U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Congressional research reportJan 8, 2010
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U.S. Motor Vehicle Industry Restructuring
and Dealership Terminations
-name redactedSpecialist in Industrial Organization and Business
-name redactedSpecialist in Industrial Organization and Business
January 8, 2010
Congressional Research Service
7-....
www.crs.gov
R40712
CRS Report for Congress
Prepared for Members and Committees of Congress
U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Summary
As Chrysler and General Motors (GM) moved toward and into bankruptcy, they received
permission from the U.S. Bankruptcy Court to terminate about 2,000 contracts with auto dealers.
Many of the dealers want their contracts reinstated and have sought relief from Congress. This
report examines the changed economic landscape facing the auto sector, automaker arguments in
favor of dealer reductions, and dealer counterpoints. It also highlights recent legislation
introduced to address dealers’ concerns.
Chrysler and GM have emerged from bankruptcy as significantly smaller companies, reflecting
the end of a multiyear restructuring process for both companies. Chrysler is controlled by the
Italian carmaker, Fiat, while GM’s majority owner is the U.S. government. GM, which in 2008
operated 47 assembly, powertrain, and stamping facilities, will operate 34 plants by the end of
2010 and 33 by 2012. The number of hourly employees will have declined from 78,000 on
December 31, 2007, to 62,200 at end-2008, to an estimated 40,000 in 2010. By way of contrast,
GM had 304,000 hourly workers in 1991. GM also discontinued two brands (Pontiac and Saturn)
and is to sell Hummer and Saab. The new Chrysler reduced its number of production facilities
from 25 to 17 as part of its restructuring. The company employed 45,000 hourly U.S. employees
in January 2008 and 27,000 in February 2009. For the first time, GM and Chrysler are not owned
by private investors; rather, the UAW’s retiree health trust owns 17.5% of GM and nearly 68% of
Chrysler; the U.S. Treasury owns nearly 61% of GM and 10% of Chrysler and the Canadian and
Ontario governments own nearly 12% of GM and about 10% of Chrysler. In addition,
bondholders and creditors own 10% of GM. Fiat holds a 20% stake in Chrysler.
The auto dealership network, a critical intermediary between automakers and final consumers,
has not escaped this turmoil. Auto dealers are independent businesses with contracts with the
automakers. Most of the approximately 20,000 U.S. auto dealers are family-owned and have been
in business in their hometowns for decades. As with all stakeholders in GM and Chrysler, the
dealer owners are faced with stark choices as the automakers downsize and seek a more
competitive business model. As part of their restructuring, Chrysler cut 789 dealers immediately
and GM is to eliminate more than 1,300 when the dealer’s contracts expire in October 2010.
While dealer reductions of this magnitude would not have been possible in the normal course of
business, the bankruptcy court approved both the Chrysler and GM requests to terminate
dealerships as part of larger processes that have allowed a new GM and a new Chrysler to emerge
from bankruptcy with many fewer assets and liabilities. Of the roughly 2,000 affected dealers,
many oppose the changes and took their battle against GM and Chrysler to Congress.
Congressional hearings were held and a number of bills to restore the dealer terminations were
introduced, including H.R. 2743, H.R. 2750, H.R. 2751, H.R. 2793, and H.R. 2796. In July 2009,
the House passed the Financial Services and General Government Appropriations Act, 2010 (H.R.
3170), which included a committee-approved amendment that would require automobile
companies that receive federal funds and are partially owned by the federal government—that is,
GM and Chrysler—to reinstate agreements with franchise dealerships that had a valid dealer
agreement prior to Chapter 11 proceedings. This provision was modified significantly during a
conference with the Senate and ultimately included in the FY2010 Consolidated Appropriations
Act (P.L. 111-117). The new law provides a binding arbitration process for terminated GM and
Chrysler dealers who would like to be reconsidered and reinstated. Other legislation affecting
dealers includes H.R. 1606, H.R. 2224, H.R. 3088, S. 1253, S. 247, and S. 1135. This report will
be updated as necessary.
Congressional Research Service
U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Contents
Introduction ................................................................................................................................1
The Role of Auto Dealers in the Distribution of Motor Vehicles ..................................................2
Changing Profile: Domestic and Foreign Auto Dealership Strength, Size, and Economic
Impact......................................................................................................................................4
Auto Dealers as an Economic Force ......................................................................................5
Auto Dealerships and Related Employment...........................................................................7
Motor Vehicle Financing and State Franchise Laws Define Modern Dealerships........................ 12
Floorplan Financing ............................................................................................................ 12
Other Financial Steps to Aid Dealers ................................................................................... 14
State Franchise Laws........................................................................................................... 15
Evolution of the Automobile Franchise System ............................................................. 15
Automobile Franchising Laws at the National and State Level....................................... 16
The General Motors and Chrysler Bankruptcies: Impact on Dealers .......................................... 20
Detroit 3 in Crisis................................................................................................................ 20
Paths to Bankruptcy ............................................................................................................ 20
Terms of Restructuring Affects Dealer Networks ................................................................. 21
Congressional Hearings: Chrysler and General Motors Arguments for Terminating
Dealers ............................................................................................................................ 22
Dealer Counterpoints to the Automakers ............................................................................. 24
Legislation in the 111th Congress ............................................................................................... 26
Congressional Hearings Held .............................................................................................. 26
Legislative Activity............................................................................................................. 26
Figures
Figure 1. U.S. Retail Sales by Sector ...........................................................................................6
Figure 2. Trends in New-Car Dealership Population and Employment .........................................8
Figure 3. Dealer Geography ........................................................................................................9
Figure 4. Auto Dealer Consolidations and Growth of Larger Firms..............................................9
Figure 5. Comparative Auto Industry Employment .................................................................... 11
Figure 6. Long-Term Trend in Automotive Industry Employment .............................................. 11
Tables
Table 1. U.S. Sales of New Motor Vehicles .................................................................................5
Table 2. Auto Dealer and Retail Employment in Top 10 States................................................... 12
Table 3. Average 2008 Unit Sales Per Franchise for Major Automakers ..................................... 23
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Appendixes
Appendix A. New-car Dealerships by State ............................................................................... 30
Appendix B. Dealerships Announced for Closure by GM and Chrysler...................................... 31
Contacts
Author Contact Information ...................................................................................................... 32
Congressional Research Service
U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Introduction
Automobile manufacturers rely on an extensive network of approximately 20,000 independently
owned dealers for sales and service of their vehicles. Dealers provide the local connection
between manufacturers and car buyers, and the dealership system is one of several linchpins in
the complex web of relationships that make up the U.S. automobile industry. Automakers and
dealers alike agree on the importance of this relationship. At a June 2009 congressional hearing,
Fritz Henderson, then-President and CEO of General Motors Corporation (GM), said,
Simply put, a strong dealer body is vital to GM’s success. Indeed, for many customers, our
dealers are the “face of GM”—so this effort [dealer network restructuring] is critically
important to the successful reinvention of General Motors.1
At the same hearing, the chairman of the National Automobile Dealers Association (NADA)
quoted from a commissioned report which states,
… the automobile dealers support the manufacturers’ efforts by providing a vast distribution
channel that allows for efficient flow of the manufacturer’s product to the public at virtually
no cost to the manufacturer.2
While there is a consensus about the overall role and value of the dealer network, manufacturers
and dealers have demonstrated that there is a wide gulf between them on the appropriate size of
that network, the flexibility of the dealerships in running their business, and the GM and Chrysler
visions of how the dealer network should perform going forward. In June 2009, Chrysler
eliminated 789 dealers, 25% of its dealer network. GM has announced it will reduce its dealer
network from 6,000 to approximately 3,600, to take effect in October 2010 when its contracts
with dealers around the country are up for renewal. 3 According to the NADA, the GM and
Chrysler dealerships slated for elimination had more than 100,000 employees. 4
Dealers are not alone in facing a tough realignment. The highest level of new-vehicle sales this
decade, including domestically-produced and imported autos, was recorded in 2000, with new
vehicle sales of 17.3 million,5 while sales in 2009 were 10.4 million units.6 All parts of the auto
supply chain have had to make what are seen as wrenching changes. In addition to closing
multiple plants, cutting thousands of union and white-collar jobs, and curtailing many supplier
relationships, both Chrysler and GM made reducing and reshaping dealerships a key component
in their restructuring.
