I have been asking for months, ever since the auto company crisis started, why the car companies would want to close dealerships. As dealerships aren't owned by the auto company, I didn't see how having fewer places sell their product would make more money. I sell books and I want as many book stores selling my books as possible. However, I don't have much cost associated with each store, but the auto companies apparently do.

Of course, I think they could change the terms of the franchise agreement to put the cost of a dealership on the dealer and strictly control the advertising and promotions. Many franchise companies do this without difficulty. A friend owns some Papa Murphy stores and, if he wants employees trained by Papa Murphy central, he must pay corporate for doing so. All advertising must be approved in advance by corporate. All changes to the menu must be approved in advance. All equipment must be approved, etc., etc., etc. Why can't Chrysler do that? Might be easier to weed out low-volume dealers by making the cost of keeping the dealership going higher. A dealer might be the only dealer for 200 miles and can well charge for the additional cost, while another would simply end the relationship.

MacAdvisor:

I have been asking for months, ever since the auto company crisis started, why the car companies would want to close dealerships. As dealerships aren't owned by the auto company, I didn't see how having fewer places sell their product would make more money. I sell books and I want as many book stores selling my books as possible. However, I don't have much cost associated with each store, but the auto companies apparently do. Of course, I think they could change the terms of the franchise agreement to put the cost of a dealership on the dealer and strictly control the advertising and promotions. Many franchise companies do this without difficulty. A friend owns some Papa Murphy stores and, if he wants employees trained by Papa Murphy central, he must pay corporate for doing so. All advertising must be approved in advance by corporate. All changes to the menu must be approved in advance. All equipment must be approved, etc., etc., etc. Why can't Chrysler do that? Might be easier to weed out low-volume dealers by making the cost of keeping the dealership going higher. A dealer might be the only dealer for 200 miles and can well charge for the additional cost, while another would simply end the relationship.

it's kind of a truism in the car industry that bad dealerships are a big problem for car brands. so, a few decades ago, porsche announced its intent to do away with dealerships and go to a factory store kind of model, for purposes of better quality control over the purchase and ownership experience. no go, the entire dealership industry got really up in arms about it.

The dealerships don't buy the cars and then sell them, the auto company supplies the car to them. So while the dealerships are privately owned if an auto company cannot provide cars to them at no cost the dealership is out of business since they don't have the capital to buy a fleet of cars in the HOPE they would sell them. i.e.no would would give them credit especially a Chrysler or GM dealer.

So in some ways you are right. GM and Chrysler didn't close these dealership. They just refused to give them any more 'free' cars.

flat, they cant sell the cars they have now so why would they make more and flood the market even more, they must cut back production and dealers because they see us all in deep shit, the economy is not recovering, the banks are still in trouble, credit is still tight and we have more rounds of bad news coming in the markets.

I believe they see years ahead of stagnation, a deep depression, perhaps worse than the great depression, I don't think they see anyway out of it and the auto industry is preparing for the worse,
I dont see how the credit market will hold up with the sure to come credit defaults that are already at record levels. No, I see this as and indicator and a bad one at that.

Your Papa Murphy analogy is almost exactly how manufacturers work with their dealers.

The writer of the article is almost clueless about how dealerships operate. Funniest part in his fictional diatribe is his comment that failing "dealers resort to tactics that make the car company look bad. Think free hot dogs, "push, pull, or drag" sales, and giant inflatable gorillas on the roof."

Want to bet the ones who survive have, do and will continue to employ such advertising?

I'm not sure this is correct.

My understanding is that the dealers buy the cars from the manufacturer, but that they finance them under what's called a "floor plan" in which, instead of having a separate loan and security agreement for each vehicle, they finance all the purchases in the aggregate. If, as seems likely, many dealers will be unable to sell their inventory before they get the plug pulled on them, the manufacturer would still have the purchase money, but the financing arm might be stuck with a nonperforming floor plan.

hellsjoker:

flat, they cant sell the cars they have now so why would they make more and flood the market even more, they must cut back production and dealers because they see us all in deep shit, the economy is not recovering, the banks are still in trouble, credit is still tight and we have more rounds of bad news coming in the markets.

I believe they see years ahead of stagnation, a deep depression, perhaps worse than the great depression, I don't think they see anyway out of it and the auto industry is preparing for the worse,
I dont see how the credit market will hold up with the sure to come credit defaults that are already at record levels. No, I see this as and indicator and a bad one at that.

You are ignoring the fact that much of the problem lies in the increased competition from new automobile manufacturers that didn't exist when this overabundance of dealerships was originally created.

The analysis proposed in this article couldn't be more incorrect. The people that purchase a vehicle are not the automotive companies customers directly. It is the dealers that buy vehicles from the manufacturer that are the true customers. The Dealer usually buy with a line of credit arranged with a local bank called a "floor plan loan". The manufacture is paid outright by the dealer when the vehicle is delivered. The dealer may hold the vehicle for many months while trying to sell it, all the while paying interest on the floor plan loan. The individual that ultimately buys the car usually needs they're own loan to finance it. They may seek new car loan from a local bank or may take a loan from the manufacturer's in house bank such as GMAC. But this is really a completely separate matter and really quite removed from the design-manufacture-sell aspect of the auto makers business.

So the dealers are the real customers of the auto companies. They are privately owned business and do not cost the auto companies any money, they are the source of the revenue. So how is forcing the Manufactures real customer out of business going to help they're business?!?

