Analyst says Auto Dealer Cuts Don’t Make Sense

Chairman of the Center for Automotive Research in Ann Arbor, Michigan, David Cole, was recently interviewed by the special inspector general’s office regarding the federal bailouts of Chrysler and GM.

Cole told the auditors that the recent dealer cuts are taking away from General Motors’ and Chrysler’s market share in the mid-size and small car markets. Terminating these dealerships, he feels, is eating away at the very heart of the companies’ strengths, which are the smaller markets rather than the bigger metropolitan areas.

Cole says, “These cuts didn’t make any sense to me. By pulling out, GM and Chrysler are giving a beachhead to Ford and some of the imports.” He also added that the cuts made in more metropolitan areas do make economic sense.

Cole is the son of former GM President Ed Cole, and said that he has a personal interest in the matter. He has no research experience with dealers, but has spoken to a number of them as well as GM executives. In a letter to the Obama administration’s auto task force this month, he reiterated his points and asked for a review of the dealer cutbacks.

The letter states, “The dealer is the face of the manufacturer to the average customer. I would suggest that the distribution network for these manufacturers be revisited by the automotive task force.”

Both automakers have said that the cuts were necessary to reduce costs and to bring the dealer network more in line with reduced market demand.

GM has made the deepest cuts since its Chapter 11 bankruptcy, planning to shut down 1,350 dealerships. Chrysler has shut down 789 as a part of its own bankruptcy restructuring. The dealerships terminated equal about one quarter of each company’s total dealer network.

GM decided to restore about 70 of its dealerships that were on the chopping block. With the reductions that remain, GM estimates a savings of about $2 billion when taking into account direct support and subsidies for the weaker dealers, and an additional $415 million savings in gross fixed costs.

Michael Robinson, GM general counsel for North American Operations, told congress in July, “These cost burdens are just not sustainable.”

Neil Barofsky is currently in charge of examining the dealer cuts made by GM and Chrysler. Barofsky’s staff has interviewed employees of the National Automobile Dealers Association and dealers with the Committee to Restore Dealer Staff working Rights, a group representing the rejected dealers in an attempt to resolve the many outstanding legal issues through negotiation and arbitration.

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