1
Testimony of Fritz Henderson before the House Committee on Energy and Commerce’s Subcommittee on Oversight
and Investigations, June 12, 2009. Mr. Henderson resigned from GM in December 2009.
2
Testimony of John McEleney, NADA chairman, before the House Committee on Energy and Commerce’s
Subcommittee on Oversight and Investigations, June 12, 2009, citing an NADA commissioned report, The Franchised
Automobile Dealer: The Automaker’s Lifeline, Casesa Shapiro Group, November 26, 2008.
3
GM News Release, “The New General Motors Company Launches Today,” July 10, 2009. GM is eliminating more
than 1,200 dealerships outright and expects another 1,200 to drop out by normal attrition.
4
Testimony of John McEleney, NADA chairman, before the House Committee on Energy and Commerce’s
Subcommittee on Oversight and Investigations, June 12, 2009.
5
AutoExec Magazine, “NADA Data,” May 2008, p. 51.
6
Automotive News, January 7, 2010.
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
At issue for Congress are the decisions made by the Bush and Obama Administrations in aiding
GM and Chrysler and the impact of their bankruptcies on dealers, retirees, bondholders, and other
stakeholders. This report examines the size and scope of the U.S. automobile dealer network, its
origins, and its economic contributions. It also examines the role of states in franchising, as well
as federal legislation and actions in the development of the present auto dealership business
model. It presents the arguments put forward by GM and Chrysler, on one hand, and dealers on
the other, regarding the large scale termination of dealers as part of these two manufacturers’
bankruptcy cases. The report concludes with a summary of recent Congressional interest and
actions with regard to the U.S. auto dealer network. CRS Report R40736, Mandating Dealership
Agreements for Automakers Receiving Federal Funds: Constitutional Analysis, by (name redacted),
(name redacted), and (name redacted), examines several of these legislative proposals.
The Role of Auto Dealers in the Distribution of
Motor Vehicles
In the early 1900s, automakers often sold their vehicles directly to consumers. However, that
system did not work well because the manufacturers were often far away from their ultimate
customers and they found the expense of setting up a nationwide network of company-owned
stores to be prohibitive. In their book on the auto supplier industry, Thomas Klier and James
Rubenstein describe Ford’s early experience with selling cars:
Ford did set up company-owned stores called branch houses during the first decade of the
twentieth century. Located in major cities, branch houses were staffed by Ford employees
who received a salary plus a bonus based on sales.
By the 1910s, though, Ford had abandoned direct selling. Ford could not open branch houses
fast enough to meet demand, nor could it find enough qualified people to staff the branches.
More crucially, Ford officials concluded that salaried employees were not sufficiently
motivated to sell cars. According to an industry analyst writing in the 1920s, “If a dealer has
a financial interest in his own company, he is found to be much more satisfactory than a
branch manager, who has practically no financial interest in the branch.”7
As discussed in more detail later in this report, the dealer franchise system emerged as a way for
the automakers to market, finance, and service motor vehicles. Dealers are independent
businesses that enter into contracts with the manufacturers to represent those manufacturers,
selling and servicing their cars locally. 8 Most of the investments and capital risk of providing
these services are borne by the dealer.
Over time, state legislatures in every state passed franchise laws to govern the relationship
between dealers and manufacturers. The goal of these laws, which are not uniform, is—in the
eyes of the dealers—to equalize the relationship between small businesses (i.e., the dealers) and
large companies (i.e., the manufacturers). According to James Surowiecki, the laws have had their
desired effect:
7
Thomas Klier and James Rubenstein, Who Really Made Your Car? Restructuring and Geographic Change in the Auto
Industry, W.E. Upjohn Institute for Employment Research, Kalamazoo, MI, 2008, p. 33.
8
LansingStateJournal.com, “Dispelling Dealership Myths,” June 22, 2009.
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
These laws do things like restrict G.M.’s freedom to open a new Cadillac dealership a few
miles away from an old one. More important, they also make it nearly impossible for an auto
manufacturer to simply shut down a dealership. If G.M. decided to get rid of Pontiac and
Buick, it couldn’t just go to those dealers and say, “Nice doing business with you.” It would
have to get them to agree to close up shop, which in practice would mean buying them out.
When, a few years ago, G.M. actually did eliminate one of its brands, Oldsmobile, it had to
shell out around a billion dollars to pay dealers off—and it still ended up defending itself in
court against myriad lawsuits. As a result, dropping a brand may very well cost more than it
saves, since it’s the dealers who end up with a hefty chunk of the intended savings.9
Under the franchise system, the manufacturers and dealers have found different ways to make
money. All dealers are not the same; some have one or more large stores selling one or more
brands in one or more metropolitan areas,10 while others operate smaller dealerships in towns or
rural areas. Some dealers focus more on selling new cars and others put more attention on service
and selling used cars.
… G.M. makes money (when it does) on new cars and on the financing of loans. Dealers, by
contrast, make most of their money on servicing old cars and selling used ones. So dealers
can thrive even when the automaker languishes. And at the state level they often have more
political influence than automakers do. In the late nineties, for instance, local dealers were
challenged by companies that wanted to sell cars over the Internet. In response, some states,
including Texas, actually passed laws making it illegal to have a business selling cars online
(unless you already owned a local dealership), and regulators told Internet companies to
cease and desist. When Ford itself started experimenting with online sales, dealers’ vigorous
objections (along with legal challenges) caused the manufacturers to quickly retreat.11
More than 57% of dealer sales stemmed from new vehicles, nearly 29% from used-car sales, and
more than 14% from service and parts sales in 2008. New-vehicle sales, however, are becoming
an increasingly less profitable segment of the dealer business. Dealer profits in new-car sales
have evaporated and, since 2005, dealers have generally not made a profit on their new-car
departments, “slipping below breakeven.”12 Used-car sales and service work result in greater
profits. According to the NADA, dealers make an average of more than $100,000 on used-car
sales and as much as $350,000 through their service and parts departments.13
9
James Surowiecki, “Dealer’s Choice,” The New Yorker, September 4, 2006.
The largest auto dealer network in the country is AutoNation Inc., based in Ft. Lauderdale, Florida. In 2007, it owned
232 dealerships, selling over 545,000 vehicles, and earning revenue of over $14 billion. At the other end of the dealer
spectrum are small dealers, who may sell a few dozen new cars in a year. Automotive News, “Top 125 Dealership
Groups,” March 23, 2009.
11
James Surowiecki, “Dealer’s Choice,” The New Yorker, September 4, 2006.
12
AutoExec Magazine, “NADA Data,” May 2008, p. 63.
13
2008 NADA data cited in Automotive News 2009 Market Data, North American Sales, June 29, 2009.
10
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Changing Profile: Domestic and Foreign Auto
Dealership Strength, Size, and Economic Impact
In 2007, U.S. new-car auto dealers sold more than $758 billion in motor vehicles,14 directly
employed over 1 million men and women, and supported an annual payroll of over $54 billion.15
New-car dealerships have a substantial presence in their communities, with an average of 54
employees, receiving wages of $48,339 a year per employee, for an average dealer payroll of $2.6
million. 16 There is a wide variance in dealer size and performance in different states. For example,
the average sales per new-car dealership range from $71 million in Arizona to less than $16
million in Vermont. California has nearly 1,500 new-car dealers, and Alaska has 35.17
Total U.S. auto industry sales have been on a downward trajectory for nearly a decade. As shown
in Table 1, in 2006 and 2007 there were over 16 million new cars and light trucks sold in the
United States, but only 13.2 million units were sold in 2008 and 10.4 million units in 2009,18 the
lowest annual sales since 10.35 million were sold in 1982, also a recession year. Although the
seasonally adjusted annual sales rate in the first six months of 2009 was only 9.5 million new
vehicles, the cash for clunkers program in July and August and a rise in sales in December helped
boost the annual sales of new vehicles for the full year.
