Congressional Opposition to Dealership Closings Proves that Politics is Local

By Chris Haak

7.13.2009

By now, it’s old news that Chrysler closed 789 dealerships as part of its Chapter 11 bankruptcy reorganization and that GM plans a similar, though far more drawn out process as part of its own bankruptcy proceedings.  In the GM situation, the company plans to cut about 2,400 of its approximately 6,000 dealers as of earlier this year through a combination of natural attrition and the non-renewal of franchise agreements in the end 0f 2010.

The US House of Representatives has a bill pending, H.R. 2743, and the bill had an unusual number of co-sponsors.  In fact, it had 239 sponsors in all – or more than half of the 435 members of the House (55%).  So what in H.R. 2743 is so darn appealing that it would entice 238 congressmen and women to attach their names to this law as sponsors – much less voting on it?  The bill in question is called the Automobile Dealer Economic Rights Restoration Act of 2009.  According to the non-partisan Congressional Research Service, the bill’s summary purpose is:

Prohibits an automobile manufacturer in which the federal government has an ownership interest, or which receives loans from the federal government, from depriving an automobile dealer of its economic rights. Requires the manufacturer to honor those rights as they existed for Chrysler LLC and General Motors Corporation dealers prior to the commencement of the bankruptcy cases of each corporation, including dealer rights to recourse under state law.

Requires the appropriate manufacturer to restore the franchise agreement between the dealers and Chrysler LLC or General Motors that was in effect prior to the commencement of their respective bankruptcy cases, and to take assignment of such agreements.

States that nothing in this Act is intended to make null and void the transfer of substantially all the assets of such corporations.

So basically, it’s aimed at restoring the terminated (or to-be-terminated) franchises of Chrysler and GM dealers who were shown the door during bankruptcy proceedings.  There is a similar bill winding its way through the Senate with the same name (S. 1304), sponsored by Sen. Chuck Grassley and 18 co-sponsors.  Among the Senate bill’s sponsors are 10 Democrats and 9 Republicans.

The problem with the apparent widespread support of these bills is that they aren’t really in the best interests of the new Chrysler Group LLC and General Motors Company.  It had been widely acknowledged for many years that Chrysler, GM, and Ford had too many brands, too many models, too many factories, too many employees, and too many dealers to support their current market share realities.  With the open nature of the US auto market, and the likelihood that we’ll be seeing cars from India and China in the next few years added to the mix that already includes Korea, Japan, Germany, the UK, Sweden, Italy, Mexico, Canada, and more – it’s easy to see that GM will never have anywhere close to 50% of the domestic market again.  In fact, it probably won’t have 20% again.  So having anywhere near these companies’ historical dealer counts just doesn’t make sense.  Where a dealer may have sold 800 units per year 15 years ago, that same dealer might be selling 200 or 250 units per year.  The theory behind dealership closures is that culling the weaker dealers – those with minimal sales, poor CSI scores, undesirable facilities, or whatever secret metrics GM and Chrysler used to determine the ones to cut – will allow the survivors to have a larger piece of a smaller pie.  Perhaps, in fact, a piece of pie similar to the pieces they enjoyed a decade or so ago.

Why do the excess dealers hurt the manufacturers, as long as those dealers are still selling some cars?  Promotional and marketing costs must still be borne by the manufacturer on a per-dealer basis in many cases, and those costs are significantly reduced if the dealer population is significantly reduced.  The downside, of course, is that thousands of small (and sometimes even larger) businesses are unceremoniously closed down.  While many of the rejected dealers have other franchises on which to lean, and may gain other new franchises such as import brands, or may focus on more lucrative used-car operations instead, some are closing their doors for good.  Those closed – or downsized – dealerships mean that people are out of work, there is less money circulating back into the community from dealership employee spending, sponsorships, and charitable contributions.  Consumers also have fewer choices as to where to buy their next new car or where to get it serviced, and are likely to eventually pay higher prices for new cars.  That pricing power is good news for the manufacturers and the surviving dealers, and bad news for consumers.

Back to the headline that, as Tip O’Neill famously said, “politics are local,” the reason that both houses of Congress will probably pass these bills overwhelmingly has little to do with what may be in the best interest of the national economy.  In terms of the big picture, n0t forcing dealer closures will only delay the inevitable closure by attrition, and manage to keep the stronger dealers relatively weak in the ensuing years.  No, instead, the reason that so many congresspeople are in favor of legislation to reverse the bankruptcy courts’ rulings that allowed for franchise agreement terminations is that they have to answer to their constituents.  I’m also skeptical that these elected officials actually understand the issues at hand, but if I was a constituent and had a dealer that I liked a few blocks away from my home or office, and was happy with that dealer, I’d complain if said dealer’s closure was forced upon them (and me).  Further, if I was the owner of a Chrysler or GM franchise and was told that the [patchwork of unreasonable] state franchise laws that I thought were protecting my franchise were, instead, invalidated by a bankruptcy court, I’d also be calling my representative and asking for some legislative help.  It’s not the individual dealer’s or customer’s problem if there is one too many dealer in the dealership count – but collectively it has become a problem.

Just as the other “excesses” had to be addressed – brands were cut (Plymouth, Eagle, Oldsmobile, Pontiac, Saturn, Saab, Hummer), models were cut, employees were cut, factories were closed, the dealer population, unfortunately, had to be reduced as well.  My hope is that all of the cut dealers will be able to pick up new franchises elsewhere in short order or will enjoy a thriving used-car business.  Meanwhile, as unfortunate as it is to say, GM and Chrysler just don’t need them anymore.  Who wants to be in a relationship with another party who doesn’t want you anyway?

Presidential Task Force on Automobiles, under the direction of Treasury Secretary Geithner, who himself was under the direction of President Obama, was fully in support of the dealership closures.  The Task Force saw those closures as part of an unfortunate necessity in the big picture of GM’s and Chrysler’s survival, I don’t see Mr. Obama signing this legislation if it reaches his desk.  With more than half of the House signed on as co-sponsors, and a decent chunk of the Senate, I suppose it’s conceivable that they would be able to override any veto, but before it got to that point, I’d imagine that the White House would be making some phone calls to select members of Congress and doing some old-fashioned politicking of their own.

If this idea came to pass, it would be a giant mess for Chrysler, whose dealers have not been Chrysler dealers for more than a month at this point, and who have sold off their entire new-vehicle inventories, told customers that they were no longer Chrysler dealers, and lost their signage.  You can’t just undo that, regardless of what kind of law is passed.  But hey, no matter what, these representatives are able to say that they tried their best to save the franchises.

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