Did US wrongly close auto dealers?
A report from TARP regulators says yes, but Treasury says millions of manufacturing jobs were saved.
A report is out today from officials saying the government
hurt American workers by forcing the closure of GM and Chrysler auto dealerships as part of the automakers' 2009 bailouts.
"The fact that Treasury was acting in part as an investor in GM and Chrysler does not insulate Treasury from its responsibility to the broader economy," said the special inspector general for TARP funds -- a kind of watchdog for the bailouts.
But Treasury and the White House were quick to counter, pointing out that the loss of dealership jobs was offset by the fact that thousands if not millions of manufacturing jobs were saved. The move was likened to layoffs at a company that hurt the individual workers who are fired but preserved the jobs of many more who remained on the payroll.
So what’s the real impact on the auto industry? Was the government's move a necessary evil or was uncle Sam looking out for corporate interests instead of the average worker?
First off, neither Chrysler nor GM are publicly traded companies. While there is speculation of a General Motors IPO as early as August, there is no way to easily track the “value” of the companies over the past several months without stock pricing.
But a look at auto sales is as good a proxy as any, and these numbers tell an interesting story for the industry as a whole. Overall June sales were down compared to May numbers but up significantly over the previous year. Specifically, in June Chrysler saw a stunning +35% year-over-year increase though it lost around -12% compared with May. The story was the same for GM -- an +11% year-over-year increase, but a drop of -13% over the previous month.
This is logical. June 2009 was a relatively weak month for automakers, with GM headed into bankruptcy protection and the industry in the midst of its worst annual sales in 30 years. So it’s natural to see year-over-year strength. More telling is the month-to-month drop which was fairly steep – over -10% in sales for Toyota (TM), GM, Chrysler, Ford (F) and Nissan (NSANY). That drop shows that we’re certainly not out of the woods yet when it comes to auto sales.
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The upcoming second quarter earnings from automakers will also reflect this year-over-year strength but sideways movement in the shorter term. Toyota and Ford will report earnings on August 4 and July 23, respectively, and both are projected to post significant profits over a steep loss for Q2 in 2009. But both companies are also to expect to report smaller profits than in each of the last two quarters (that’s Q1 2010 and Q4 2009).
So in a nutshell, things are better for automakers but vehicle sales have not yet returned to pre-recession levels. More significantly, auto sales show no clear sign that they are permanently on the upswing. That means that in the short term, bailed out auto companies GM and Chrysler must stay lean and competitive just like Toyota, Ford and others.
With an outlook like that, it’s hard to argue that the government cut too much from the balance sheets of Chrysler and GM. If these automakers were seeing record sales that may be a legitimate argument -- but as with all corners of the economy, until we know for sure that the recovery has taken hold it seems wise to use a healthy dose of caution.
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It's worth noting that the TARP Czar was fair in saying the government was acting as an investor in GM and Chrysler when it made the dealership cuts. For better or worse, when these companies took the bailout from Uncle Sam, that is exactly what the government became. Unfortunately, accusing the government of acting like an investor doesn’t inherently prove malice.
Of course, whether or not the
government should ever be in that position to begin with is a separate (and
much more complicated) argument.
I don't know the financial terms that exist/existed between the auto makers (GM and Chrysler) and the auto dealers, though I do know there is some independence. (Dealers are not employees, per se, of the makers.) So to some extent at least the argument that cutting dealers is analogous to a company cutting its workers does not make sense. No more for instance than Budweiser (AMBEV) cutting the number of retailers that sells Bud Light. In general I would like, silly me, that an auto maker would want to have as many places as possible selling its product -- not less -- if it hoped to increase/maintain sales.
However the relationship is not that simple. There is some financial linkages between the dealers and the makers. The makers make loans to the dealer to carry the inventory and there is a cost associated with making those loans and carrying that paper.
In an economic downturn, manufacturers lay-off the workers, those that make the product. That makes a lot of sense. They should not want to reduce the number of salesmen that sell the product. That really seems backwards to me. Why reduce the number of places your product can be sold, when you are trying to increase sales?
I would have thought the simplest solution to reduce the financial load on the makers is to reduce/eliminate the subsidy to the dealers, but not the number of dealers. Especially those dealers that had the best sales numbers in an area with the best reputation. But that's exactly what they did. Auto czar criterion for closing dealers was the politics of the owner -- to whom did they contribute the most money to, Dems or Republicans. Seems Republican contributing dealers lost out overwhelmingly to Democrat contributing dealers, regardless of the health of the dealership and how well it sold cars.
The first Chrysler dealership on the list was one in FL that was a top seller and had a good rep in the neighborhood and good customer satisfaction scores. However the owner just "happened" to be a Republican Congressman.
Hmmm. Smells like cronyism to me. But I am just a statistician, what do I know.
The inspector general got it right. The administration can't spin their way out of this one.
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