What’s with All the Auto Dealers?
The great unexplained mystery in the auto bailout is the persistence of all the surplus dealerships for American-made cars. UAW benefit costs have been broken down and analyzed but no one has bothered to explain why the Big Three are unable to break their dealership agreements or show the mechanics of how those surplus dealerships are an economic drain on the companies. (I assume it is the cost of providing them with cars and helping to finance those cars but it would be great to have some hard numbers to illustrate the scope of the problem.)
Today, the WSJ at least begins to generate some dealership facts:
One problem for the domestic-brand dealers is that there are so many of them. At the start of 2008, according to the National Automotive Dealers Association, the U.S. had 20,700 new-vehicle dealers, of which about two-thirds sold domestic makes. But those brands accounted for only about half of sales.
GM alone has 6,426 dealers, the company says. Toyota, with U.S. sales equaling about 85% of GM’s, has just 1,461 dealers.
In seeking federal aid, the Detroit companies promised to close or combine thousands of dealerships. Although the recently approved loans for GM and Chrysler don’t require this, the recession has been lowering the numbers anyway. The dealer association estimates that 900 auto dealers in the U.S. closed in 2008 — 86% of them sellers of domestic makes. It expects about 1,100 more dealerships to close in 2009.
With 3.7 dealers for GM to everyone 1 for Toyota on a car by car basis, there’s still a lot more room for GM to drop dealers.
Source:
The Trials of the Auto Dealer
Long a Road to Wealth in Towns Across America, Selling Cars Has Turned Into a Struggle to Survive, Not Always Successful
KATE LINEBAUGH
Wall Street Journal; January 3, 2009
http://online.wsj.com/article/SB122969965719421799.html?mod=djemITP
January 3rd, 2009 at 7:27 am
I have posed this question myself elsewhere in the past. I remember that back in the 1990’s (maybe after the recession in 1994 or so?), Porsche tried to buy out and make all their dealerships part of the factory, so they could have better and consistent control. But they were unable to do so because of various state laws.
It would seem to me that that the factories could gain efficiency, save $$$ and provide better service if they owned their outlets.
I’d like to understand the issues involved in this better.
January 3rd, 2009 at 8:17 am
Various state laws make it difficult and expensive for manufacturers to get rid of dealers. In North Carolina, for example, you’ll find the following language in the statute governing motor vehicle dealers:
“[I]t shall be unlawful for any manufacturer, factory branch, distributor, or distributor branch to offer to a dealer, revise, modify, or replace a franchise‑related form agreement, as defined above in this section, which agreement, modification, or replacement may adversely affect or alter the rights, obligations, or liability of a motor vehicle dealer or may adversely impair the sales, service obligations, investment, or profitability of any motor vehicle dealer located in this State”. N.C.G.S. § 20-297.1(b)
There is, of course, a process through which a manufacturer can alter the terms of the franchise-related form agreement, but the process is long and expensive, especially when one considers the large number of dealers as noted in the article.
The statute also provides that a manufacturer may not terminate a dealership without “good cause”. N.C.G.S. § 20-305 contains a long list of requirements that a manufacturer must complete before terminating a dealer. I suppose the manufacturers would rather let the dealer fail than deal with the complexities of shutting down dealerships.
January 3rd, 2009 at 8:28 am
Match Game 2009
Let see whats a guy to do to make a living to feed himself and family:
a) a product or service that a majority of folks can’t live without
b) a product or service that doesn’t cost more than a $75K outlay to get going (that number depends on locale)
thinking bigger in a progressive locale:
c) product or service that the bankers, chamber, college, city mayors will pump massive dollars into with uncertain return when the established have major advantages (size, spance, price’g power)
thinking smaller in an overpopulated with few job opportunitys locale :
d) product or service that folks can escape situation with
now match these answers to the letters a-d:
baby sitting - sewing - house cleaning - running a cash register - stocking shelves - drugs - prostitution - car jacking - bank robbery - military industrial complex dodad - military industrial complex tank/jet/ship/small arm - green energy dodad - the Oil Energy replacement GREEN Energy - used car dealership - new car dealership - commercial property builder - residential home builder - restraurant - used stuff store - “save the brown bay seals” organization - have a kid and become a ward of the state
thats the short list … game 2 - while watching the tv news match the last job title to the person in the story
January 3rd, 2009 at 8:43 am
hey LS you posted that while I was writing …
I wonder if lawyers were banned from holding a political position .. the laws got written in courts argued by lawyers and supervised by judges with the outcome and law decided by jurys with that result recorded by court reporters … became the laws we operate under … would we be better off ?
It would interesting times with jury tampering wouldn’t it.
January 3rd, 2009 at 9:18 am
It would be interesting to look at the growth in dealerships as of the time when GMAC began financing dealer inventory. I suspect that if GMAC made a lot of money from this, it would create an incentive to create more dealerships.
January 3rd, 2009 at 10:49 am
My shallow understanding is that dealer contracts make it extremely difficult for manufacturers, GM mostly, to drop car lines. If you need to pay Hummer dealers $2 billion just to stop making Hummers, it makes your long-term decisions tougher.
January 3rd, 2009 at 10:59 am
@doherj01
Do we know for a fact that the “cost” of the dealer network is the financing of excess vehicles for excess inventory? This is my main question. And thought it makes a great deal of sense, I’m curious to get some solid information.
January 3rd, 2009 at 11:35 am
One thing no one has explained is that why Toyotas cost more if their workers are paid significantly less. Of course, the reason is price fixing by Toyota. Toyota controls supply tightly and conventional Toyota dealers don’t really compete in a meaningful way.
Around Houston, you can show them the invoice prices and holdbacks from Consumer Reports or Edmunds and they will deny it. It’s pointless trying to deal with them. I had to fly from Houston to DC to get a reasonable deal on Camry at Fitzgerald Auto Mall who advertises prices on the web that have a reasonable markup. Even counting the cost of the trip (minus the fun of driving a new car back through the Blue Ridge) I saved a good bit.
January 3rd, 2009 at 4:25 pm
Don’t think of them as GM dealers. Think of them as attended parking lots for inventory. Gotta put them somewhere, might as well put a sales and support staff with the cars.
January 3rd, 2009 at 11:29 pm
GM has been in business sice 1920. Toyota has been selling cars in the US since the 70s. A better comparison would be how many dealer did GM have in the 50s.
January 4th, 2009 at 12:51 am
Car dealerships in many parts of the country are basically just real estate investments.
They are a way to justify a commercial loan on the outskirts of a growing town (ca, tx, co, nv).
They run a low margin business hiring cheap salesmen on commission and may not even offer service (which is quite lucrative) directly, but contract it out to a 3rd party for a % of sales.
All it takes is to pave a lot (improve it :^) and put up a small building and wait for land prices to increase. Then they sell and make bank, or if the land doesn’t increase they default on the commercial loan and break bank.
January 4th, 2009 at 7:47 pm
Domestics might actually NEED a denser network of distributors, who, in turn, capture a larger share of the sales price, because of higher warranty expenses?
Another feature: the domestics seem more likely to have dealers in Smalltown, RuralState, whereas the imports, having built their networks more recently, have not emphasized the declining small towns, and instead are concentrated in urban centers.
Such as ours: it’s impossible to go more than a couple minutes before seeing a preponderance of Priuses here in Oakland/Berkeley. Even last Saturday night coming home from SF at 1AM (Drunks’ Rush Hour), at one point, the majority of cars on the road were those PC hybrids.