According to some analysts, U.S. auto sales may not return to more than 12 million units per year
until 2012 or later.19 U.S. auto dealers, automotive manufacturers, suppliers, and workers have all
been directly affected by the national recession, credit crisis, and the deteriorating economic
situation in the United States. The result has been the worst consumer-spending slump since the
1940s20 and the worst market for automobile sales since 1982.
Donald Grimes, a University of Michigan economist notes that from 1970 to 2001, there were
0.76 vehicles sold per driver in the United States and that the figure has now dropped to 0.4
vehicles per driver—with little prospect for a rebound in coming years.21 The decline in auto sales
is attributable to a range of factors that affect the number and size of cars sold, including volatile
gasoline prices, tight credit markets for auto dealers and customers, declining consumer
confidence, concerns over personal discretionary spending, and high unemployment rates. The
finance arms of the manufacturers have faced higher than normal capital costs reflecting the
credit risk posed by the Detroit 3.
14
U.S. Census Bureau, Estimated Annual Sales of U.S. Retail and Food Services Firms by Kind of Business: 1992
Through 2007. The 2007 statistics are the most recent available data from the U.S. Census Bureau. They were released
on March 31, 2009.
15
AutoExec Magazine, “NADA Data,” May 2008, p. 56.
16
Ibid and Automobile, “Dealer Closings, The Numbers,” August 2009, p.14.
17
NADA Industry Analysis Division. See Appendix A of this report.
18
Automotive News, January 7, 2010; Wall Street Journal, “Car-Sales Rebound Seen for June,” June 30, 2009.
19
TheDetroitBureau.com, “Global Auto Sales Will Continue Decline in 2009,” May 14, 2009, citing an R.L. Polk and
Company projection.
20
StreetInsider.com, “Goldman Sachs Slashes Forecast For Auto Sales, Cuts Price Targets In Auto Group,” November
26, 2008.
21
Maynard, Micheline, “Industry Fears Americans May Quit New Car Habit,” New York Times, May 30, 2009.
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Table 1. U.S. Sales of New Motor Vehicles
(in thousands of vehicles)
Manufacturer
2006
2007
2008
2009
BMW
314
336
304
242
Chrysler
2,143
2,077
1,453
931
Daimler
248
253
250
205
Ford
2,903
2,559
2,002
1,677
General Motors
4,065
3,823
2,955
2,072
Honda
1,509
1,552
1,429
1,151
Hyundai-Kia
750
773
675
735
Mazda
269
296
264
208
Nissan
1,019
1,068
951
770
Subaru
201
187
188
217
Toyota
2,543
2,621
2,218
1,770
VW
329
328
314
298
Other
269
282
243
156
Total
16,562
16,155
13,246
10,432
Source: Automotive News.
Notes: Includes cars and light trucks produced in the United States and imported.
As a result of these factors, the average dealership profile indicates total sales of over $33 million
in 2004 dropped to just under $29 million in 2008. In the same years, the net profit before taxes
for the average dealer was $559,000 and $280,000, respectively.22 Auto dealer industry analysts
predict that if prevailing unfavorable economic conditions continue, and, in particular, if the
availability of automotive loans remains limited to those customers with higher credit ratings, this
could affect the ability of some consumers to purchase cars. Thus, vehicle sales and margins of
the auto dealers could continue to be adversely affected.23 The recession has resulted in reduced
sales and profits for all auto dealers and accelerating consolidations. Market share has also shifted
away from GM and Chrysler to foreign-owned automakers as concerns about their bankruptcies
cut into their sales.
Auto Dealers as an Economic Force
The nation’s auto dealers are a significant economic force in the U.S. economy. Their $758 billion
in revenue in 2007 makes the auto dealer retail industry one of the largest retail sectors in the
United States, comprising 19% of the $4 trillion in retail sales that year.24 Retail sales by the
nation’s auto dealer industry exceeded the retail sales of other large retail industry sectors,
22
23
Automotive News, “2009 Market Data: Dealer Data,” May 25, 2009, based on NADA data.
AutoNation, 10K Filing of February 17, 2009 for December 31, 2008, p. 11-12.
24
U.S. Census Bureau, Estimated Annual Sales of U.S. Retail and Food Services Firms by Kind of Business: 1992
Through 2007. The 2007 statistics are the most recent available data from the U.S. Census Bureau. They were released
on March 31, 2009.
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
including general merchandise stores, food and beverage stores, and gasoline stations (see Figure
1). Combined U.S. auto dealers (new- and used-car dealerships) accounted for 7.9% of total retail
employment, directly providing jobs for an estimated 1.2 million American workers in 2008,
based on preliminary employment statistics from the U.S. Department of Labor.25
Figure 1. U.S. Retail Sales by Sector
2007
(in billions of dollars)
$900
$759
$577
$600
$560
$438
$437
Food Services
and Drinking
Places
Gasoline
Stations
$300
$0
Automobile
Dealers
General
Merchandise
Stores
Food and
Beverage Stores
Source: U.S. Census Bureau, Annual Retail Trade Survey, March 31, 2009. http://www.census.gov/retail/.
Notes: 2007 statistics are the most recently available data from the U.S. Census Bureau.
The auto dealer industry consists of two segments, new and used vehicles, with some overlap.
New-car dealers, with revenues of $677.2 billion in 2007,26 are the larger segment, often called
franchise dealers, who primarily sell new cars, sport utility vehicles (SUVs), pickup trucks, and
passenger and cargo vans. They retail these new vehicles in combination with other activities,
including warranty and non-warranty repair services, and selling used cars, replacement parts,
and accessories. Virtually all new automobiles, light trucks, and vans bought in the United States
are sold through franchise dealers. They sell and lease vehicles manufactured by one or more auto
companies (e.g., Ford, Chrysler, GM, Toyota, Honda).27 New-car dealers also sell additional
automobile-related services to potential buyers, including extended warranties, insurance, and
financing. New-car dealers are selling proportionally more used cars than ever before. According
to an estimate by the NADA, employment of salespersons alone apportioned to used cars at new25
The employment statistics are based on preliminary annual data for 2008 reported by the U.S. Department of Labor,
Bureau of Labor Statistics, Quarterly Census of Employment and Wages (QCEW) program. They include all
employees who work at automobile dealer establishments included in North American Industry Classification System
(NAICS) category 4411 (this category covers new- and used-car dealers). Unless otherwise noted, this categorization is
the basis for statements in this report regarding auto dealer employment.
26
U.S. Census Bureau, Estimated Annual Sales of U.S. Retail and Food Services Firms by Kind of Business: 1992
Through 2007. The 2007 statistics are the most recent available data from the U.S. Census Bureau. They were released
on March 31, 2009.
27
A trend among larger, urban dealerships in recent years has been to have dual franchises, representing more than one
manufacturer. It is not uncommon to find dealers selling Chevy and Honda or Jeep and Nissan.
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
car dealerships is over 70,000 employees, with new-car dealers selling about 12 million used cars
to retail customers in a strong year and 10.5 million in a slower one. 28
The other segment of the industry comprises car dealers who sell only used cars and trucks. With
sales of $82 billion in 2007,29 they are often referred to as independent dealers because they do
not have a franchise agreement with a manufacturer. Independent dealers sell a variety of vehicles
that have been previously owned or formerly rented and leased. Used-car dealerships are a viable
business today due to improvements in technology which have increased the durability and
longevity of new cars and have raised the number of high-quality used cars that are available for
sale.
Auto Dealerships and Related Employment
There was steady growth in employment among dealerships for over a decade. However,
employment began to drop in 2005, caused in part by dealership consolidation.30 As shown in
Figure 2, there were 24,825 new-car dealers in 1990, dropping to just over 20,000 in early 2009.
