Dealers need a co-signer: Congress

Hundreds of car dealers marched on Washington this week, hoping to build public support for a bill to block General Motors and Chrysler from closing about 3,300 dealerships.

These were family businesses, they said, mom-and-pop stores employing hundreds of thousands of Americans. And they were being asked to shoulder more than their share of pain in the restructuring of the auto industry.

An honest political observer would acknowledge that the bill has almost no chance of becoming law. The House version of the bill has broad support -- in fact, it has more co-sponsors than it needs votes for passage, but Senate approval is iffy, and the White House has signaled strongly that it has a veto ready.

Yet the continuing debate over the closings reminds us that the U.S. auto industry’s distribution model is as antiquated as almost everything else about it -- including its union-driven overstaffing, its hidebound management and its reliance for profits on sales of gargantuan SUVs.


Would-be industry reformers have long held that the domestic manufacturers have too many dealers, especially compared with their Japanese rivals. GM started the year with about 6,100 dealers nationwide. That’s more than four times as many as Toyota, even though GM’s 19.6% market share this year is only a tad ahead of Toyota’s 16%.

Consequently, one key directive issued to GM and Chrysler by Obama’s automobile task force was to cut dealerships.

The companies took to this task with all the vim of Great White Hunters closing in on a herd of wildebeest. (There doesn’t seem to be much love lost between the companies and dealers, which may be part of the problem.)

Chrysler issued shutdown orders to nearly 800 of its roughly 3,200 dealers, giving them a deadline of about three weeks. GM was more solicitous of its 1,400 rejects, allowing them until October 2010 to wind down operations -- though it won’t sell them any new cars or parts for anything but warranty work in the interim. In California, the two companies are terminating 97 dealers between them.


Both manufacturers parrot the task force’s position that overgrown dealer networks hurt their brand image and profitability -- which, oddly, amounts to the rather un-American argument that there’s been too much competition in the marketplace.

Their claim is that too many dealers were financially weak and therefore inclined to slash prices to move inventory fast. That might be good for consumers, but it ultimately reduced the residual values of their cars and thus the value of the brands. Weak dealers couldn’t hold up their end on promotion or customer service, another way they made the carmakers look bad.

It should go without saying that dealers dispute all these points. “There’s no reason to close dealerships,” says Bailey Wood, the Washington representative of the National Assn. of Automobile Dealers. “They’re not a cost center for automakers -- they buy the cars before they ever leave the factory, pay for their transport, and pay for the advertising. Business 101 says that the more places you can sell things, the better.”

On the other hand, a lousy dealer can certainly hurt a carmaker’s name. Personal case in point: An indescribably rude and unobliging Westside dealer ensured that the first Chrysler vehicle I ever bought was the last one too. That was 14 years and four cars ago. (As it happens, this dealer has survived the Chrysler blood bath.)

Yet if one accepts the manufacturers’ viewpoint, it’s fair to ask why it took them so long to get tough. The answer has a lot to do with how the dealer system got dysfunctional in the first place.

As far back as the 1950s, independent dealers were complaining that the manufacturers tended to act like thugs. Car dealers weren’t like grocery or department stores, which could buy goods from any number of manufacturers; they were each tied to one supplier.

The carmakers took advantage. They forced dealers to take inventory they didn’t want, cut off franchisees who didn’t toe the line, and weren’t above bestowing new franchises on favored businessmen just up the street from dealers they didn’t like.

The dealers had one advantage over the carmakers: They were local merchants. Almost every state legislator had one or more in his or her district. And car sales being good business -- despite all the whining -- they had money to spend.


That’s still true. In California, it’s not unusual for car dealers to make a total of nearly $750,000 in political contributions through the state New Car Dealers Assn. in a single election cycle. That’s not counting the contributions dealers make as individuals.

The harvest of the dealers’ local clout was a raft of state laws giving car dealers special rights versus the manufacturers. (The dealers define this as “leveling the playing field.”)

It became much more difficult to terminate dealers without cause or load them down with inventory or expenses. It became illegal for manufacturers to sell cars directly to the public. During the governorship of Ronald Reagan, California established a state board at which dealers could fight the establishment of new dealers in their brands within 10 miles of their location, a standard imposed by many other states. Reagan crony Holmes Tuttle, a big Ford and Lincoln/Mercury dealer, was one of the first members named to the board.

The only way to get around such restrictions was to go into Bankruptcy Court, where a judge’s authority trumps state franchise laws. That’s why Chrysler and GM could move so decisively against the dealers during their recent sojourns in Chapter 11. The bill in Congress would restore the dealers’ franchise rights, notwithstanding the bankruptcy.

GM also imposed new restrictions on the surviving dealers, under the implicit threat that if they didn’t agree, they’d be terminated via the Bankruptcy Court. For example, henceforth they can only protest new dealerships within a radius of six miles.

The real issue underlying the dealership carnage is how much it will help GM and Chrysler survive.

Peter Welch, president of the California New Car Dealers Assn., says that even if one accepts that the dealer networks have gotten too fat, the unfriendly terms GM imposed on surviving dealers will hurt its business in the future.

“Chrysler only ticked off the 800 dealers it closed, but GM ticked off 100% of the ones it kept,” he told me. “They’ve squandered their ability to make a new company.”


He also argued, justifiably, that the way a showroom is run matters less than what it has to show.

“Seventy percent of the new car business,” he said, “is the product.”


Michael Hiltzik’s column runs Mondays and Thursdays. Reach him at, read previous columns at and follow @latimeshiltzik on Twitter.