed us easy access to service and repairs.
So, how does a franchise cost a manufacturer money?
What kind of moron goes to federal bankruptcy court and makes a completely innumerate argument?
Oh wait, we’re talking about Bob Nardelli.
Never mind.
Paulie, a franchise costs a manufacturer money in the back-office support. Zone reps, people to process parts orders and push papers for warranty claims. Somebody in the back-office has to check up on the franchise holders to make certain they’re playing by the rules, and make sure the customers are satisfied.
That takes people on the road, and in the field.
There is an excellent article here on TTAC recently (in the last two months) that comprehensively answers your question, rochskier. I distinctly remember there being 4 key areas.
Just a moment while I see if I can locate it….
I was talking to a customer about all of this and related a story – I was raised in a tiny town in an out of the way Upper Peninsula corner, of about 10,000 in the 1960’s. We had a STUDEBAKER dealer, who admittedly also had to sell Rambler (American Motors) and Kaiser-Jeep vehicles to get enough floor traffic to even keep a little store going.
But the thing was, having access to a large dealer network was IMPERATIVE for any automaker with any desire for success at all.
When Studebaker left the biz, there were some 2300 US dealers and 350 Canadian dealers, if I recall reading correctly. Bearing in mind, in the end, Studebaker’s last full calendar year of production (1965) saw 18,542 cars, or less than 1 car per month sold per dealer.
Obviously, that’s not viable without a second line of some sort (whether RV’s, motorcycles, another brand of car whether foreign or domestic).
But my point is this;
No car maker has ever succeeded in the US without a dealer network which allowed less than about 90% of the population to easily access a dealer. The ONLY successful import line from the 1950’s through the late 1960’s was Volkswagen, which made a very strong, concerted effort to put into place a very large, comprehensive dealer network in towns large and small.
After all, the United States is a very large place, with a very spread-out population (much more so than Canada or Australia, two nations of similar physical size but less population).
Stick that in your crack-pipe and smoke it, Chrysler.
Ah, I cannot seem to remember the necessary “key words” to locate it via google, although I thought it was by Sajeev Mehta. Perhaps it was in the comments section, rather than article.
Either way, also consider-
* Inventory: The automaker often has to take back unsold inventory. A lot of dealers selling a little inventory is costly, because you have to ship a minimum number of cars to each dealer
* Financing: The automaker helps many dealers float their purchases (though to be fair, those dealers also tap their own credit for things like advertising, expanding the company’s effective spending)
* Brand costs: Shabby, run-down dealerships don’t improve the image of the firm, and if they are the only game in town, drive users to other cars. Too many dealers for the same vehicles/mfgr simply undercut each other, reducing overall sales prices (and with it, revenue and profits).
I will ask again why Debtor Chrysler is culling dealers at all, as Debtor Chrysler is about to close the doors as soon as (or if?) the asset sale occurs. This company is going to cull ALL the dealers because it will not have any product to sell. The company needing dealers is NEW Chrysler (Chryat?). The only reason I can see for this tactic is for Old Dead Chrysler to take the political fallout. This way, it becomes a human shield to protect Chryat and its governmental benefactors from the wrath of middle America when all of dealers are forced out.
Too many dealers are bad for many reasons, already stated, and because they tend to compete with themselves for sales, thus driving down transaction prices.
The fact that there are Senate hearings regarding Chrysler dealer culling is an ominous sign, though not suprising. This is the type of government meddling that I expect to turn the Governmnet Motors experiment into a total quagmire.
To add to what fallout11 said, there’s also the devaluing of their products. 10 dealers in the same area are all going to compete for the same business, and they usually will resort to dropping the price. If you take a car with an MSRP of $30k and most dealers sell it for $25k, that’s $5,000 immediately off of the resale value of that car before it even hits the road. Resale value is a factor in many people’s car purchases, and eliminating some of the competition amongst dealers in a given area will give more potential to sell the cars at a price closer to MSRP.
There is also the factor of advertising costs. Less dealers means less advertising.
Hell why not cut out all the dealers and sell them at walmart? I think this is not over yet. Never underestimate rich powerful and desperate people and their friends. I can’t remember where but I believe I read that a Chrysler dealer that was cut was suing another Chrysler dealer who was not cut for basically stealing his business. Even if the “New” Chrysler can walk on water, their surviving dealers might still be bogged down in lawsuits
@ fallout11:
Thanks for your efforts.
I want to clarify the point I apparently failed to make with my smart remark.
I’m not denying the existence of overhead costs Chrysler has to bear for each dealer.
I was trying to point out Nardelli’s ludicrous attempt to snow a Federal judge with his purely qualitative argument. At the end of the day, bankruptcy is all about numbers.
