General Motors, Chrysler: Cutting Their Way to Greatness 19 comments
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The Big Three auto companies certainly aren’t selling as many cars as they used to. As such, they need to reduce their fixed costs to more closely match their current revenues.
Towards this end, the two sickest “U.S.” automakers are shedding dealers. Thursday, Chrysler gave notices to 789 of its dealers (about 25%) that their contracts end June 9. On Friday, GM gave 18 month notice to 1100 dealers, and is expected to dump another 500 later this year. (GM is also hoping to sell its Saab, Saturn and Hummer divisions, which have their own dealers).
Both claim to have targeted their least profitable dealers. GM said that 18% of its dealers cut account for 7% of sales, while Chrysler says 25% of its dealers account for 14% of sales. GM hopes to cut 42% of its dealers by the time it’s all over. Meanwhile, Ford (F) is also reducing dealers, but in a less confrontational way.
The ailing automakers are in a tough spot. Having too many dealers means that its sales are spread across too many dealers, making it hard for the others to survive. It’s like throwing the sickly out of an overcrowded lifeboat in hope that the rest will survive.
The dealer associations question the logic of the cuts (as in these commentaries in NJ and LA). Dealers are the distribution network for the car companies — more dealers means more sales, less dealers means less sales.
Cutting dealers makes certain assumptions about the substitution of demand through alternate distribution channels. In some cases, shifting demand is plausible, as when a dealer is closed in metropolitan areas where the buyer can drive another 10 miles to another franchise.
However, in some cases, substitution is highly suspect. For example, Chrysler is cutting its only dealer in El Centro, a farming town in Southeast California (population 40,000). Those residents won’t drive an hour to Yuma (or 90 minutes to San Diego) to buy their next Dodge truck: they’ll buy a Toyota (TM) or a Ford (or a Chevy if that dealership stays open).
The other problem is that many (or most) of the dealers that GM and Chrysler want to kill aren’t interested in dying. As autonomous economic actors, they are going to find other ways of making money.
Some may become independent used car lots, repair shops, or other auto-related businesses that build on their loyal customer base and service their previous customers. But clearly some are going to sell new cars for someone else. Multi-brand dealership will just push their other brands; former single-brand locations will be looking for another brand to carry. For example, the PBS Nightly Business Report Thursday interviewed one axed Chrysler dealer who’d already signed up to sell Kias.
It’s impossible for a firm to cut its way to greatness: closing dealerships and plants isn’t going to solve the underlying problems. GM, Chrysler (and to a lesser degree, Ford) still have to figure out a way to make cars people want to buy.
At the same time, longer-lasting, high-quality cars mean that per capita auto sales may never return to the levels demonstrated in the 1990s. U.S. sales (for all makers) peaked in 2000 at 17.4 million; early predictions for 2009 were for 11 million units.
Towards this end, the two sickest “U.S.” automakers are shedding dealers. Thursday, Chrysler gave notices to 789 of its dealers (about 25%) that their contracts end June 9. On Friday, GM gave 18 month notice to 1100 dealers, and is expected to dump another 500 later this year. (GM is also hoping to sell its Saab, Saturn and Hummer divisions, which have their own dealers).
Both claim to have targeted their least profitable dealers. GM said that 18% of its dealers cut account for 7% of sales, while Chrysler says 25% of its dealers account for 14% of sales. GM hopes to cut 42% of its dealers by the time it’s all over. Meanwhile, Ford (F) is also reducing dealers, but in a less confrontational way.
The ailing automakers are in a tough spot. Having too many dealers means that its sales are spread across too many dealers, making it hard for the others to survive. It’s like throwing the sickly out of an overcrowded lifeboat in hope that the rest will survive.
The dealer associations question the logic of the cuts (as in these commentaries in NJ and LA). Dealers are the distribution network for the car companies — more dealers means more sales, less dealers means less sales.
Cutting dealers makes certain assumptions about the substitution of demand through alternate distribution channels. In some cases, shifting demand is plausible, as when a dealer is closed in metropolitan areas where the buyer can drive another 10 miles to another franchise.
However, in some cases, substitution is highly suspect. For example, Chrysler is cutting its only dealer in El Centro, a farming town in Southeast California (population 40,000). Those residents won’t drive an hour to Yuma (or 90 minutes to San Diego) to buy their next Dodge truck: they’ll buy a Toyota (TM) or a Ford (or a Chevy if that dealership stays open).
The other problem is that many (or most) of the dealers that GM and Chrysler want to kill aren’t interested in dying. As autonomous economic actors, they are going to find other ways of making money.
Some may become independent used car lots, repair shops, or other auto-related businesses that build on their loyal customer base and service their previous customers. But clearly some are going to sell new cars for someone else. Multi-brand dealership will just push their other brands; former single-brand locations will be looking for another brand to carry. For example, the PBS Nightly Business Report Thursday interviewed one axed Chrysler dealer who’d already signed up to sell Kias.
It’s impossible for a firm to cut its way to greatness: closing dealerships and plants isn’t going to solve the underlying problems. GM, Chrysler (and to a lesser degree, Ford) still have to figure out a way to make cars people want to buy.
