Inside The Chrysler Dealer Arbitrations

The Chrysler dealer arbitrations have been completed. Out of 108 arbitration hearings Chrysler maintains they won 76 of the decisions to 32 in their favor of terminated dealers. 32 out of the 789 franchises initially rejected have now received a “Letter of Intent,” which still makes th dealer subject to the nefarious whims of Chrysler when it comes to re-establishing their business. Word has it that Chrysler has employed unscrupulous tactics with their jilted dealers, leading to their overwhelming won/loss ratio.
On the heels of the final Chrysler arbitration numbers comes the Special Investigator General Troubled Asset Relief Program (SIGTARP) report. This is the government’s own audit of the use of TARP funds to bailout Chrysler and GM. The report castigates the Auto Task Force, led by Ron Bloom, Steve Rattner, and Steve Girsky for forcing the terminations. It seems the Task Force wanted to impose the “Toyota Throughput Model” ON GM and Chrysler. The OEMs might not have had any choice in cutting down their franchise count. After all Rick Wagoner was fired for not submitting an aggressive enough restructuring plan after taking TARP money from the Bush administration in December 2008. There isn’t enough space to analyze SIGTARP here. Others have already done so and the document speaks for itself. There is no doubt it would have been quite helpful to dealers locked in arbitration with their OEMs, had it been available at the time.
How Chrysler, in particular, went about their termination process is telling. Chrysler aggressively pursued arbitration, probably at the behest of CEO Sergio Marchionne, who thinks the dealers work for him. GM, on the other hand, wasn’t as aggressive as new CEO Ed Whitacre quickly figured out who his customers are and worked to restore many dealers quickly.
We talked to Carl Woodward, CPA of Woodward and Associates, Inc. Mr. Woodward has 38 years experience specializing in auto business accounting serving hundreds of auto dealers. He also has actual dealer experience as a partner/owner. Mr. Woodard participated in about twenty dealer arbitration cases on behalf of dealers. We have also spoken with dealers, some who won and some who lost their Chrysler arbitration hearings. A common theme arose from these conversations. Many of the Chrysler terminations made no sense at all. They were made based on incorrect data, incorrect interpretation of data, and quite possibly out of retribution toward dealers who had stood up for themselves in the past.
Chrysler typically fought against motions to transcribe arbitration proceedings. It seems they routinely took advantage of the lack of auto business and financial experience of some of the arbitration judges. Chrysler must not have wanted a record to be available when they took different sides of an issue depending on who the arbitration judge happened to be. For example, Chrysler might take a position that LIFO counts as working capital if that argument works in their favor, supporting a dealer they retained over one who was terminated. In another situation they might argue that LIFO reserve does NOT count as working capital if that argument supported the termination of a dealer. If the arbitration judge didn’t know the difference, and the dealer wasn’t knowledgeable and well prepared, this worked out in favor of Chrysler. As a practical matter, LIFO reserve DOES count as working capital. Chrysler must not have wanted a record to be available. Why have to deal with precedent if it is inconvenient?
In at least one instance, Chrysler retained a dealer with negative working capital over one with many times Chrysler’s own guide formula. Chrysler got caught on it when the dealer was well prepared with a knowledgeable attorney and CPA experienced in these matters.
In my own case, I have been in and around the auto business for 40 years. Until recently I have NEVER heard from any manufacturer any assertion that fewer dealers sell more vehicles. A spot check of Chrysler’s Alpha – Genesis project revealed interesting results. The project involves consolidating all of the Chrysler – Jeep - Dodge – Dodge Truck franchises under one roof. Imagine a market that has a 3 dealerships, one for Chrysler, Dodge/Dodge Truck, and Jeep. Now you put them all in one location. Yes, it’s probably good for the dealer who ends up with the 4 franchises under one roof, unless he/she had to boost overhead substantially to accomplish it. But I have yet to find an instance where overall Chrysler market share increases under this circumstance. My research is admittedly anecdotal. But others I have spoken to, including Carl Woodward and various dealers, are telling me the same thing. Even a couple of “factory people” have made the same observation without agreeing to attribution. When challenged in arbitration hearings to prove that Alpha – Genesis has been proven to achieve the stronger market penetration Chrysler says it desperately needs, they have, to my knowledge, not been able to provide any data to support their assertion. Might their entire premise to terminate dealers be based on a false premise?
Tammy Darvish, co-leader of the Committee to Restore Dealer Rights and vice president of Darcars Automotive Group in Silver Spring, MD weighed in: "It is curious that there is no accountability for the gross error in judgment on behalf of the Auto Task Force in addition to those that we believe committed perjury in Federal Bankruptcy court and in Congressional Hearings. Raising your right hand and swearing to tell the truth, the whole truth and then doing everything else but is unconscionable."
There is no doubt that it has been better for the economy to have a relatively orderly restructuring of GM and Chrysler instead of a disorderly liquidation. But the motives and tactics of Chrysler, in particular, are repugnant at best.
Addenda: We bloggers on Marketplace July 19, 2010

