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We all know how much dealers contribute to vehicle marketing but this is not about dealer costs its about OEM overheads insofar as they do or do not rise in proportion to the size of their dealer network. The OEM's tell us that the cost of running a dealer network rises in proportion to the number of dealers NOT the volume of sales.

A 6,000 dealer network requires roughly twice as many (dealer related) staff members to service as compared to a 3,000 dealer network.

They also tell us that the capital requirement for stocking vehicles and parts inventory for a 6,000 dealer network is roughly double the capital requirement for stocking inventory for a 3,000 dealer network. In other words they need to build and circulate twice as many (unregistered) cars for sale. OEM's must pay for labor and OES's for components to build the finished product. One way or another this inventory requires capital to floor it. Very often funded directly or indirectly through OEM credit facilities. Unless the OEM's receive cash on delivery they need to use their own capital to fund network inventory. The interest that they may either pay or receive for capital is irrelevant for this discussion.

If the average dealer inventory were $5 Million then the capital requirement for stocking 6,000 dealers would be $30 Billion as opposed to a 3,000 dealer network which would be only $15 Billion.

The view of many dealers is that it does not cost the OEM's any more to retain a large dealer network. What do you think?

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Hey Brian,

I value your opinion more than most on many issues and the fact that you are observing the death of the free marketplace and our constitution from London has an ironic twist to it!

That said, rather than address the math of the situation as you requested - which is obviously flawed since dealers are self sufficient on many levels including marketing expenses, floor plan, tools and the day to day cost of running a sales/service facility under the strict guidelines of their respective O.E.M - I prefer adressing the true issue which is the decision by our administration through their Car Czar and related Marxist methods to dismiss the rule of law when they stole the auto dalerships that they arbitrarily decided to eliminate.

The free marketplace has a mechanism to reduce unecessary businesses which has been in place for a few hundred years serving as the differentiator between the United States and the various socialist, Communist, Facist and Marxist regimes and their restricted economies that we have been so succesfully competing with. The abuse of our established Federal Bankruptcy Court and Chapter 11 process by the administration was a blatant attempt to nationalize the auto industry following similarly subversive tactics to take over the banking and insurance industry with the health care and energy industries in their line of sight!

The administration's supposed desire to "protect their less tangible brand damage caused by under capitalized dealers" is overshadowed by the much more immediate and proven impact that closing auto dealerships in small communities will have on the reputation of the brand. Simply put, relationship based selling is alive and well in rural America and the insult of STEALING your neighbors business will have long lasting impact on decisions to buy American for many years to come! Of course the more universal issue of not having a local dealer for future sales and service is more tangible, however the net effect is the same.

In my considered opinion, Chrysler and Government Motors intentionally dismantled the american auto industry under the DICTATE of the administration to accelerate the destruction of capitalism , the free marketplace and the United States as we know it. Obama's stated decision to "REMAKE THE UNITED STATES" as he has repeatedly promised before and since his election is a distortion of the word "change" that was not understood by those who unwittingly voted for him under that platform. Unfortunately, as he has so often reminded us - there are consequences to an election so our only hope is to believe him this time and next time we need to vote for our constitution and the free marketplace with individual rights - like those of the impacted auto dealers - as our preferred way of life.

Simply put, the "intelligencia" and big government that Obama is positioning to take over our country and our lives has their own set of rules and math so the only way to answer your question is with a question;

Did you vote to replace our constitution and the rules of law with a Car Czar or would you prefer to have allowed the free marketplace to decide which dealers should close and how they should have been allowed to do it?
I too greatly respect the opinions and hard earned experiences expressed by Phil. However I simply cannot accept that the US auto industry has been run under a true free market model. Not since 1950 anyway.

US dealers wield infinitely more power than any other dealers on the planet. They do this through STATE FRANCHISE LAWS, which they bought with election donations.

If you think US dealers are hard done by read the Block Exemption rules for the EU. Almost all special exemptions will be gone forever by 2013. That could include the whole dealer franchise system, down the toilet. Now thats what I call a free market. I can't wait.

My issue isn't with the franchise system that may indeed have its own political roots and restrictions to free trade but rather with the fact that the rule of law and the fundamental principals of our constitution were thrown out along with the dealerships!