NADA estimated that by the end of 2009, the number of dealers would fall below 17,000.31
The number of dealerships tends to fall during recessions, much like employment in the rest of
the auto industry, and tracks national employment trends. (For a table showing the number of
new-car dealerships by state, see Appendix A.)
U.S. government statistics indicate that new-car dealers employed more than 1 million workers in
2008, accounting for 89% of total auto dealer employment. Used-car dealers employed 126,300
workers, comprising the remaining 11%. Together, new- and used-car dealers employed nearly
1.2 million workers in 2008. Employment levels at the nation’s dealerships dropped by 5%
between 2007 and 2008, based on 2008 statistics from the Bureau of Labor Statistics. This was
the biggest decline recorded since 1991, when auto dealership employment contracted more than
5% over the previous year.32
28
NADA chief economist Paul Taylor provided this information to CRS by e-mail on June 30, 2009.
Ibid.
30
According NADA chief economist Paul Taylor, dealer consolidations may lead to more employment among the
remaining dealerships, for several reasons. Many dealers who are closing are in rural areas and sell only one vehicle
brand. Remaining dealers are in more urban areas with growing populations; many of them sell two brands. In these
markets, dealers often add new services such as valet parking and other new services, which may add employment.
31
Testimony of John McEleney, chairman of the National Automobile Dealers Association, before the House
Committee on Energy and Commerce’s Subcommittee on Oversight and Investigations, June 12, 2009. Mr. McEleney
also pointed out that there were 50,000 dealerships in 1950.
32
Employment data are from the U.S. Department of Labor’s Quarterly Census of Employment and Wages (QCES)
and are derived from NAICS 4411 (includes new- and used-car dealers); 2008 statistics are the most recently available
statistics.
29
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Figure 2.Trends in New-Car Dealership Population and Employment
26
1,200
25
1,000
24
23
800
22
600
21
Employment
2007
2008 (p)
2006
2004
2005
2003
2002
2000
2001
1999
1998
1997
18
1995
1996
0
1993
1994
19
1992
20
200
1991
400
Dealerships in
Thousands
1,400
1990
Employment in
Thousands
1990-2008 (p)
New Car Dealerships
Source: Employment data are from the U.S. Department of Labor’s Quarterly Census of Employment and
Wages (QCES) and are derived from NAICS 44111 (new-car dealers) and the dealership statistics are from the
National Automobile Dealers Association.
The consolidation of dealerships parallels two other trends in the industry. First, the recession and
the elimination of a large number of GM and Chrysler dealers are changing the balance of
dealerships. In January 2008, the Detroit 3’s U.S. dealerships totaled 14,199, but by January 2009
(even before the elimination of the Chrysler dealerships and the 2010 closing of GM dealerships),
they had shrunk to 13,220. In contrast during the same time period, import-badged dealerships
selling just one import brand (e.g., just Toyota or Honda, but not two or more brands) grew from
6,463 to 6,544 dealerships.33 This trend accelerated in 2009 and into 2010 with the closure of over
2,000 GM and Chrysler dealerships and the sale of GM’s Hummer and Saab34 divisions and their
corresponding dealerships. Hummer and Saab dealerships will now sell vehicles produced by
their new owners. Saturn dealers will close, sell used cars only, or contract with another
automaker to sell its vehicles. GM’s Pontiac brand is also being terminated, but there was no
effort to sell it to a third party.
The make up of the foreign-badged dealerships differs significantly from the Detroit 3’s dealer
networks. As shown in Figure 3, nearly half of Honda’s dealers are in metro areas, whereas a
quarter of Chevrolet dealers are in those markets (in part reflecting the Detroit 3’s strong position
in light trucks). While GM, Ford, and Chrysler have far better representation in rural areas than
the Asian automakers, urban areas are where population and incomes are generally growing
faster.
33
U.S.-badged automobiles are cars and light trucks produced by the Detroit 3, regardless of whether they were
produced in the United States or abroad. Similarly, import-badged automobiles may have been produced abroad or at
the U.S. facilities of foreign manufacturers such as Toyota and BMW. Source: Automotive News, “Market Data/Dealer
Data, 2009,” May 25, 2009, p. 2.
34
In early January 2010, negotiations for the sale of Saab were under way with no final agreement completed.
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Figure 3. Dealer Geography
U.S. auto dealers
Chevrolet’s Dealerships
Honda’s Dealerships
Honda's 1,032 Dealers
Chevrolet's 3,717 Dealers
Se condary
597
16%
Secondary
316
31%
Me tro
901
24%
Rural
209
20%
Rural
2,219
60%
Metro
507
49%
Source: Chrysler, “U.S. Dealer Network Review,” May 21, 2009.
Notes: The Detroit 3 has a larger footprint in rural areas compared to the more recent dealerships that market
foreign-badged vehicles. The example above is illustrative of these differences.
Figure 4. Auto Dealer Consolidations and Growth of Larger Firms
1988, 1998, and 2008
Annual New-Unit Sales
10,000
7,883
8,000
7,007
6,328
6,000
5,989 6,065
5,227
5,763 6,142
4,630
4,520
4,000
5,506
3,336
2,000
0-149
150-399
400-749
750+
Number of Dealers
1988
1998
2008
Source: AutoExec Magazine, “NADA Data,” May 2008, p. 47.
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Second, as the auto industry has matured, the nature of dealerships has also changed.
Consolidations are creating larger dealerships as size and financial capabilities, especially in
urban areas, become increasingly more important factors in the ability to compete successfully.
As shown in Figure 4, the loss of dealerships is concentrated in the smaller-volume categories. In
2008, more dealers sold at least 750 cars a year (6,142 dealerships) than those selling fewer than
150 cars a year (3,336 dealerships).
Some dealers see the advantage of the consolidation, which they maintain will enhance the
competitiveness of the remaining dealers. Mike Jackson, CEO of AutoNation, the largest U.S.
dealer group, which had seven of its Chrysler dealerships terminated, said recently, “dealer
consolidation is a necessary measure in today’s automotive industry, and will strengthen
America’s dealer network and improve dealer profitability over the long term.”35
The recession and the GM and Chrysler reductions in their dealership networks have also
accelerated this trend. In June 2009, NADA estimated that the recession would have prompted the
loss of about 1,200 dealers and that the GM and Chrysler reductions will double or triple the
number of dealers who will have changed hands or gone out of business.
Auto dealer employment at nearly 1.2 million36 is larger than the number of workers employed in
the entire automotive manufacturing industry, which employed 880,000 people last year.37 Within
the auto assembly sector,38 GM, Toyota, BMW, Ford, and other assemblers employed an
estimated workforce of 166,000 workers in 2008 (see Figure 5). The largest sector in automotive
manufacturing is the motor vehicle parts manufacturing industry, with employment totaling an
estimated 541,100 workers, according to U.S. government data.
That there are so many more workers in auto parts manufacturing is a result of extensive
outsourcing by automakers over the past 20 years. At one time, the Detroit 3 made most parts
themselves. This changed over time so that a majority of the 15,000 or so parts in a car or truck
are today purchased from other companies (such as Dana, Delphi, American Axle, and Lear) and
assembled into a finished car or truck by the automakers. Outsourcing of parts; the application of
new technologies, such as robotics and computers; and the resulting rising productivity have
greatly diminished the amount of labor needed to produce an automobile.39
35
36
AutoNation press release, May 14, 2009.
U.S. Department of Labor’s Quarterly Census of Employment and Wages (QCEW).
37
This industry is comprised of NAICS 3361 (motor vehicle manufacturing), 3362 (motor vehicle body and trailer
manufacturing), and 3363 (motor vehicle parts manufacturing). For a complete description of the NAICS system see
http://www.census.gov/eos/www/naics/.
38
NAICS 33611 covers automobile and light truck manufacturing and includes are such vehicles manufactured in the
United States, including those made here by foreign-owned companies such as Honda and BMW.