Rattner's "Tell All"

I have been trying to resolve a mystery for months. When it was announced that General Motors and Chrysler were terminating dealers as a part of restructuring through bankruptcy, I smelled a rat. So did many who have been around the auto business for a while. Historically it has been a practice of auto manufacturers to add sales points as a method of driving volume and market share. Were we expected to think they no longer cherish these objectives? In a complete turnaround from their histories, they asserted that closing dealerships saved money for the manufacturer. The mystery? Whose idea was it? Who imposed it? I have speculated that it was forced on GM and Chrysler by the government’s Automotive Task Force in its zeal to impose a “Toyota Throughput” model. Both the manufacturers and the Auto Task Force blame the other for the dealer terminations.

Part of the answer came at the recent Auto Finance Summit held in Las Vegas at Red Rock Hotel and Casino. One of the high points was an address to attendees by Rick Wade, a member of the Automotive Task Force. During his address, he never specifically mentioned the decision to cut dealers, but his tone indicated that he thought everyone figured that dealer terminations were necessary to make GM and Chrysler viable. He came across as an enthusiastic, bright, and well-intentioned person who was placed in a position, with the other members of the Task Force, where important decisions had to be made quickly. He was quite pleased, as am I, that GM and Chrysler have been, at least temporarily, “saved.” Before being called to serve, Wade was certainly an auto industry outsider, for better or for worse.

But the real bombshell has been Steve Rattner’s recent article in Fortune magazine, where he reveals all sorts of interesting inside information. Rattner is the now-resigned head of the Automotive Task Force during the Chrysler and GM bankruptcies, the real “car czar.” Some of the information he reveals probably should have stayed “inside” for a while out of common courtesy and discretion. In particular, he shares his personal views on GM management, and Rick Wagoner in particular, in a particularly caustic manner. He reveals the content of private conversations. In his tell-all piece he also acknowledges the challenge of dealing with the N.Y. attorney general’s investigation of his former firm, Quadrangle, while simultaneously heading up the “Team Auto,” as they called themselves. He freely admits that he and his fellow task force members knew little of the auto business.

It is true Team Auto had no real precedent to rely on and faced a critical time schedule. It made me wonder why he was selected to the post in the first place. He must not be expecting to be considered for any important positions in the future as it is unlikely that anyone would speak candidly to him knowing his penchant for being less than discreet.

The Bush administration had “bridged” GM and Chrysler over to the Obama administration with an injection of $17.4 billion in TARP funds in late December 2008. The decision to use a Section 363 bankruptcy strategy to accomplish a quick “cleansing” of liabilities through Chapter 11 has at least temporarily saved the two companies and hundreds of thousands of jobs. For this, I commend Rattner and Team Auto. If things go as planned, GM will IPO in the next couple years and buy out the government’s stock holdings. Chrysler’s situation is much more fragile and depends on Fiat more than anyone should be comfortable with. But GM and Chrysler were saved at a time when their liquidation could have touched off a catastrophic chain of events in the auto industry and the overall economy.

