TOPICS > Economy

Auto Dealership Closings Reverberate Across Economy

May 15, 2009 at 6:00 PM EST
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General Motors and Chrysler announced the closings of hundreds of dealerships in an effort to bring the companies back from the brink of bankruptcy. Analysts examine the impact of the moves.
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JIM LEHRER: General Motors today began a process to eliminate about 1,100 of its 6,200 U.S. dealerships. Those cuts are part of a larger restructuring plan aimed at preventing bankruptcy.

Jeffrey Brown has our lead story report.

JEFFREY BROWN: It was an anxious day for G.M. dealers around the country as they waited for word about whether they would survive. When the call came to this dealership in Alexandria, Virginia, Jim Warren felt…

JIM WARREN, sales manager, Alexandria Chevy: Well, relief, employed, you know, for another day at least. So, obviously, it was a relief to all of us, to just know where you’re going to be, to have that sense of continuance.

JEFFREY BROWN: His dealership having been spared, Warren will continue as sales manager at Alexandria Chevy, which employs some 50 workers.

JIM WARREN: A dealership, it’s a building with cars, but it’s also got a whole bunch of people in it. It’s people who cannot now go across the street and just get a new job, because, with the dealer numbers being shed, where exactly are they going to go?

JEFFREY BROWN: Many others are now asking that same question. The 1,100 G.M. dealers who were notified today that their contracts would not be picked up were part of the automaker’s plan to cut some 40 percent of its total 6,200 dealers by 2010.

The rest of the cuts will come as G.M. phases out or sells its Saturn, Hummer and Saab brands and as dealers voluntarily close or are consolidated.

On a telephone conference call this afternoon, G.M.’s vice president of sales, Mark LaNeve, said the decision was not made lightly.

MARK LANEVE, General Motors vice president of sales: It’s not something that we didn’t do without a lot of deliberation, a lot of thought, a lot of poring over the lists, re-poring, checking the data, you know, making sure that — that we actually — you know, that we absolutely had it as right as we possibly could.

And, you know, it’s just a move that, you know, perhaps people could argue should have been taken years ago, but, you know, certainly this leadership team has no choice but to take now and I think will be good for — as painful for the dealers as it is, will be good for the remaining dealers and for the business long term.

JEFFREY BROWN: Today’s announcement came just weeks before G.M. faces a deadline to present a restructuring plan to the government or a bankruptcy filing.

It also came just a day after Chrysler, which has already filed for bankruptcy, announced it was dropping a quarter of its dealerships.

STANLEY BALZEKAS, Balzekas Motor Sales, Chicago: They do not want us to be a Chrysler dealer anymore. It’s a little hard for me. I hate to break up at this point, but time has come.

JEFFREY BROWN: Chrysler’s vice chairman, Jim Press, addressed the closings on a conference call yesterday.

JIM PRESS, Chrysler vice chairman: It’s not a day that anybody can be prepared for, but we’re going forward with the appropriate plans. I’d like to start by making it clear that, also today, there are no winners, there’s no losers.

JEFFREY BROWN: Of course, Chrysler dealers who were cut loose felt otherwise. Rob and Rick Engel are brothers who own two Chrysler dealerships in Wyckoff, New Jersey, a business started by their father more than 40 years ago.

RICK ENGEL, Wyckoff Chrysler: They’ve already told us that they’re not going to be buying back our parts and they’re not going to be buying back our new car inventory.

ROB ENGEL, Wyckoff Chrysler: They’re telling us — yes, that’s the really, for us, frightening news is that, you know, we are burdened with these cars and with these parts. It’s really, as far as I’m concerned, not a moral way to treat dealers that have been around for so long and have done a good job.

JEFFREY BROWN: All told, the cuts by G.M. and Chrysler could threaten more than 60,000 dealership jobs.

Car sales down

Geoff Pohanka
Pohanka Automotive Group
Well, there's a real problem that car sales are down about 40 percent this year, which means, if it stayed at that level, you would need 40 percent fewer manufacturing and 40 percent less car dealers.

