Published November 4, 2010, Los Angeles Daily Journal – At the stroke of midnight on Oct. 31, 2010, the landscape of the automotive industry in the United States forever changed. With the final tick of the second hand, dealer agreements for some 500 General Motors dealers expired, ending generations of businesses across the country. This, it was held, was the way the “New GM” would move forward.
While the fate of these dealerships may now be certain, the way that we arrived here is unsettling. The trouble began in 2008, when leaders from GM, Chrysler and Ford responded to the deep economic downturn by traveling to Congress in private jets, asking for bailout relief. As they arrived in ostentatious fashion, the corporate executives claimed that their companies would not remain viable without immediate taxpayer dollars. With the possibility of a collapsed automotive industry being too much to risk, the Treasury agreed to provide $80.7 billion in grants and loans to Chrysler and GM. However, before the funds were committed, President Barack Obama created the “Presidential Task Force on the Auto Industry” and the “Treasury Auto Team,” two agencies sanctioned to review Chrysler and GM’s restructuring plans. This is where the problems began.
In February 2009, both Chrysler and GM submitted restructuring plans that included a gradual reduction of their dealer network that, they claimed, would allow them to become “more competitive” with foreign competition. This move was generally consistent with the automaker’s plans of consolidating franchises in smaller markets and discontinuing the Plymouth and Oldsmobile brands that had been in place since the 1970s. However, the Treasury Auto Team – lead by two non-industry executives (investment banker Ron Bloom and private equity group founder Steven Rattner) – rejected the two plans, giving the automakers 60 days to submit a “more aggressive plan” for dealership terminations, stating that it would be “a waste of tax payers’ money” to not take this opportunity to significantly reduce their dealership networks. The Treasury Auto Team was looking to emulate the “Toyota Model,” which suggested that smaller dealership networks would reduce competition among dealers and increase sales volume for the remaining dealers, which in turn, would allow dealerships to invest more in their facilities, and improve brand equity.
Chrysler and GM responded to the request by submitting aggressive plans, which set out to swiftly shutter scores of dealers. In June 2009, the same month that Chrysler and GM filed for bankruptcy protection, Chrysler notified 789 dealerships that they would be terminated in 22 days, and GM notified 1,454 dealers that they would no longer be able to order new vehicles and that they must wind down all operations by Oct. 31, 2010. The Bankruptcy Court then ratified these termination procedures – a critical fact, given that state franchise laws generally forbid auto manufacturers from terminating dealers without good cause. With that, America was set to have its new dealership network.
However, while the Treasury Auto Team pushed for a drastic, and immediate, reformatting of the Chrysler and GM dealer networks, public sentiment did not follow. With the average dealership employing 50 people, and generating $15 million in annual sales, the termination of these businesses would result in the unemployment of 115,000 individuals, and the loss of $35 billion in annual sales to local economies – many of which rely on these dollars to generate precious tax revenue. Hence, in late 2009 President Obama signed into law the Consolidation Appropriations Act of 2010, which enabled the terminated dealers to have their dealer agreements reinstated through an arbitration process. For Chrysler dealers, who had already been terminated six months earlier, the decision to arbitrate was challenging, as many of them had already ceased operations. For GM dealers, who were still operating until October 2010, however, the law breathed new life into their fateful situation. Of the 1,454 terminated dealers, 1,169 pursued arbitration.
The arbitration procedures have now concluded and it has been determined that 500 GM dealers will lose their livelihoods. But with the businesses that will be lost and the lives that will be forever changed, an important, if not critical, question lingers: Is this justice served? Have we, as a society, appropriately thinned the ranks of the dealer networks, and set up the domestic manufacturers to better compete; or have lives been permanently altered without proper consideration?
Following the billions of dollars that were given to Chrysler and GM, many members of Congress had been asking the same question, prompting a full audit of the situation by the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). In its 41-page report, SIGTARP made public several startling findings. First, while the auto executives told Congress that the elimination of its dealers would result in substantial costs savings to the manufacturers, neither Chrysler nor GM gave [any] consideration to these cost savings when making their termination decisions. Moreover, the amounts purportedly saved by the manufacturers varied greatly between Chrysler and GM – Chrysler estimated cost savings of $45,500 per dealer, while GM estimated savings of $1.1 million per dealer – calling into serious doubt the credibility of the claims.
But, more troubling were SIGTARP’s findings relating to the reasoning behind GM’s decision to close its 1,454 dealers. GM officials stated that the termination decisions were based on an objective criterion: dealers who either failed to have a dealer performance score of at least 70 (which measures customer satisfaction, etc.) or sold fewer than 50 cars in 2008 were selected for termination. However, the SIGTARP audit found that GM did not uniformly apply the criteria to the entire network; that GM terminated dealers who did not qualify for termination, while retaining others who did; and that GM retained little to no documentation on its decision making process, making outside review nearly impossible. So troubling were the findings, that SIGTARP has opened an investigation into possible illegal activity surrounding the terminations, which could result in prosecution by the Department of Justice.
Upon learning of SIGTARP’s findings, members of Congress urged President Obama to issue an administrative mandate, halting the Oct. 31, 2010 termination date for the GM dealers until a full investigation could be completed. As Steven LaTourette (R-Ohio) and John Boehner (R-Ohio) wrote in an official letter to the Oval Office just days before the looming date, “there is too much at stake to proceed in an atmosphere where dealers were denied so much crucial information in a process rife with secrecy.”
The calls by lawmakers to save the dealers from termination went unanswered, leaving their dealer agreements to expire on Oc. 31, and closing another chapter on justice unserved. So, the automakers will continue on their way, SIGTARP will move forward with its investigation, and the entrepreneurs who served the automakers, in many cases for generations, will join the expanding ranks of the unemployed.