So what about my mystery? Who made the decision to terminate dealers? I’m not talking about shutting down Pontiac and Saturn or selling Saab and Hummer. A business case can be made to support these decisions. I’m talking about decimating the Cadillac dealer network and terminating thousands of viable GM franchises across the country. I’m talking about terminating 789 Chrysler, Dodge, and Jeep franchises.

There was a recent article in Automotive News on Jim Press, Chrysler’s now discredited and terminated co-president, which itemizes many apparent contradictions in Press’ career. I distinctly recall Press and GM CEO Fritz Henderson during the Senate committee hearings itemizing the “savings” they would realize by terminating dealers. I didn’t hear anything that smacked of the truth. It is now disclosed that Press had his own private reservations about terminating dealers. Mark LaNeve, the recently deposed head of GM sales, has stated publicly that he is worried about GM’s lack of dealer coverage and its negative impact on sales and market penetration. He expressed concern about GM making orphans of 900,000 GM owners. Then there is the quote from Joe Eberhardt, Chrysler Group’s past senior vice president for sales and marketing: “When a company loses a dealer, its overhead costs stay the same and — at least in the short term — it loses a few hundred car sales. There's no immediate payback." Carl Woodward, a longtime CPA serving auto dealers, also disputes any claims of net savings to auto manufacturers by terminating dealers. In his 6,000-word article for Fortune, Rattner took no credit for the dealer terminations. I wonder why.

published in Auto Finance News

Lies, Damn Lies, and Statistics!