39
A look at GM’s production and employment numbers show the dramatic change in auto making from outsourcing
and technology applications. In 1988, GM employed 634,000 worldwide to produce 7.7 million vehicles. By 2008, GM
was producing 8.3 million vehicles, but employed 243,000 people. That is a nearly 8% rise in vehicle production, but a
60% drop in the workforce over 20 years.
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Figure 5. Comparative Auto Industry Employment
2008 (in thousands)
30
143
1,500
143
1,000
166
1,175
500
541
0
Autom obile Dealers
Autom otive Manufacturing
Automobile Dealers
Motor Vehicle Parts Manuf acturing
Automobile and Light Truck Manufacturing
Motor Vehicle Body and Trailer Manufacturing
Heavy Duty Truck Manuf acturing
Source: Employment data are from the U.S. Department of Labor’s Quarterly Census of Employment and
Wages (QCEW) and represent NAICS 4411 (Auto Dealers), the summation of NAICS 33611, 3362, and
3363 to represent automotive manufacturing.
Within the auto supply chain, auto dealer employment has increased since 1990, rising from
989,000 to 1.2 million, posting an increase in employment of 19% by 2008 (see Figure 6) and in
line with the general economy. By comparison, the overall increase in private sector employment
between 1990 and 2008 was 25%, while retail trade employment grew by 14% during the same
time period. These statistics are in sharp contrast to auto and auto parts manufacturing
employment, which dropped by 21% between 1990 and 2008, declining from 1.1 million to an
estimated 880,000. Within this category, employment at just the auto assemblers, such as GM and
Ford, posted an even greater drop of 27% during the same time period, falling from 228,800
workers to 166,000.
Figure 6. Long-Term Trend in Automotive Industry Employment
1,600,000
1,200,000
800,000
400,000
Automobile Dealers
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
Number of U.S. Employees
1990-2008
Auto Manuf acturing
Source: Employment data are from the U.S. Department of Labor’s Quarterly Census of Employment and
Wages (QCEW) and represent NAICS 4411 (Auto Dealers), the summation of NAICS 3361, 3362, and 3363 for
Automotive Manufacturing.
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Franchise dealers are significant contributors to the economic health of local and state economies.
Bureau of Labor Statistics data shown in Table 2 below highlights five states—California, Texas,
Florida, Pennsylvania, and New York—where the auto dealer industry in each state employed
more than 50,000 workers in 2008; it exceeded 100,000 in California and Texas. In many states,
dealer employment comprises a sizable share of total retail employment. For example, in Georgia,
the 37,000 auto dealer employees account for 7.9% of all retail employment. Other states where
auto dealers comprise a significant share of total retail trade jobs are Delaware (8.9%), Maryland
(8.8%), Oklahoma (8.6%), and Virginia (8.6%).
Table 2. Auto Dealer and Retail Employment in Top 10 States
2008
(employment numbers in thousands)
Rank
Dealer Employment %
of Total Retail
Employment
State
Auto Dealer
Employment
Retail
Employment
U.S.
1,175
15,307
7.7%
1
California
125
1,636
7.6%
2
Texas
100
1,176
8.5%
3
Florida
81
988
8.2%
4
Pennsylvania
53
649
8.2%
5
New York
52
895
5.8%
6
Illinois
48
628
7.6%
7
Ohio
45
590
7.6%
8
Georgia
37
465
8.0%
9
North Carolina
37
463
8.0%
10
Michigan
37
475
7.8%
Source: Employment data for 2008. Data are from the U.S. Department of Labor’s Quarterly Census of
Employment and Wages (QCEW) and represent NAICS 4411 (Auto Dealers) and NAICS 44 (Retail Trade).
Motor Vehicle Financing and State Franchise Laws
Define Modern Dealerships
Floorplan Financing
Without financing, virtually no automobiles would be sold in the United States, either to dealers
or to consumers. It is a vital component of the manufacturer-dealer-consumer value chain.
Dealers buy cars from the automakers using financing, and 90% of consumers take out a loan to
buy their car.40 With the credit crisis of fall 2008, this system broke down.
40
Testimony of John McEleney, NADA chairman, before the House Committee on Energy and Commerce’s
Subcommittee on Oversight and Investigations, June 12, 2009.
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An integral part of the franchise system is floorplan financing. When automakers sell cars, the
dealers serve as the intermediary between the manufacturer and customer. Dealers have
traditionally used the manufacturers’ finance arms (e.g., GMAC, Chrysler Financial, Toyota
Motor Credit) to purchase the automobile inventory from the manufacturers. These loans are
called floorplan financing. 41
When customers purchase cars or trucks from dealers, auto company financing also plays an
important role. Through the finance arm of the manufacturers, auto dealers also provide their
customers with retail financing from companies like Ford Motor Credit or GMAC. Those
customers who do not want to purchase a vehicle with cash or do not use a credit union or an
alternative source of credit frequently use auto dealer arranged financing. Much of the floorplan
and retail financing for GM and Chrysler vehicles is provided by GMAC, which absorbed
Chrysler Financial when Chrysler went into bankruptcy. Prior to that bankruptcy, Cerberus
Capital owned 80% of Chrysler LLC, including its finance arm, Chrysler Financial. Both GMAC
and Chrysler Financial were formerly captive companies, wholly owned by the automakers.
Cerberus paid $14 billion to GM for a 51% stake in GMAC in November 2006.42 As described
below, the majority share of GMAC is now owned by the federal government. Other auto
financing companies, such as Ford Motor Credit Company and Toyota Financial Services, are still
wholly owned by the automakers.43
As the 2008 banking crisis intensified, floorplan and retail financing were seriously affected
because the financing companies were unable to raise the capital to fund the manufacturer-dealerconsumer pipeline. A key component of the federal government’s auto support program has been
a recapitalization of GMAC and Chrysler Financial, the two financing companies. As part of this
restructuring, GMAC entered into an agreement with Chrysler LLC in April 2009, to provide
floorplan and customer financing for Chrysler dealers and customers. 44 Over $16 billion in
federal assistance has been provided to GMAC since December 2008, in an effort to jumpstart the
flow of financing to dealers, including $3.8 billion provided in January 2010.45 In return for the
U.S. Government recapitalizing GMAC, the U.S. Treasury now owns approximately 56% of the
company, while Cerberus owns 15%, third party investors own 12%, General Motors owns just
under 7%, and a blind trust owns nearly an additional 7% of GMAC. GM must sell its ownership
of the trust by the end of 2011 in return for the GMAC bank holding company license it received
in 2008.
41
According to the Comptroller of the Currency, “Floor plan, or wholesale, lending is a form of retail goods inventory
financing in which each loan advance is made against a specific piece of collateral. As each piece of collateral is sold
by the dealer, the loan advance against that piece of collateral is repaid. Items commonly subject to floor plan debt are
automobiles, large home appliances, furniture, television and stereo equipment, boats, mobile homes, and other types of
merchandise usually sold under a sales finance contract.” Comptroller of the Currency, Administrator of National
Banks, Comptroller’s Handbook, “Floor Plan Loans (Section 210),” March 1990, p. 1.
42
GMAC Financial Services, GM press release, “GM Closes GMAC Sale,” November 30, 2006; DBRS, “GMAC
LLC’s Ratings Unchanged After GM Bankruptcy, Senior at CCC,” June 1, 2009.
43
GMAC Investor Relations Website, http://www.gmacfs.com/us/en/about/investor/faqs.html, visited July 1, 2009.
44
As part of the Chrysler restructuring, it was agreed that the assets of Chrysler Financial would be transferred to
GMAC, which would in turn become the financing arm for both GM and Chrysler vehicles. GMAC Financial Services,
“GMAC Financial Services Enters Agreement to Provide Financing for Chrysler Dealers and Customers,” April 30,
2009.