At the same time, longer-lasting, high-quality cars mean that per capita auto sales may never return to the levels demonstrated in the 1990s. U.S. sales (for all makers) peaked in 2000 at 17.4 million; early predictions for 2009 were for 11 million units.
Disclosure: No positions
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The line "making cars people want to buy" is so overused and misleading, it's getting highly frustrating. Do you know who has recently sold the most mid-sized cars? GM, but just because the volume was spread out over many models, the press jumped all over it as GM doesn't sell cars people want. Sure, there were a lot of fleet sales a few years back, but that has been significantly cut back. GM also has many loyal buyers and so do Ford and Chrysler. Read the most recent quality stats and you'll see that the domestics often outperform imports. So, it's not as if the products are so bad.
I think automotive press writers need to start writing articles that are more fair so that people aren't convinced away from buying from companies based in OUR country.
On May 17 10:12 AM User 415242 wrote:
> I would buy a new GM car tomorrow if I was sure the dealer wasn't
> trying to squeeze me for every dollar he could and his repair facility
> was honest. Example-- with only 16000 miles on my last new car they
> wanted to charge me over $300.00 to get new brakes or they wouldn't
> pass my car for inspection.
I would think the key issue would concern the degree of trade area overlap with other GM dealerships. If a small GM dealership and a large GM dealership are competing, the large dealership gets the nod and the small dealership gets the axe. So they are favouring large volume operations.
I have not seen the cut list, or even their cut criteria, but if they are just cutting on the basis of size, they could be leaving money on the table. For example closing a small GM dealership in a rural area that has zero overlap with other GM dealerships basically gives current service parts and sales business away to their competitors. In addition, when a company walks away from a group of its current customers, basically abandoning them, its highly likely those orphaned customers will be lost forever. I have seen that in many industries.
This country is in the process of being corrupted beyond all recognition.
We do not have any Kia/Hyundai/Toyota dealers yet, so perhaps the cut/closed dealers will become one of those dealer brands.
Great marketing move.
The govt's justification for bailing out Detroit is that Detroit has been struggling for decades with high labor, health care and pension costs. Detroit's pensions are grossly underfunded. Should the automakers fail, the US government and US Taxpayers will be on the hook for billions to pay the lush pensions and retirement health care benefits of the autoworker.
The big problem will be convincing the American Taxpayer who was just let go from his minimum wage paying job at Best Buy, (retail workers are 10% of the american workforce) to support the bailout plan, by convincing the average american:
a. Why It is better for the USA economy to rescue a UAW workers job ($70 per hour in total costs, appx $34 per hour in wages), rather than a retail-workers job.
b. Why it is better for the government to support the lavish pensions of the UAW worker (when the average american chump has no pension and has just seen his 401K plummet by 30+ percent)
c. Why it is better for the american government to pay for the lavish health care benefits of UAW workers and retirees (when 25% of americans have NO health insurance.
It seems that the government has done good job of hoodwinking us that bailing out detroit is "good for america"
On May 18 01:41 AM Mr. Ed, Jr. wrote:
> How long before the stories start to surface about how certain dealerships
> were saved and others closed because of political favoritism ? <br/>
>
> This country is in the process of being corrupted beyond all recognition.
Well, next thing you know, we'll all be driving identical, small, "gas-efficient," white-roof civilians cars which will only seat 2.5 children anyway. The white roof will make the vehicle's eventual ID numbers or barcodes scannable from above. . . . Sorry for the negativity. Hope these thoughts were at least entertaining.
I still prefer GM Cars, I have purchased about 20 or 25 over the years mostly new. Have driven one up to 120,000 miles, still run and drove great, replaced brakes at 95,000 only repairs.
You do not know that to be the case. There are many dealerships whose owners are claiming they have always been profitable for Chrysler-- but now their business is being GIVEN to a another dealership in the area. Just like Chrysler lienholders got shafted by this administration in order to GIVE the benefits to the UAW, it is quite possible (likely) that some of the dealerships that are being GIVEN (Do you get that ? A profitable business being shut down to GIVE the customers to a nearby dealership.) to someone who is politically connected.
Don't be so naive. You have no idea what the process was in deciding which dealerships would be closed and which would get to stay open. I understand very wll how business works, and I also understand the seamy side of business and politics. And the Obama administration is proving itself to be very seamy. Thugs, in fact.
On May 18 05:44 PM The Betsy wrote:
> Mr. Ed, jr., . . . .not saved or closed because of political favoritism
> -- saved or closed because of financial stability and long-term healthy
> economic growth using zip code and demographic studies -- the same
> way businesses carefully scout new locations to build new stores.
>
From The Washington Examiner, May 28,2009
Evidence appears to be mounting that the Obama administration has systematically targeted for closing Chrysler dealers who contributed to Repubicans. What started earlier this week as mainly a rumbling on the Right side of the Blogosphere has gathered some steam today with revelations that among the dealers being shut down are a GOP congressman and closing of competitors to a dealership chain partly owned by former Clinton White House chief of staff Mack McLarty.
.www.washingtonexaminer...