JEFFREY BROWN: And for more about these closings and the fallout to come, we turn to Geoff Pohanka, president of Pohanka Automotive Group, which includes 18 car dealerships here in the Washington, D.C., area. His Chrysler-Dodge dealership is slated to close and three others are at risk of closing. His stores also include Honda, Hyundai, and other import franchises. Mr. Pohanka is a former director of the National Automotive Dealers Association.

Also with us is George Magliano, who follows the industry for Global Insight, an economic and financial analysis firm.

Mr. Pohanka, we heard the G.M. official say there was no choice. How does it look, how does the dealership problem look from your perspective, and the actions taken today?

GEOFF POHANKA, Pohanka Automotive Group: Well, there's a real problem that car sales are down about 40 percent this year, which means, if it stayed at that level, you would need 40 percent fewer manufacturing and 40 percent less car dealers.

The real thing with this is that dealers are not an expense -- part of the expense structure of the manufacturer and that by canceling these dealers will not automatically raise the performance of the car manufacturers.

And to cancel dealers, dealers who have worked hard to establish their businesses, is probably the wrong way to do this. It's much better to let market forces either allow the dealer to decide to stay in business or not and not just cancel the franchise.

JEFFREY BROWN: But you're not arguing with the notion that there are too many dealers at this point, or are you?

GEOFF POHANKA: Well, if sales stayed at the current level, which they probably would not, I would agree that there are too many dealers, and dealers -- the sales level does not support the number of dealers.

But this may be true of a lot of the import franchises, as well, right now. Toyota was down 42 percent last month over the same month the prior year.

But long term, it's wrong. Dealers are not a cost to the manufacturer. They don't pay us to stay in business, don't pay our rent. We're independent businesspeople.

But one thing that will happen for sure, as in Chrysler's case, when you eliminate 25 percent of the retail dealerships, you're going to have fewer car sales. You're not going to reduce costs that much.

Long-term structural problems

George Magliano
Global Insight
But there are long-term structural problems with G.M. and Chrysler. And, quite honestly, their dealer networks were set up in an era where they had almost twice the market share than they have today.

JEFFREY BROWN: So, Mr. George Magliano, what is in it for the auto companies? Why do they say they're doing this?

GEORGE MAGLIANO, Global Insight: Well, I think he's focusing on the wrong issue. He's focusing on the recession today.

But there are long-term structural problems with G.M. and Chrysler. And, quite honestly, their dealer networks were set up in an era where they had almost twice the market share than they have today.

G.M. back in 2000 had 30 percent share. Today, it's well below 20 percent, and it's probably going to go closer to 15 percent. Chrysler has gone from 15 percent of the U.S. market, and they're going to fall to around 8 percent or 7 percent of market share.

And that means longer term, when business gets good, the volume isn't going to be there. And if you look at the dealers that are caught up in this, they're selling very few new cars and trucks every year.

And this is the issue. They've got to realign. They've got to focus on the stronger dealerships, and they've got to focus their efforts on supporting the stronger dealerships to get more sales through them.

JEFFREY BROWN: And staying with you for a moment, what's known about how these decisions were made, I mean, which particular dealerships to be offed, in a sense? How were those decisions made?

GEORGE MAGLIANO: Well, according to the manufacturers, there are viability tests that are conducted on a regular basis throughout the year as far as how the dealers are doing with quality, repair work, how they're treating their customers, who rate them.

And these dealers, according to General Motors, were underperforming dealerships. And that's the issue why their contracts are being cancelled at the end of 2010.

JEFFREY BROWN: Mr. Pohanka, you started to talk about this, but explain the relationship between the dealership and the auto company, because I don't think most of us understand it. We go to you and we might buy a car. Who owns those cars? And what happens to that inventory now?

GEOFF POHANKA: Well, the dealer owns the cars. And basically, we're independent businesspeople. We have a franchise with the manufacturer, so we buy the cars from the manufacturer. We have a relationship with the bank that typically owns the cars. And as we sell those cars, we pay off those loans on each car.

And the manufacturer does not subsidize us in any way. They give us some support. And there's very little field staff. So when you reduce your dealer buy, in case of Chrysler, 25 percent, it's not going to save like 25 percent of Chrysler's costs.

