Beat the Dealer

Is the Obama administration turning Chrysler into a patronage machine?

When people talk about the problems that have driven Chrysler to bankruptcy and General Motors to the brink thereof, they usually have in mind the companies’ excessive commitments to those who build their cars: the high wages, lavish benefits and irrational work rules written into union contracts. A less-discussed problem is the companies’ relationship with those who sell their cars. A 2006 Forbes article gave an outline:

General Motors still has 7,100 dealerships (some with multiple franchises, for example, Buick-Pontiac-GMC). That count is down from 8,434 ten years ago. Ford Motor has 4,400 dealers and Chrysler Group 3,900.

Contrast Toyota, with 1,215 franchises. These sell an average 1,613 new vehicles a year apiece. Chevrolet has 4,111 franchises selling an average 643 vehicles. Ford showrooms sell 696, and Dodge stores (Chrysler’s largest division) sell only 408. The situation is disastrous for the smaller brands: Buick franchises sell only 102 new cars a year, Jeep franchises 170.

Manufacturers can only watch as their dealers carve one another up by advertising giveaway prices. Worse, at least for the manufacturer, is that a lot of these dealers own competing franchises. A Buick dealer, that is, may also have a Toyota dealership down the road. Naturally, they shift their best salespeople and capital to the most profitable brands, leaving their Buick or Ford store looking shabby and staffed by inept or green sales agents.

Why don’t the weak dealers just fold on their own? Two reasons. They can still make money on service and on selling used cars. And the dealership provides jobs for the owner’s friends and relatives.

Car makers, however, have little ability to rationalize their dealer networks, because dealers have substantial political clout, which translates into laws protecting them. “Under state franchise laws car companies must show good cause to terminate a dealer’s franchise agreement,” Forbes notes. Since the dealers are constituents of the officials who make these decisions while the car makers are not, the bias in favor of the former is systematic.

Closing down dealers thus requires a big outlay of cash that produces dividends only in the long run:

It cost GM $583 million to compensate its 699 Oldsmobile dealers after it decided in 2000 to phase out the brand. That’s $840,000 per. . . .

When a company loses a dealer, its overhead costs stay the same and–at least in the short term–it loses a few hundred car sales. “There’s no immediate payback,” says Joe W. Eberhardt, Chrysler Group’s senior vice president for sales and marketing.

Things are different now, at least for Chrysler, which is now in bankruptcy court. As a May 4 Wall Street Journal editorial noted, the Obama administration “is hoping the judge will do little more than rubber stamp the restructuring deal it has worked out among the Treasury, the United Auto Workers and the Italian car maker, Fiat.” As part of the restructuring, the Detroit Free Press reports, has sent termination notices to 789 of its dealers:

Dealers no longer have protection from state franchise laws because Chrysler is in Chapter 11 bankruptcy, but they can contest the process by which Chrysler chose the survivors, said Scott Silverman, a Boston attorney representing four terminated Chrysler dealers in Massachusetts.

“What dealers need to do is look at the criteria Chrysler said it used and look at how you performed on those metrics,” said Silverman. Those criteria included sales volume, customer service scores, local market share and average household income in the immediate area.

But what if one of the criteria is partisan politics? Blogger Doug Ross raises that possibility:

A tipster alerted me to an interesting assertion. A cursory review by that person showed that many of the Chrysler dealers on the closing list were heavy Republican donors.

To quickly review the situation, I took all dealer owners whose names appeared more than once in the list. And, of those who contributed to political campaigns, every single one had donated almost exclusively to GOP candidates. While this isn’t an exhaustive review, it does have some ominous implications if it can be verified.

However, I also found additional research online at Scribd (author unknown), which also appears to point to a highly partisan decision-making process. . . .

I have thus far found only a single Obama donor (and a minor one at that: $200 from Jeffrey Hunter of Waco, Texas) on the closing list.

It must be emphasized that Ross’s evidence is suggestive, not conclusive. It does not appear that anyone has yet conducted a complete analysis of Chrysler dealers’ political contributions. Ross’s post, published Monday, contains nine updates with supporting material from news sources and blog posts, but the whole thing ends up being rather disjoined and hard to digest.

This situation certainly bears watching. If Ross’s suspicion is unwarranted, we’re sure Obama’s many online defenders will be along soon with data to debunk it. If he’s right, though, it could complicate the bankruptcy proceedings by giving the jilted dealers a basis on which to challenge their termination. It would also demonstrate that political intervention in private business is an invitation for the most brazen sort of corruption.

James Taranto, Wall Street Journal

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Full article: http://online.wsj.com/article/SB124344262081759057.html

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The Scandal That Wasn’t

Last month we noted that some bloggers were suggesting that Chrysler, presumably at the Obama administration’s behest, was targeting Republican donors in its decisions about which dealerships to shut down as part of its bankruptcy. Kevin Hassett of the American Enterprise Institute has taken a thorough look at the data, and he writes at Forbes.com that the allegations don’t pan out:

Of the nearly 3,000 Chrysler dealerships in the country, we successfully matched the owners of 420 to political contributions, using data from the 2008 election cycle. From this list, we considered a dealership to be Republican-owned if the majority owner gave more money to Republicans than to Democrats. Of the 300 Republican-owned dealerships we identified, 77 were on the list of closed dealerships. A dealership was determined to be Democratic-owned if the primary owner gave more money to Democrats than Republicans. There were many fewer, only 120, of these. Car dealers, it turns out, tend to be Republicans.

For the Democrat-owned dealerships, 31 out of 120 were shut down. Comparing those numbers, we found that 25.7% of Republican dealerships were schedule to be closed while 25.8% of Democrat ones were.

That difference is utterly insignificant. Thus, the data indicate that the Chrysler closings did not systematically favor Democrats.

James Taranto, Wall Street Journal

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Full article: http://online.wsj.com/article/SB124638639349674763.html