CAR Management Briefing Seminars-#2, Dumping Dealers, HUH?

Understanding Some Mysteries
By Steve Purdy
The Auto Channel
Detroit Bureau

One of my goals this week is to understand one of the issues surrounding the struggles of the Detroit Three automakers that have eluded me throughout this mess. That is: How do the manufacturers gain financially with the closing of all those hapless dealerships around the country?

First, I asked the boss, our host, one of the most respected and quoted analysts in the business, the founder and chairman of the Center for Automotive Research, David Cole. I accosted him while we cruised West Traverse Bay in the beautiful three-masted schooner enjoying the hospitality of some of the few auto suppliers who still have the resources to court the media.

“Forgive me Dave, but would you mind talking business for just a few minutes more?” I asked.

He nodded with his usual friendly smile.

“I’m still struggling to understand how the dumping of so many dealers, many of whom are profitable, help the bottom line of the Detroit Three. I don’t get it.”

I was a bit taken aback when he replied concisely, “I don’t either.”

We spent the next half hour, while waiting for the bar to be manned, tossing back and forth the manufacturer’s stated motivations, which continue to ring hollow.

We’ve heard from the manufacturers: that it will decrease the overly-tenacious competition among the dealers in over-served markets; that it will make for fewer delivery sites for the inventory; that they’ll save the few dollars the manufacturers put into regional advertising budgets; that these dealers were “underperforming” on the sales goals set by the manufacturers.

On the other side of that argument: many, if not most, of these dealers remained profitable; that many of the closed dealers, particularly smaller ones, served markets without excessive competition; and that they provide needed outlets for products; and there has been an inconsistency and an unfairness around which dealers are dumped.

Dave Cole cited his situation in northern Michigan, a sparsely populated resort area, where the only Cadillac dealership within 80 miles is slated to close. Now a Cadillac owner will have to drive all day to get his car serviced. Sure, that doesn’t mean a loss of many Cadillac sales, but in this market I’d think every sale is an important one. What, exactly, would it cost GM to continue the franchise of that dealer?

That’s the question to which I’m trying to understand the answer.

A few other journalists had gathered around as we were discussing this topic. I asked one of them if he thought there was a punitive element to these closings.

“Certainly there was at Chrysler,” he opined. Others have agreed that it has been an opportunity for the manufacturers to get rid of troublesome dealers as well as underperforming ones. Many have speculated that some of these decisions have been made with less than justifiable motives.

Finally, another colleague came up with the most logical reasoning I’ve heard thus far. That is, that the savings essentially come from the administrative costs the manufacturers save in not supporting those dealers. Think about the regional managers, the reps who take the orders and the others within the corporation who work directly with the dealers. It still seems like a rather meager savings considering the flack and bad PR the whole process has generated.

I feel like I’m getting closer to understanding one of the most divisive issues in this whole mess. But, I’ll not give up asking that question yet.

On another matter today, we’re looking forward well into the future with some degree of optimism. One of the panels is exploring the topic of “connected vehicles,” which means the vehicle’s connection, wirelessly, with surrounding infrastructure – a fascinating topic for engineers of all kinds. Government, of course, plays a huge role in this process. We’re well into the development of systems that will allow more efficient use of roads, safer use of roads and more effective regulation of everything from emissions to toll and tax collection.

Michigan is positioning itself to be the center of this technology. We have here in the southeast Michigan area just about 80% of all the auto industry’s research and development and currently the first connected vehicle research center. We heard Roger Curtis, president of Michigan International Speedway pitch his facility as the real-world testing grounds for all this technology.

Just finished sitting through a 3-hour discussion on innovation in the auto business by a panel of truly smart people.