Three rural car dealers sat elbow to elbow with the chiefs of Chrysler and General Motors in Senate hearings Wednesday that exposed the harsh, often bewildering maneuvers underway in the auto industry and the gruesome consequences of corporate restructuring for small businesses.
Pete Lopez, of Spencer, West Virginia (pop. 3800), told the Senate Commerce, Science and Transportation Committee he had learned over the past three weeks that both his car dealerships, serving six counties in rural West Virginia, would be closed. “When I purchased the dealership, the companies welcomed me with open arms,” Lopez relayed to the senators. “Since that time, I have been a faithful customer of both Chrysler and GM, even purchasing additional vehicle inventories earlier this year, at Chrysler’s insistence, to help the corporation through this economic recession."
Now Lopez may be stuck with the cost of his inventory, auto parts and expensive tools, if Chrysler can't convince an ongoing dealer to buy them all. After owning the dealerships for just two years, Lopez had grown the business and doubled his workforce. “I have met every financial obligation put forth by Chrysler and GM,” he told the committee, chaired by Sen. Jay Rockefeller (D-WV).
“Now Mr. Chairman, they want to shut me down. What gives the government the right to do that?”
Danny Johnston for AP On May 13, Chrysler sent letters to 789 of its dealers telling them their contracts would be terminated as part of Chrysler’s bankruptcy proceedings. Having received $7 billion in federal bailout money already – and with $4 ½ billion more pledged for its future restructuring -- Chrysler plans to partner with Italian car maker Fiat, reorganize and resume operations with a smaller dealer-network. Barring a ruling against this plan in bankruptcy court, the Chrysler terminations will take effect June 9 – less than a month after the company notified dealers.
General Motors, similarly, has informed some 1100 car and truck dealers that its contracts with them will end in October 2010. Those with ongoing GM businesses were told this week they must sign a 24-page legal agreement by June 12 or their dealerships, too, would close next year.
John McEleney, chairman of the National Automobile Dealers Association and a “go-forward” GM dealer himself in Clinton, Iowa, received his “participation letter," Tuesday, June 2. McEleney vigorously objected to GM’s terms before the Senate committee Wednesday.
“If I sign (the participation letter), I'll be committing my business to spend hundreds of thousands of dollars that I know about today and committing to millions of dollars of potential financial obligations in the future. I will also be subjecting my business to sales performance standards that are not specified in the contract,” he told the committee. “Even worse, GM can alter the terms of these requirements at any time at its sole discretion. The final blow, I must waive any right of protest to any action taken by the manufacturer.”
Fritz Henderson, CEO of General Motors, told the commerce committee that GM’s network of more than 4000 dealers expanded in the 1950s and 1960s, “when we held a dominant share of the U.S. auto market. Since that time, strong new competitors have entered this country, and our market share has shrunk, leaving us with too many dealerships and, in many cases, in the wrong locations.”
The list of GM closings has not been made public. Here’s a list of the dealerships that Chrysler plans to close.
Senate Commerce, Science and Transportation Committee James Press, Chrysler president, told the committee that the company’s “multiple distribution channels” have become inefficient, “an expensive legacy of more than 80 years being in business.”
Press told the gathering that in the current car market, “There is simply not enough business to go around. With projected annual sales in the U.S. this year of only 10 to 10.5 million compared to historical levels of 16 million, Chrysler cannot support the same number of dealers that we have in the past.” He reported that in 2008 the average Chrysler dealership lost $3,431.
“This puts us at a real disadvantage,” Press said, “because it increases our costs of product development, distribution, marketing and advertising, as well as dealer administration by more than several billion dollars every year.”
The Chrysler and GM announcements have brought outcries from dealers and their customers across the nation, notably in rural areas where the local car dealer, typically, is also a major employer, civic leader, and donor to community charities. (Here are multiple reports about what's happening with rural car dealerships in Illinois, Iowa, Minnesota, Missouri, Nebraska, North Dakota, Texas, West Virginia, and Wisconsin.)
Russell Aubrey Whatley, III, of Mineral Wells, Texas, whose Chrysler-Dodge-Jeep dealership is slated for termination, told the Senate commerce committee that his grandfather had opened the car business in 1919.
“All dealers like us sponsor school events, Little League, Pee Wee Football, rodeo and many other special events,” he said.
