Today I read yet another story about the contentious situation between U.S. car manufacturers and their dealerships. One dealership just lost a case against Chrysler in binding arbitration. The dealership had been targeted for closure by Chrysler. Chrylser is trying to shut down the lower-volume dealerships to concentrate sales in fewer, higher-volume dealerships.
So how can a manufacturer “close” an independently owned dealership?
I can think of only two options:
The contractual relationship is like a franchise, and the dealership operates at the pleasure of the manufacturer
The manufacturer cannot legally shut down a dealership but can simply refuse to sell it any cars, effectively closing it.
I am also confused by the overall strategy; why would the manufacturer want to close down dealerships? I would think it would be better to let the free market decide. And the more dealerships you have, the more cars you’re going to sell overall.
This Slate magazine piece addresses the why. “Chrysler and GM and other auto manufacturers must maintain a large, costly field force of trainers (to train technicians to fix cars), salespeople (to persuade dealers to buy more cars), and auditors (to verify claims for reimbursement). The more dealerships, the more go-betweens a car company needs to employ and the more money it has to shell out. Shuttering dealerships could also result in less intra-brand price competition.”
They are responding to the free market reality of less demand for cars and are manipulating the free market by shrinking the supply. One way to shrink supply is to make fewer cars; another way is to limit the number of places you can purchase a vehicle. Having too many dealers for fewer cars shrinks the profit margin for eveyone involved.
Nitpick: I don’t think it’s accurate to call a reduction in supply “manipulating the free market” since that’s pretty much how the free market is supposed to work. Lower demand results in lower production.
That’s the way it worked with one dealer here. The manufacturer (Chrysler) canceled the operating agreement, but the dealership kept its doors open as a used car dealer.
For the record, it doesn’t include just selling cars. The manufacturer can refuse to honor warranty work done by the ex-dealer, refuse to train the service techs, not include the dealer in any corporate rebate or incentive programs, take the dealership off any corporate lists (so, for example, a dealer wanting to order a new clutch assembly would have to get it from a third-party supplier, not the company), etc.
But by reducing the number of dealerships, they are reducing the amount of competition – there are fewer dealers in the area trying to get a customers’ business, so less price cuts & sales will be offered to customers.
I suppose you might consider that “manipulating the free market”.
It depends on whether you view car dealers as independent retailers. But it seems, from this discussion, that they’re effectively agents of the manufacturer since the auto companies have them by the balls. It’s virtually vertical integration.
Car dealers were never totally independent. They used to be called “agencies” – i.e., agents of the manufacturer. Even in the glory days of the American auto industry, you never saw (for example) two Chevrolet dealerships in the same area. I don’t know what the criteria were for locating a dealer, but there seems to always have been some restriction based on geography or population or something. You couldn’t just build a showroom and order a bunch of new cars from the manufacturer without some sort of agreement in place.
As for the free market, well, no one accuses Sears of “manipulating the market” when they close a store.
Well, all states had franchise laws which prohibited the car companies from forcing dealerships to close. The exception was in the case of bankruptcy, which was one reason why it was advantageous for GM and Chrysler to declare bankruptcy.
The market share of GM and Chrysler had plummeted over the past 20 year, but the number of car dealers remained more or less the same. That is a situation which is unstable.
And GM & Chrysler had roughly twice as many dealerships as, for example, Toyota or Honda. Which means twice as many salespeople to keep training, twice as many service department mechanics, twice as much paperwork, etc. So twice as much overhead, but not as many cars sold to spread this overhead any more.
The branded dealerships - Chevy, Dodge, Honda, etc. - are franchise dealers. They have to operate within the governing guidelines of the manufacturer. Independent dealers are used car operations and buy here-pay here places.
**kunilou **also touched on some other points that are totally correct.