45
At the time GMAC was provided its initial federal assistance of $5 billion in December 2008, GM was also given a
$1 billion loan to facilitate GMAC’s reorganization. Subsequently GM used nearly $900 million of that loan for that
purpose. In a further effort to boost automobile financing, Chrysler Financial was given $1.5 billion in January 2009 by
the Bush Administration.
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Private sector and government efforts to revive floorplan and retail financing met with limited
success in 2009, and dealers have been constrained by the amount of funding available to them
and their customers. Many banks have exited the auto financing market, further tightening credit
availability. While zero percent retail financing has been widely advertised, it has been available
mainly for those customers with excellent credit. 46
Other Financial Steps to Aid Dealers
In addition to support for the financing companies, the federal government has taken other steps
that have provided help for dealers and dealer financing—although not always as successful as
envisioned—including:
•
Warranty commitment. In March 2009, the Obama Administration announced a
new “warrantee commitment program” to assure potential vehicle purchasers that
new-car warranties would be backed by the federal government during the period
in which GM and Chrysler were being restructured. Whatever the status of the
companies, even in bankruptcy, any vehicle warranty offered by the companies
would be “back-stopped” with federal support.47 Treasury ended this program
after the new GM and new Chrysler were formed. 48
•
Small Business Administration (SBA). Through the SBA’s 7(a) loan program,49
the Dealer Floorplan Financing (DFP) pilot program permits governmentguaranteed loans to be issued to finance dealer inventories for autos (as well as
recreational vehicles, boats, manufactured homes and other dealerships). Starting
July 1, 2009, this new program has allowed dealers to borrow from banks against
retail inventory and “acts as a revolving line of credit for a dealer to obtain
financing for retail goods. The dealer repays the debt as its inventory is sold and
can borrow against the line of credit to add new inventory.”50 The DFP makes
individual loans of up to $2 million available. Many dealers believe the cap
undercuts the usefulness of the program, and President Obama has asked
Congress to raise it to $5 million.
•
Term Asset-Backed Securities Loan Facility (TALF). The Federal Reserve
announced in December 2008 that auto dealers could participate in a new $200
billion loan facility to finance inventory purchases. TALF is not a source to
which dealers can apply to obtain floorplan loans directly, but it helps by
reopening the floorplan securitization market and in turn providing capital to
banks and other floorplan lenders so they can extend better credit to auto dealers.
This facility has had limited success. According to NADA, “Unfortunately,
because the funding is limited to AAA-rated securitizations and many dealer
46
Automotive News, “GM Offering 0% Financing in Brief July Sale,” June 30, 2009.
47
See discussion of federal government steps to aid the dealer network in CRS Report R40003, U.S. Motor Vehicle
Industry: Federal Financial Assistance and Restructuring, coordinated by (name redacted).
48
Automotive News, “Government Ends Warranty Program for GM, Chrysler,” July 21, 2009.
49
7(a) loans are the most basic and most frequently used loans provided by the SBA to small businesses in the United
States. http://www.sba.gov/services/financialassistance/sbaloantopics/7a/index.html.
50
U.S. Small Business Administration, “Dealer Floor Plan Financing Program,” http://www.sba.gov/floorplanfinancing/
, referenced on July 1, 2009.
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floorplan securitizations were recently downgraded below AAA, the initial
funding of the TALF is not expected to significantly enhance the availability of
credit for floorplan loans. Nevertheless, the initial funding is assisting in the
availability of retail auto credit.”51
•
Consumer Assistance to Recycle and Save Act of 2009 (CARS Act; P.L. 111-32).
In June 2009, Congress passed a $1 billion “cash for clunkers” bill to stimulate
the purchase of new cars for the period July 1 to November 1, 2009. Unlike some
other initiatives, this program exceeded expectations and the program reached its
maximum support level within a week of regulations being issued, prompting
Congress to pass an additional $2 billion appropriation that carried CARS
through until the end of August. Nearly 700,000 vehicles were sold during the
summer, and it is estimated that most of them would not have been sold without
the federal rebate.52 A website—http://www.cars.gov/—was established by the
National Highway Traffic Safety Administration (NHTSA) to explain the cash
for clunkers program to the public.
State Franchise Laws
Over the years, all 50 states and the District of Columbia have adopted franchise laws governing
contracts between independent auto dealers and the manufacturers they represent. Initially these
laws were passed to level the playing field between auto manufacturers and dealers. However,
auto manufacturers and dealers often do not see eye to eye on the reach of these statutes. Dealers
say they need protection from termination without cause, while auto manufactures claim they
need more flexibility to improve the distribution of their automobiles and their ability to react to
changing market conditions.
Evolution of the Automobile Franchise System
As the motor vehicle industry developed, automotive manufacturers quickly realized that a
distribution system was needed to outsource the costs associated with vehicle retailing and
maintenance. The early automakers viewed dealers as a source of cash and sales experience, and
as a way to increase their businesses with minimal expenses. Thus, the automobile manufacturers
moved to set up franchise arrangements to sell their products. This gradually evolved into the
franchise dealer system.
Franchise agreements cut the cost of the middleman and gave manufacturers greater control over
how their cars were sold. The first franchise agreements were vague with many of these
agreements benefitting the automotive manufacturers at the expense of the dealers. Generally, the
auto manufacturers had the superior bargaining position and were able to gain control over much
of the dealer’s operations. Auto dealers were exclusive agents of automakers. In exchange,
according to auto industry economist Lawrence Seltzer, the car manufacturers imposed tough
conditions on dealers, including requirements such as payment of huge cash deposits when
51
NADA, “Understanding the TALF,” March 30, 2009.
For a full description of the cash for clunkers voucher system and how similar systems have evolved abroad, see
CRS Report R40654, Accelerated Vehicle Retirement for Fuel Economy: “Cash for Clunkers,” by (name redacted)
and (name redacted). Source of the estimate of cars sold under “cash for clunkers” is the National Automobile Dealers
Association press release, November 3, 2009.
52
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dealers ordered vehicles, payment upon delivery of the automobiles by the dealers, and
acceptance of cars regardless of market conditions.53
Prior to 1940, automobile dealer agreements typically were on a year-to-year basis and were also
subject to unconditional cancellation by the manufacturer. In return, the dealers agreed to provide
suitable facilities and their best energies to sell the cars.54 Dealers could carry as many brands as
they wanted, but they were restricted to an assigned selling territory and had to sell the cars at the
price specified by the manufacturer. Responding to pressure from NADA to investigate the auto
industry, the Federal Trade Commission (FTC) conducted a study in the late 1930s that criticized
the power that manufacturers could exert over dealers.55 A 1939 FTC report concluded that the
automobile franchise agreements were unfair and noted that the franchise agreements were
“between parties of very unequal economic bargaining power. The terms of the agreements were
set by the manufacturer.”56 In the same report, the FTC criticized dealer practices that were not in
the interests of consumers, pointing to practices such as price fixing, padding new-car prices, and
packing finance charges.57
Automobile Franchising Laws at the National and State Level
Because of the perceived inequality in the relationship between the auto manufacturer and auto
dealer, states began to enact statutes pertaining to the regulation of automobile distribution, with
Wisconsin being the first in 1937. Almost 20 states had dealer franchise laws in place regulating
some aspect of the auto manufacturer and auto dealer relationship before a federal measure was
enacted on auto franchising. 58 Despite these state laws, there were continued concerns about the
business issues arising from the inequality of power between the manufacturers and dealers.
U.S. Automobile Dealer’s Day in Court Act
In 1956, after nearly two decades of demands for federal automobile dealer legislation by NADA,
national legislation was passed by Congress. The Automobile Dealer’s Day in Court Act (the
Dealer’s Act)59 provides for legal remedies for dealers harmed by the actions of manufacturers
that are not in good faith, the so-called good faith law, in complying with or performing the terms
of the franchise agreement, or in terminating, canceling, or not renewing the franchise agreement.
Auto dealers contend that the 1956 federal law has not been effective in protecting them.