The need to reduce the number of dealerships for GM and Chrysler has been an issue for many years that has been blocked by State Laws that favor the car dealers who fund the political coffers of their local politicians. I do not challenge that truth, but the solution lies within the same laws that protected the dealerships that need to be changed through due process in accordance with the rules of law. That is the republic that I grew up in and that I wish to leave to my children.

In my considered opinion, throwing out the laws that were in place governing the situation and replacing them with the dictate of a Car Czar that simply shifted the favored party to the Unions that supported Obama's coffers in favor of the secured bond holders and auto dealers that had legitimate interests reflects a shift to a Marxist and even a Facist government that was not part of the change that many Americans voted for. I may be wrong - but I don't think so!!
Once again I must agree with Phil. About one thing anyway. The rule of law and due process. I don't like the way that dealers were terminated with under 30 days notice. I WOULD NOT HAVE DONE THAT.

However, state laws made it quite impossible to cull the networks any other way. The same state laws that were sponsored and instigated by dealers. Granted mostly long before many of todays dealers were born. 'But thats what happens when commerce is ruled by laws instead of freely negotiated contracts and free market forces.

The root of the current crisis with Detroit dealers stems from protectionist franchise laws. I think it is true to say that if it weren't for that then the OEM's would not have BK'd.

By the way; the opposite of a protectionist is not communist, it is free market. I am a staunch freemarketeer.
Thanks for the support Brian - I think? Your comment suggested that the system that allowed State Laws to create the "problem" that needed to be addressed to reduce the dealer count was principally at fault. Well, I suppose so but is that trully relevant to the dealers that were eliminated?

Many of the stolen dealerships were either passed down from prior generations or acquired with hard cash that relied on the laws that were in place at the time of their acquisition with the legitimate expectation that those same laws would protect their investment. The problem/solution that you suggest relies on the principal of "restitution" which frankly represents a portion of our adminitsrations justification for the "re-distribution of wealth" that initiated their illegal actions.

That same logic suggests that we should be paying our taxes to the indians and since there is no justification for the injustice that former laws and generations imposed on African Americans and the Japanese - for example - maybe we should sign the dealerships over to them instead of the Unions?

Simply put, the solution to a bad law is to change the law within the system that created it - not to steal it and give it to your friends!
Phil your comments are all perfectly valid, in the sense of moral justice, but domestic OEM's will argue that they have been trying to resize their dealer networks for decades.

At 16,000,000 vehicle sales p.a. the domestics were well over-dealered, compared to imports. At 10,000,000 they would have about twice as many dealers as they need, compared to imports.

Some dealers would argue that dealer numbers should be left to natural attrition. Well history shows that it doesn't work so well. All states are not the same of course but I think we should concede that it is very difficult for OEM's to terminate dealers. Many dealers have been making nothing out of new car sales for years. But they survive on service and used cars. They simply roll their new cars out the door at whatever they can get to meet targets. OEM's will argue that this hurts the market and hurts good dealers that do focus on new cars.

My solution would be a little different from the way it has been done so far. Providing I am not forced either through contract or law to finance or fund my dealers in any way I WOULD NOT TERMINATE ANY DEALERS. Instead I would turn the sales pressure all the way OFF. Yes I say "OFF". As long as dealers have enough cars for demo and enough to keep the brand intact I WOULD NOT SQUEEZE NON KEY DEALERS TO BUY INVENTORY. In my mind I would treat non key dealers as service dealers. If they need cars quick they might need to get them from bigger dealers. I would not go out of my way to service them.

My marketing model would by a "pull-model" rather than a "push-model". I would of course take inquiries or orders on the Internet, on behalf of my dealer network, and point buyers to any dealers with the inventory.

Why this strategy? 'Because if I take the pressure al the way off underperforming dealers then they might stop selling cars so cheap, just to meet targets, but I still retain the benefit of "service on every street corner" which certainly can't hurt me. It might be worth a shot.

PS: Of course that's my conventional solution. As you can guess my ultimate solution would be DYNAMIC PRICING. OEM to Dealers and Dealers to Consumers. The free market solution is always the best.


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