Our costs are minimal, but we do sell cars and we do service cars. So the customer is going to have less choice as to where they get their car serviced. As well, they might be less inclined to buy that product.

Bankruptcy complicates dealings

George Magliano
Global Insight
I believe what has to happen now is that, if the dealers want to contest this, they have to wind up in the federal court and contest that in front of the bankruptcy judge.

JEFFREY BROWN: Are there options that you have now for the dealerships that are being turned loose? I mean, are there other options for staying in business?

GEOFF POHANKA: Well, let's compare the General Motors letter that came out today and the Chrysler letter that came out yesterday. In Chrysler's case, we must shut down by June 9th. We have $3.5 million worth of car inventory right now. It's impossible for us to dispose of this inventory between now and June 9th.

So the costs to us won't be just losing our business. We have the cost of this merchandise, which we won't be able to get incentives on after June 9th. So that's a real problem.

In G.M.'s case, we have a -- you know, we don't have a General Motors dealership right now that has a letter like that. The General Motors dealers that got those letters, a thousand dealers today, they have a year-and-a-half in which to, you know, close their business, which gives them time to plan for their real estate, their employees, their merchandise, their parts, things like that.

And this 30, 21 days, or 26 days to close your business is just -- it's terrible.

JEFFREY BROWN: Mr. Magliano, I take it that some of this has to -- the difference in treatment, that is, has to do with the fact that Chrysler is in bankruptcy already?

GEORGE MAGLIANO: Oh, exactly. I mean, the issue is that G.M. dealers are protected under the franchise laws, and it would -- G.M. would be responsible for that inventory if they decided to close them, say, like Chrysler is doing within a month's time. They simply can't do it. There's an obligation between G.M. and these dealerships right now, and that obligation ends at the end of 2010.

What they've said to the dealerships, basically, is, "We're not going to renew your franchise contract, your service contract with us at the end of 2010."

And they can contest that. And they can go back and say, "Well, your measures are wrong. We've done better with our service. We've done better in supporting our customers." But that's sort of nebulous as to how this works.

But right now, Chrysler is in bankruptcy. And with that, they do not have to take back the inventory. They do not have to take back the parts. And their obligations in bankruptcy court are considerably less.

And I believe what has to happen now is that, if the dealers want to contest this, they have to wind up in the federal court and contest that in front of the bankruptcy judge.

Ripple effect around the country

Geoff Pohanka
Pohanka Automotive Group
Are we exploring options? And we are. We may continue to sell used cars at this facility or service -- do non-warranty repairs on vehicles. So dealers do have some options in terms of continuing their business.

JEFFREY BROWN: Mr. Pohanka, the ripple effect, talk a little bit about that, because auto dealerships are economic and even social engines in many towns around the country. How do you see it playing out and affecting even more people beyond your own employees?

GEOFF POHANKA: Well, the automobile industry is about 20 percent of retail sales in the United States. So when the auto industry gets a cold, it affects the entire economy of the nation, not just, you know, retail sales, steel, glass. We're a very significant part of the economy.

And the real problem here is that car sales are low. We need to get car sales back. And they will improve at some point. The question is, how long?

And the question is, you know, will the people that will be able to survive this period in order to get on to when the economy does improve, but we do affect the community. The average dealership has about 45 positions, technicians, salespeople, parts people. These are good-paying positions.

And a lot of these people have worked many years in dealerships, in some cases multigenerational. They'll be out of a job. You hardly get a job. We're an important part of the economic engine of the local community, in terms of tax-paying, charitable contributions. And it will have an effect on the community where dealerships are.

And you asked about our dealership. Are we exploring options? And we are. We may continue to sell used cars at this facility or service -- do non-warranty repairs on vehicles. So dealers do have some options in terms of continuing their business, but for sure the business model will change a lot.

JEFFREY BROWN: All right, we will leave it there. Geoff Pohanka and George Magliano, thank you both very much.

GEORGE MAGLIANO: Thank you.

GEOFF POHANKA: Thank you.