It is farcical that Nardelli seems to believe that Gonzalez should buy into his argument for axing dealers when Nardelli is unable or unwilling to produce clear, concise numbers that support the cull.
Paulie, I’m on your side. I think that the dealer shutdowns are by and large a bad idea. I posted an editorial to that effect last week: https://www.thetruthaboutcars.com/editorial-why-chrysler-and-gms-dealer-slash-and-burn-wont-work/
Nardelli admitting that Chrysler didn’t have a financial analysis which purports to add up the savings is just more of the same. With the US market down by 30% or more, the non-viable dealers will be closing on their own. A top-down cull by the same management geniuses in Detroit who are largely responsible for the underlying problems is highly unlikely to do the job well.
No car maker has ever succeeded in the US without a dealer network which allowed less than about 90% of the population to easily access a dealer.
Yet Honda and Toyota seem to make do with a bare fraction of the number of dealers that Chrysler, Ford, and GM have.
Heck, Honda has not many more dealerships TOTAL than Chryser is proposing eliminating.
Yes, Nicholas; but in “flyover country”, none of the transplants do as well as the “big 3” in rural / small town areas because
-people want a dealer near to them!
Put another way, if the “transplant” companies really want to capture small town America, they’re going to have to step up to the plate and understand that they’ll need representation in the areas where they aren’t, and soon.
I don’t understand how reducing dealer populations materially benefits GM and Chrysler. Dealers are factory resellers. If a dealer consistently sells below cost he is out of business.
An analogy might be Chrysler refusing to sell cars because of excessive warranty costs, though it hasn’t deterred it yet. The solution is to build quality cars, not fire the customers.
Hyundai will be signing up displaced rural dealers to replace GM and Chrysler as small town mainstays. The industrious Koreans undoubtedly have a pickup truck in design! Then the shrunken, government subsidized two will whine about unfair foreign competition stealing their key market.
menno: So?
And are you so sure? Honda may not exist in the small towns, but it has a significant presence in the cities in the midwest.
EG, put in the zip code for Wichita Kansas into Honda’s dealer locater.
You find two in Wichita (pop ~300K), one in Hutchinson (pop ~40K), one in Salina (pop ~50K), one in Manhattan kansas (pop ~50K), one in Topeka (pop ~130K…)… And at that point I give up and stop separating out Kansas from Oaklahoma in the list….
You can have a significant presence in the midwest without having agazillion dealers.
And its not like they are underserviced. The entire STATE has less than 3 million people, and as a result, Honda probably has as many dealers per-capita in Kansas than they do here in the SF bay area.
In Europe, where there aren’t these franchise laws, the manufacturers have been culling smaller dealers for years.
The Rationale for Culling Dealers: Each dealer does cost the manufacturer; reps, support, training, materials. etc. To my understanding, the overwhelming majority of the culled dealers are small, carry only one Chryco line, and have not scored well on a number of objective critera.
I doubt there are any/many smaller towns losing their only Chryco dealer. In Eugene, the Jeep dealer is also a Volvo dealer. They are pulling the plug in order to give it to the Chrysler/Dodge dealer. They want to integrate their stores to carry all three Chryco lines. Cheaper advertising, etc…
The big manufacturers want to have big, strong, healthy dealers so they can afford to upgrade their facilities, personnel, and pay for expensive advertising. It clearly is in the manufacturer’s best interests. And given thta these manufacturers are fighting for their life, why cull dealers unless its in their best interests?
Now, there may be some exceptions along the way, but trying to make a sausage out of the dead meat of GM and Chrysler isn’t going to be pretty. Ask the bondholders how they feel.
I want to scream.
Dealers are NOT overhead of the manufacturer. Do you know that the dealers PAY for the transportation costs of the vehicle AND advertising costs of the vehicle?
If you believe competition is good (I still do) then the elimination of dealers is a mistake. The channel question is another matter, wherein I support a fair-minded approach with combining Jeep/Chrysler/Dodge dealers under one roof. GM has a similar challenge without the “one dealership for all GM brands” constraint of Chrysler.
It’s also wrong to think more dealers automatically produce lower transaction prices. They don’t. Dealers compete on many levels, including customer service. Yes, you can believe that.
The fact is, one dealer can sell Ram trucks for an average $3,000 gross profit (yes, that’s a higher transaction cost) and another dealer realizes only a $1,500 average. Why the difference? It is NOT the # of dealers in the market! Rather, it’s a host of things, including a better customer experience, sales training, etc. It’s not just about price.
Jim (“burn us down”) Press and Fritz (“I’m not creative”) Henderson are being disingenuous, at best. GM and Chrysler have a chance to become profitable again, but it’s going to take better leadership than what I’ve seen from these two.