When I graduated from college in 1961, I imediately went to work for the International Harvester Company. I was a Zone Traveller (their name for the account representative who called on dealerships) and I reported directly to a regional Vice President named Earl Gates. My territory was New Hampshire, Vermont, some of Western Mass and some of Western Conn. In this territory there were 2 different kinds of dealers, not meaning different in product mix, but different in how they ran their own businesses. There was large dealership in Brattleboro Vermont that sold Farm equipment, tractors and trucks. This dealer was a very large volumn dealer selling trucks and equipment throughout the New England States to Government entities, farmers, truckers, and construction companies. He was able to maintain a large inventory of whole goods as well as a full parts department.

This dealership ran his business on a cash and carry basis. He also had a several million dollar whole goods credit limit and a 2 million dollar parts credit limit. The reason he was afforded this was that he ALWAYS PAID FOR THE WHOLE GOODS AND PARTS. If I went into his dealership and there were 27 tractors, a field full of farm and construction equipment and 40 trucks, they ALL belonged to the dealer. He had paid for the inventory, and was able to maintain a good market base and a positive cash flow because he could reach the goal of 34% profit from his parts department and 28% profit from his whole goods sales.

In western Connecticut, there was another dealer who floor planned everything. Every piece of equipment and every truck, scout or travellall was STILL OWNED BY IHC. IHC had a lein on every part in his parts department. When he finally failed in the 70's, IHC lost over a million dollars in accrued interest, trucks that had been reduced because they were up to three years old. Before ho could order a custom vehicle, we had to approve the credit of the buyer, and have the buyer enter into a contract with IHC in order to have the vehicle made in Springfield Ohio.

Now to today. The dealerships that are being forced to close are a financial burden to the manufacturers. ALL OF THESE DEALERS have poor dealership credit, all have leins on the whole goods inventory and the parts inventory, AND ALL ARE LIMITED LIABILITY CORPORATIONS that does not allow GM or Chrysler to attach the dealers personal assets in order to be paid for the goods and services purchased by the dealers AND NOT PAID FOR!

THAT IS WHY THEY ARE CLOSING THE DEALERSHIPS!

Macadvisor,

I am currently a Chrysler dealer and You're asking why can't Chrysler do that??? To clear up and answer your question... THEY ALREADY DO!! I pay sign rights every month. I also pay for tools, parts, training the techs, being able to log into chrysler's homesite, brochures, and the cars. And all of these things, are of course, PAID UP FRONT. As far as the advertising goes, you are required as a dealer, to pay for a portion of your market area advertising. It's included in the cost of the vehicle. Chrysler is under no obligation to pay for a dealer's anything. It's already paid for up font out of your checking account to them every week. We as dealers cost the manufacturer nothing. Oviously, your ignorance shines thru by not knowing of what you're speaking of.

Sincerely,

financeguru99, chrysler dealer

It is clear the author of the original article did very little research before writing the article. While it is true that the manufacturer does supply training to the dealerships, the training is not provided for free. It is a profit center for the manufacturer with the dealers which they frequently farm out to outside trainign companies. They charge dealers even when salespeople takes online selfstudy tests on their own without any trainer. Yes, the manufacturers have to have road people to sell the cars to the dealers, but when one rep handles 10-20+ dealers in urban areas and the rural dealers are handled largely by phone and online, the expense is minimal.

As a number of posters have explained, the dealers are the only customers the manufacturer have. When they ship a car to a dealer, the dealer pays for it in full and finances on his "floor plan" with a bank or captive finance company. The dealer insures the car while on his lot, the dealer pays the carrying interest to keep it on his lot. Less dealers will mean higher prices to consumers plus longer travleing time for service.

Probably the only legitimate argument for less dealers is the thought that the remaining dealers will be stronger and be able to compete better with other brands better. This is largely due to being able to charge more for the cars due to less competition. However, Chrysler in particular has given its dealers only 3 weeks to close. The short notice has elevated closing losses astronomically effectively bankrupting almost every dealer. If the long term is the concern, would it have mattered if they gave the dealers a year to close down in an organized fashion like GM did? It just goes to show the unconscienable brutality which Chrysler is treating its customers(dealers) Does anyone think they won't treat you the same as a customer if need be?

I wish I had the time to point out all the flaws with this authors article. Since I don't i'll just name a few. By having fewer dealers, and having more profit has nothing to do with car companies, the dealer gets the profit not the car company. Dealers floor cars, we only pay a very small % of the car every month. So If a dealer is just starting off and goes under, the factory gets the car back or we sell them to other dealers. Manufacturers do not loose out. When we send our staff out to training or have training come to us, we pay for that training. And it's not cheap.

Since you're a Chrysler dealer, I would be interested in your opinion. Are these closures within the rights of Chrystler per the franchise agreement? Isn't this akin to an unlawful siezure? When a dealership is cut loose, can they still sell their inventory as new cars? What happens to the parts that they have in inventory? Could they continue to sell as 'Joe's Cars and Parts' but not use the Chrysler name?

I'd think that it's a darned scary time to be a car dealer.

financeguru99 : of course I am ignorant of how car dealerships work and freely admitted so. That ignorance is the very reason I've been asking the question of how auto manufactures do better with fewer dealerships as such a setup is contrary to what would be true in other situations. I even discussed how my books do better when in more stores than fewer. The article is the one suggesting the manufactures had an expense associated with "tools, parts, training the techs, being able to log into chrysler's homesite, brochures, and the cars," not me. I took the article's assertions as accurate and wanted to know why that could be changed to match other franchise operations. That the article is inaccurate is not my ignorance.

Again, and I ask financeguru99 to answer the question, how are auto manufacturers better off with fewer dealers than more? If they are not, why is that the goal of all three American manufacturers? Why does Toyota and Honda have fewer dealers and is doing better?