The Flight Deck

There is something that has been nagging me about the Automobile mess and the recent efforts by those in charge to right the sinking ships that are GM and Chrysler.

I won’t get into the forced shotgun marriage between Chrysler and Fiat other than to ask: exactly how good a deal could the executives at Chrysler have been expected to negotiate when the major stockholder and investor of last resort declared publically that they had 30 days to do a deal or be allowed to go under? I mean when you tell one party to a negotiation that the other party has a drop dead date to get a deal done that party is liable to drive (no pun intended) a harder bargain than if there was some element of uncertainty in the outcome. This would all be amusing to observe save for the fact that the major shareholder who committed this blunder was none other than the US Government and that means it is our future tax dollars (used to pay for the money borrowed to make the loans in question) who got squandered as a result.

I won’t go into the fact that the concept of bankruptcy is coded into Federal Law exactly to deal with the sorts of situation the companies in question now find themselves and that creditors extend credit or loan money knowing that there is Federal Law that will protect them, or at least determine with specificity, in what order they fall in the list of creditors to be paid in event of a Bankruptcy. I won’t mention that those laws were, in very real effect, thrown out to reward one class of creditors (the Unions) over another (Investors – AKA Bond Holders) with not a hint of explanation other than to label the latter class with the always in the context spoken derogatory adjective “speculators” while looking out for another class (workers) who through mandatory dues payments managed to find it within its budget during these trying times to donate millions to the campaign coffers of those who decided to ignore Federal Law by throwing the Bankruptcy Statutes in the trash.

No I won’t waste time going over those things. I want to talk about something I think I have some insight in, namely the plight of the Dealers. I am not, nor have I ever been in, the car business. But I have spent a lot of time developing and managing distribution strategies that involved wholesale distribution and retail dealer outlets for complex products. And based on my experiences I just don’t get it.

To hear the Car Companies (and by proxy the Administration) the car companies have to get rid of a large number of the dealers they have in order to return to prosperity. It is as if the fact there is a GM dealer on almost as many corners as there are McDonald’s is, in itself, a major contributor to their current woes. My experience runs contrary to what we are hearing. Usually, if a manufacturer signs up too many dealers the loudest complainers are the dealers themselves. Too many dealers chasing too little market leads to inevitable price erosion at the retail level and profit margin pressure on the dealers. The dealer buys the car from the manufacturer, sells it at a markup, and the net between sales price and what he bought it from is his gross margin. If the dealers all pay the same price (and by law need to under same terms and conditions) then discounting at the retail level hurts margins but does not affect revenue to the manufacturer.

Of Course, if the dealer stops making money then the other things the dealer does for the manufacturer (provide service infrastructure, parts sales, etc) will suffer and so the manufacturer has an incentive to see the dealers succeed and prosper. But how is it that closing a large number of dealers is going to help GM or Chrysler? Oh the argument goes that if the dealers are more successful they can provide better service and therefore make consumers want to buy more products. Yeah right. Of Course if, all other factors being equal and a GM dealer out hustled and out serviced the Toyota dealer then that would make all the difference. But, all other things are never the same. If they were the GM dealer in the pervious example would be a Toyota dealer.

So I don’t get the dealer purge. The ones left may very well be made stronger (as long as GM and/or Chrysler survives to supply cars to them to sell) but I don’t see how the purge will help Chrysler or GM design, build, market, and sell a better car or greatly reduce the expenses that the car companies spend in marketing and sales to support them.

There is something sinister about the way it has been done as well. There is something wrong about anonymous elites deciding the fates of these dealers and not allowing the market to work. I mean if I ran a 98 year old GM dealership in Podunk that only sold 35 cars a year and I wanted to keep at it and had the financial wherewithal to do so what is to be gained by GM to cut me off?

I just don’t get it. But I’m pretty sure that whatever explanation being given by GM, Chrysler, and the Administration doesn’t make any sense and therefore there is something else going on here and, like most everything else coming out of Washington, it doesn’t have much to do with free-enterprise and probably even less with sound business sense.