According to a study of the Dealer’s Act by NADA, dealers attained relief in about 20 of 115
53
Seltzer, Lawrence H., “A Financial History of the American Automobile Industry,” Boston: Houghton Mifflin, 1928;
Allen, Leslie, “The First Dealers: From Humiliation to Retail Success,” Automotive News, September 25, 2006.
54
Garner, Michael, “Franchise and Distribution Law and Practice,” September 2008, Volume 2, Thomson-West,
Chapter 14, p. 4.
55
Federal Trade Commission, Report on the Motor Vehicle Industry, Government Printing Office, Washington, DC,
1939.
56
Smith, Richard, Franchise Regulation: An Economic Analysis of State Restrictions on Automobile Distribution,
Journal of Law and Economics, p. 131, The University of Chicago, April 1982.
57
Higashiyama, Jessica, State Automobile Dealer Franchise Laws: Have They Become the Proverbial Snake in the
Grass, University of California, Hastings College of Law, April 2009, p. 7.
58
Garner, Michael, “Franchise and Distribution Law and Practice,” September 2008, Volume 2, Thomson-West,
Chapter 14, p. 7.
59
15 U.S.C. §§ 1221-1225.
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cases they filed in the law’s first 30 years.60 Since the passage of the Dealer’s Act, which the
dealers maintain did not give them protection from the abusive and coercive practices of the auto
manufacturers, all the remaining states and the District of Columbia have enacted automobile
dealer legislation. In 2002, Alaska was the last state to pass legislation on dealer franchises. 61 The
state-level auto franchise laws have been scrutinized by the courts and the statutes have been
upheld by them. 62
State Automobile Franchise Laws
The main instrument at the state level for regulating auto dealers’ operations is each state’s motor
vehicle franchise law, which often goes into considerable detail about the relationship between
auto manufacturers and dealers. The dealerships are seen as a heavily regulated sector,
particularly when compared to franchisees in other industries. The business relationship between
auto dealers and manufacturers has been subject to a level of regulatory scrutiny not found in
many other industries. For instance, states such as Texas and North Carolina have asserted that
the smooth operation of the retail auto industry has such broad economic implications that it is a
matter of public interest, and thus requires a unique set of laws.63
Auto dealer franchise laws vary from state to state, and states regularly amend them. Generally
speaking, state laws typically cover a much broader range of conduct than the Dealer’s Act and
provide for certain obligations on how car manufacturers must interact with their dealers. They
typically address a range of issues in the franchise relationship, including:
•
relevant marketing area (RMA) laws which define the geographic area within
which a new-car dealer is presumed to be directly competing with existing
dealers;
•
the administration of warranty claims;
•
level of investments made by dealers;
•
new cars, parts, and specialty tools to be purchased by dealers;
60
Teahen, John, “Day in Court Act Fought Factory Coercion,” Automotive News, September 14, 2008.
The Alaska State Legislature, Motor Vehicle Sales and Dealers, SCS CSHB 182(L&C), June 20, 2002.
62
For example, in New Motor Vehicle Board of Cal. v. Orrin W. Fox Co., 439 U.S. 96 (1978), the Supreme Court of
the United States recognized that States are “empowered to subordinate the franchise rights of automobile
manufacturers to the conflicting rights of their franchisees where necessary to prevent unfair or oppressive trade
practices.” See Statement from Texas Attorney General Greg Abbott Concerning the Objection Filed by Texas
Regarding GM’s Attempts to Circumvent Texas Laws. June 12, 2009. https://www.oag.state.tx.us/oagnews/
release.php?print=1&id=3010.
63
For example, the Texas Motor Vehicle Commission Code states that the “distribution and sale of motor vehicles
vitally affects the general economy of the State and the public interest and welfare of its citizens.” Tex. Code
§ 2301.001. Similarly, North Carolina’s statute says that
the distribution of motor vehicles in the State of North Carolina vitally affects the general economy
of the State and the public interest and public welfare, and in the exercise of its police power, it is
necessary to regulate and license motor vehicle manufacturers, distributors, dealers, salesmen, and
their representatives doing business in North Carolina, in order to prevent frauds, impositions and
other abuses upon its citizens and to protect and preserve the investments and properties of the
citizens of this State.
N.C. Gen. Stat. § 20-285.
61
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•
the allocation and delivery of automobiles; and
•
the mechanism for terminating a franchise.
A central concern in many of the state automobile franchise laws is the manner of and terms for
termination, cancellation, or nonrenewal of the dealer relationship. Typical state franchise laws
can require “a manufacturer to show good cause in order to terminate a dealer agreement, provide
a framework for determining fair value of the franchise terminated, and establish basic rights of
succession from generation to generation.”64 Some state franchise laws (e.g., Massachusetts,65
California,66 New Jersey, 67 North Carolina,68 and Virginia69) also place limitations on the
manufacturer’s ability to place new dealers in an existing dealer market area without first giving
the dealer notice and an opportunity to protest the action. Automakers assert that some of these
state franchise laws make it difficult and costly for them to adjust to changing market
conditions.70
According to the NADA, the state franchise laws were enacted to create a more level playing
field to “address the vast disparity in the bargaining position between a dealer and its
manufacturer.”71 Others view these laws as having shifted too much power in the relationship to
the dealer. For example, in many states, state franchise legislation restricts the auto
manufacturer’s ability to terminate its relationship with a dealer. 72 While effectively preventing a
manufacturer from arbitrarily and unfairly terminating a dealer, some experts contend that the
termination provisions that exist in many state automobile franchise laws are a key reason for the
existence of too many dealers.73 In other instances, some state franchise laws “protect the dealers
by making it unlawful for the auto manufacturers to engage in coercive behavior, such as forcing
the dealers to take unwanted and unordered vehicles, parts, and accessories.”74
Auto manufacturers argue that it is becoming increasingly more difficult for them to comply with
more recently enacted state franchise laws. They claim that these state laws severely constrain
their ability to operate their businesses efficiently and strategically. Increasingly automakers
contend that, in addition to state level automobile franchise laws making it hard for them to adjust
to changing market conditions, these laws also benefit the narrow interests of traditional franchise
dealers at the expense of consumers, manufacturers, and other retailers. For instance, in 2002, 45
64
National Automobile Dealers Association, The Benefits of the Franchised Dealer Network: The Economic and
Statutory Framework, November 24, 2008, p. 5.
65
Mass. Gen. Laws ch. 93B, § 6.
66
Cal. Vehicle Code § 3062.
67
N.J. Stat. § 56:10-18–23.
68
N.C. Gen. Stat. § 20-305.
69
Va. Code § 46.2-1569.
70
The case of GM’s elimination of its Oldsmobile line is often cited, which took four years and over $1 billion in
payments to Oldsmobile dealers.
71
National Automobile Dealers Association, The Benefits of the Franchised Dealer Network: The Economic and
Statutory Framework, November 24, 2008, p. 1.
72
Jessica Higashiyama, State Automobile Dealer Franchise Laws: Have They Become the Proverbial Snake in the
Grass, University of California, Hastings College of Law, April 2009, p. 11.
73
Michael Oneal, “Credit Crunch: Auto Dealerships Struggle, Close as ‘Floorplan’ Financing Dries Up,” The Chicago
Tribune, March 29, 2009.
74
Jessica Higashiyama, State Automobile Dealer Franchise Laws: Have They Become the Proverbial Snake in the
Grass, University of California, Hastings College of Law, April 2009, p. 12.