David Ruggles
See also Cliff Banks article in Wards

As I watched the Senate hearings today on CSPAN my blood boiled. When asked about the money they would save by cutting their dealer count these guys, Henderson (GM) and Press (Chrysler), engaged in some serious obfuscation. They asserted that by swapping an "under performing" dealer for a "performing dealer" they would pick up the gross profit of the additional sales of the new "performing" dealer. These calculations of the difference between what they got and what they felt they were entitled to makes up the bulk of what they claim the rejected dealers "cost" their companies.
I have a little experience in this area. I have operated dealerships in a number of markets. As a consultant I have visited hundreds of dealerships and worked closely with them. The best dealers are those who have structured their business in such a way as to be less vulnerable to the inevitable downturn in either the new vehicle market or the times when the offerings of their manufacturer weren't well accepted in the market. These successful dealers learned to develop their pre-owned business and other profit centers, and they probably brought in other manufacturer makes to help cover their fixed costs in the event of a market downturn.
These dealers are typically still profitable, despite our difficult sales environment. These are precisely the type of dealers targeted by Chrysler and GM.
Markets are not created equal. To understand the concept, think in terms of MSR, which stands for Minimum Sales Responsibility in the Chrysler business. GM has its own terminology, but the same meaning. MSR is where a manufacturer's national market share percentage is applied to the total new vehicle volume in a specific dealer's market. Any deficiency – shortfall from the target – is what a manufacturer views as lost sales. They can calculate the gross profit they would have made had the dealer hit its MSR. But now they appear to count it as a cost in justifying the arbitrary termination of dealers and their employees. There are additional assumptions. The gross profit they calculate is the margin they make when they sell the a new vehicle to the dealer. The dealer has to sell it at retail to make money themselves, which isn't always possible. MSR also varies by locality; it is certainly possible that a dealer who exceeds MSR in one market would underperform in another.
The fact is, Chrysler and GM resent dealers who have managed their business in such a way as to not be overly dependent on selling their products. Many rejected dealers have been targeted as a result of their business acumen. In addition, Chrysler and GM are moving to force more expense onto their retained dealers. GM has sent out "participation agreements" that any dealer wanting to go forward must sign. It effectively replaces the franchise agreement, forcing dealers to agree to do anything and everything, or else. Don't sign, and the dealer is terminated. GM and Chrysler want more elaborate and expensive facilities. The also want exclusivity in those expanded facilities, meaning the manufacturers won't allow competitive makes in these facilities, even though they are purchased or leased by the dealer, NOT the manufacturer.
Normally, dealers would be protected from these types of unreasonable demands by state and federal franchise laws. But GM and Chrysler are taking advantage of their bankruptcies to avoid these restraints. They are showing why these laws existed in the first place - there is a long history of franchisors abusing franchisees, once the franchisee has money in the business that they can't extract. The auto industry isn't unique, but each store represents a far larger investment than in fast food or most other franchising. Congress and the states had made such blackmail illegal; now Chapter 11 is being manipulated to allow it.
I have a friend who had a Chrysler-Jeep operation yanked from one store, and a Dodge operation from another. Now Chrysler can give them to a competitor. These yanked franchises didn't fall out of the sky, good money was paid for them. Chrysler wants to exact a 3 million dollar building from the other dealer in return for being granting it the franchises. The dealer who was NOT terminated was not selling near their MSR, so there must be other motivations. It will be poetic justice if the yanked Chrysler, Jeep and Dodge franchises languish for lack of a party willing to invest that much for a new facility. Time will tell.
According to Chrysler's Press the distribution costs per vehicle amount to about $1000. Of course, each vehicle bears its proportion of these costs regardless of which dealer they were shipped to. In Press' argument this cost would be less if they could replace under performing dealers with (fewer) performing dealers. But these costs aren't related to the number of dealers – they represent the money spent to develop and maintain the software in the first place.
Furthermore, neither executive mentioned the costs their companies have transferred to the dealer. While claiming there were substantial costs associated with the software and hardware related to their dealer communication IT package, Press neglected to mention that each dealer is charged about $2600 a month for this. He failed to mention that there really are very few, if any, field people these days, as dealer contacts are made by email and telephone instead of actual in-store visits. There was a concerted effort to overstate costs and avoid altogether any mention of how much of these costs are actually reimbursed by dealers. In fact, studies show that each dealer represents POSITIVE cash flow BEFORE they buy a vehicle or a part!
I've been frustrated by previously not being able to determine who made the decision to cut dealers, rather than to allow natural attrition to thin out dealer ranks. (That attrition rate is high at present!) It is hard to believe that Henderson and Press have that little understanding of the auto business. I have to conclude that the initiative to lower the dealer count is driven by the Task Force, who think Toyota's business model is what everyone should emulate. The Task Force may be made up of restructuring geniuses, but they have little understanding of the auto business. Their profession means they are mostly North Easterners who may not even own a vehicle, and are not oriented to the issues of smaller businesses. But when a dealer closes, it likely results in a bankruptcy in which a family's life savings are wiped out. It's not just a job loss. The Task Force doesn't seem to understand this. Closing dealerships will cost sales for Chrysler and GM, something they can ill afford. And the ill-will it generates will cost them a lot more than any potential savings.
Imagine Gillette volunteering to give up shelf space space at the super market to Schick! It's the same principle. Foreign competitors looking to expand their dealer base will scan the ranks of rejected GM and Chrysler dealers. If not for the recession, that would save many of the terminated dealers.
In the meantime the "task force" is driving the bus while all parties deny any micro managing by the government.
But remember: as bad is it is, it's better than liquidation! Those who think Chapter 11 for GM and Chrysler should have been declared last summer have forgotten the financial crisis. To operate in Chapter 11 still requires financing, and for almost a year now that has only been available from the US Treasury. The Task Force is necessary, but the specialized nature of their skill set is apparent. The faster these two firms exit Chapter 11 and the Task Force stops calling the shots, the better.