Senate Commerce, Science and Transportation Committee Whatley stressed that his business has been a vital part of the local economy. He reported that "in the past 40 months alone, our dealership has gross sales of almost $18 million, or $443,000 per month." He told the committee that as well as paying its employees and payroll taxes, in this same period the dealership had paid the state and county more than $805,000 in taxes and fees ($20,126 per month) and $52,668 in county property taxes. "All this in a down economy," Whatley said.
Many of the committee members stressed that the closing of dealerships will especially penalize rural communities.
Sen. Byron Dorgan (D-North Dakota) said at Wednesday’s hearing that many of his constituents have been loyal customers of local GM and Chrysler businesses, buying their car or truck "from a small dealer that's been around for 70 years selling the same car, and they bought it with a warranty -- and now the question is, who's going to service the warranty?”
Dorgan’s question went unanswered Wednesday.
As local dealerships close, GM and Chrysler customers in states like North Dakota may have to drive three hours round trip, Dorgan said, to have their cars serviced.
Sen. Johnny Isakson (R-GA) said, that from phone calls he had received earlier in the week, “It appears what Senator Dorgan referred to is correct, that there's a disproportionate closure of rural dealerships” -- perplexing if true, in that small towns have been GM's stronghold. Fritz Henderson confirmed that General Motors holds a 10% “market penetration advantage” in rural areas.
Throughout Wednesday’s hearings, the underlying economics of the auto industry became more and more opaque. The GM and Chrysler executives maintained that every dealership amounts to a corporate expense, thus the dealer networks needed to shrink for the companies to survive.
But the dealers countered that they, not the auto companies, had always borne the expense of doing business. “We are not a cost to Chrysler," Russell Whatley of Mineral Wells told the committee. "No dealership is a cost to Chrysler. We pay for everything we use and we take all the risk. We are Chrysler's customer. In a typical month, we pay Chrysler over $2,500 in fixed expenses alone, plus all the parts and the vehicles which are paid for in full and up front.”
McEleney, of the Automobile Dealers Association, argued likewise: “Over 90 percent of Chrysler and GM's revenue comes from the dealer, because the dealer buys the cars, the parts and even the dealership signs from the manufacturer. The retail network, the land, the building, the employees -- the dealers pay for all of it. Dealer cuts won't save any money, because dealers don't cost the manufacturers any money.”
Several of the senators concurred. Sen. Isakson (R-GA) told the gathering, “It seems like to me when you close your dealerships you're firing your sales force.”
New York Times
Committee chairman Sen. Jay Rockefeller, who called for the hearings, asked in his opening statement if trimming the number of dealerships weren’t simply an effort to pump up prices. With fewer dealers, Rockefeller said, "there's less competition so the price goes up....I think each company has a responsibility to assure this committee that it is not using this restructuring process as a way of unfairly increasing prices.”
Such assurances were not forthcoming Wednesday.
There were larger questions broached also, about the how the business closures and GM’s new contracts might reshape the future of automobile marketing.
Senator Kay Bailey Hutchison (R-TX) pointed out that Chrysler had announced the closings of all three dealerships in Waco, Texas, a city of 122,000. Hutchison said that Chrysler's decision “appears to be an effort to change the contracts with the dealers that are in place to make better contracts with new dealers coming in” from out of state.
The auto industry has been moving in the direction of greater vertical integration on its supplier side. Do GM and Chrysler envision a future in which independent dealers will be replaced by its own sellers and showrooms – further vertically integrating sales as well?
John McEleney, chairman of the National Automobile Dealers Association, leveled a challenge along these lines in his remarks to the committee. With reference to the GM “participation letter” he's been asked to sign in a week or lose his business, McEleney said, “This really is no choice at all. It's a classic example of opportunistic and overreaching behavior by the manufacturers," a detour around the state laws that regulate franchise contracts.
“No other manufacturer has forced dealers to sign such an onerous agreement," McEleney told the committee. "This is not necessary for GM's viability, and federal funds are being used to empower GM to do this. This is a manipulation of the bankruptcy process to eviscerate the state franchise laws, laws that inject balance in the inherently one-sided economic relationship between the dealer and the manufacturer and that also provide consumers with a reliable, convenient and competitive retail auto network.”
Just one hour into the nearly three-hour committee hearing, Sen. Rockefeller looked around the room and told those gathered, “This is the largest turnout that I can remember in 24 years on the Commerce Committee.”