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states did not allow manufacturers to sell cars directly to consumers in competition with their
dealers (e.g., over the Internet).75 As a result of such restrictive legislation, some argue that
automakers are unable to develop more efficient ways to sell cars to consumers.76 According to
Gerald Bodisch, an economist at the Antitrust Division of the U.S. Justice Department:
Perhaps the most obvious benefit from direct manufacturer sales would be greater customer
satisfaction, as auto producers better match production with consumer preferences ranging
from basic attributes on standard models to meeting individual specifications for customized
cars. With better information about consumer demand, optimal inventory levels should fall,
even short of full build-to-order capability by auto manufacturers.77
Bodisch goes on to note:
The total value of new car inventory held by the 20,700 franchise new car dealerships in the
United States near the end of 2008 was about $100 billion and the annual carrying cost of
that inventory was estimated as $890 million. These figures may provide an order-ofmagnitude perspective of the savings potential from a reduction in inventories that might
derive from direct manufacturer sales of autos.78
The issue of automobile franchise laws remains hotly contested. Beyond existing state-level
dealer franchise legislation, about two-thirds of the state legislatures are considering new dealer
franchise laws, including California, Colorado, New York, South Carolina, Texas, and
Washington, as auto dealers continue to press to strengthen statutes that benefit them on such
matters as warranty rate reimbursement and post-termination assistance. 79
75
Gerald R. Bodisch, “Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers,” Economic
Analysis Group, Antitrust Division, U.S. Department of Justice, May 2009. Singleton, Solveig, “Will the Net Turn Car
Dealers into Dinosaurs? State Limits on Auto Sales Online,” Cato Institute Briefing Papers, July 25, 2000.
76
In a 2002 report, the Consumer Federation of America concluded that the distribution inefficiencies fostered by
restrictive automobile dealer laws add at least $1,500 to the price of every new vehicle. Source: Cooper, Mark,
“Bringing New Auto Sales and Service into the 21st Century: Eliminating Exclusive Territories and Restraints on Trade
Will Free Consumers and Competition,” p. 9, Consumer Federation of America, October 2002.
77
Gerald R. Bodisch, “Economic Effects of State Bans on Direct Manufacturer Sales to Car Buyers,” Economic
Analysis Group, Antitrust Division, U.S. Department of Justice, May 2009, p. 4.
78
Ibid.
79
Cooper, Mark, “Bringing New Auto Sales and Service into the 21st Century: Eliminating Exclusive Territories and
Restraints on Trade Will Free Consumers and Competition,” Consumer Federation of America, October 2002, p. 9.
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The General Motors and Chrysler Bankruptcies:
Impact on Dealers
Detroit 3 in Crisis
The global recession and credit crisis have caused serious problems for automakers all over the
world, but none have been affected as much as the Detroit 3.80 GM and Chrysler have gone
through bankruptcy; Chrysler is now managed and partially owned by Fiat,81 while 72.5% of GM
is owned by the U.S. and Canadian governments.82 Ford Motor Company narrowly avoided
bankruptcy because it took steps several years ago to shore up its finances. From two-thirds of the
U.S. market for passenger cars in 2000, the Detroit 3 share fell to less than half in 2008, with
foreign-owned companies making steady inroads.83
In the fall of 2008, the combination of rising gasoline prices and a full-blown credit crisis and the
recession it spawned created a major downturn in automobile sales in the United States and
abroad, with 2008 sales 30%-40% lower than a year before. U.S. auto sales fell to a 26-year low,
from a high point of 17.3 million cars and light trucks in 2000 to 13.2 million in 2008. Sales fell
much further in the first half of 2009 and were 10.4 million units for all of 2009. Many analysts
say that recovery to 12 million units is several years away.
In light of the market turmoil and credit contraction, the weak financial base of both GM and
Chrysler led them to seek federal assistance. The path to federal assistance and the congressional
and Administration steps to encourage restructuring outside of bankruptcy are detailed in CRS
Report R40003, U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring,
coordinated by (name redacted). While both companies succeeded in obtaining new contracts with their
unions and most of their creditors, they were unable to reach agreement with all creditors.
Paths to Bankruptcy
General Motors and Chrysler submitted viability plans to the Obama Administration in midFebruary 2009, to demonstrate how they would work their way out of their financial situations. At
that time, the federal government had already provided GM with a $13.4 billion loan and
Chrysler with $4 billion. 84 These funds were inadequate to stem the losses caused by these two
companies’ precarious finances and the deteriorating economy. The incoming Obama
80
Toyota recorded its worst quarter on record in QI 09, losing nearly $8 billion, even more than the nearly $6 billion
GM lost in that quarter.
81
Fiat owns 20% of the equity, the UAW’s VEBA owns nearly 68%, and the U.S. and Canadian governments own the
remainder. Fiat’s share may grow to 51% if it meets certain benchmarks.
82
In addition, the GM VEBA owns 17.5%.
83
CRS Report R40003, U.S. Motor Vehicle Industry: Federal Financial Assistance and Restructuring, coordinated by
(name redacted). The same trend is true of auto production. In 1998, GM produced 14.8% of all autos sold in the world and
Toyota sold 8.4%. By 2008, GM was producing 12.8% of all autos and Toyota had eclipsed it as the world’s largest
auto company, selling 13.7%. The new GM, with four divisions, is projected to have a smaller market share than GM
before bankruptcy.
84
The Bush Administration provided these first federal loans to the automakers at the end of December 2008, taking
the funds from the Troubled Asset Relief Program (TARP).
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Administration asked for viability plans on which it would base further federal assistance. The
viability plans submitted by GM and Chrysler in February 2009 were rejected by the
Administration at the end of March 2009 as inadequate. Chrysler was given 30 days, until April
30, 2009, and GM was given 60 days, until June 1, 2009, to develop comprehensive restructuring
plans, including the dealer network. During this time, the Administration’s Auto Task Force
worked closely with the two automakers to line up stakeholders so that bankruptcy could be
avoided.
The companies were unable to complete their restructuring in the time allotted. Chrysler filed for
bankruptcy on April 30, 2009, and GM followed a month later on June 1, 2009. The Chrysler and
GM proceedings went swiftly. A new entity, formed in part by Fiat, purchased most of Chrysler’s
assets in mid-June and then changed its name to Chrysler Group LLC.85 In early July, the sale of
most of GM’s assets to a new entity named “General Motors Company” was approved. The new
automakers are smaller companies that have fewer plants, workers, and, in some cases, brands86
than did the former GM and Chrysler.
Other parts of the auto supply chain have been affected by the downturn in auto sales as well.
During the first half of 2009, at least 15 auto parts suppliers have sought Chapter 11 protection,
including two of the largest auto suppliers, Lear Corporation and Visteon, as well as CooperStandard and Metaldyne. 87 An increasing number of smaller auto suppliers are also going out of
business or filing for bankruptcy as the restructuring process and the months-long closure of GM
and Chrysler plants left them with few backup financial resources and limited prospects for quick
or large increases in car and light truck production.
Terms of Restructuring Affects Dealer Networks
As part of its restructuring plan, Chrysler terminated 789 of its 3,200 dealers in June 2009, and
General Motors announced that it would reduce its dealerships from over 6,000 dealers to 3,600
when contracts expire in October 2010.88 The Auto Task Force, in rejecting the companies’
viability plans in March, cited a number of steps the manufacturers should accelerate, including
reducing the number of dealers, while leaving the details of such reductions up to GM and
Chrysler management.
Chrysler and GM have argued that reducing the size of their dealer networks will be a key
ingredient in the success of the new automakers. Many dealers across the country are opposed to
the size and scope of the reductions. In addition, many Chrysler dealers have objected to the short
wind-down period (26 days) and lack of appeals process; some GM dealers voiced objections to
85
Chrysler LLC, which entered bankruptcy at the end of April, is now referred to in court documents as “Old Carco
LLC (f/k/a Chrysler LLC).”
86
The new General Motors Company will no longer produce Pontiacs, Saturns, Hummers, or Saabs.
87
Bennett, Jeff and Jay Miller, “Lear Reaches Tentative Pact with Lenders to Restructure,” Wall Street Journal, July 3,
2009.
88
General Motors instituted an appeals process for its announced dealer terminations and reinstated over 50 dealers.
While Chrysler’s contracts with its dealers had no expiration date, GM’s dealer contracts all expire in October 2010. In
June 2009, GM asked 1,300 dealers to sign termination agreements, while asking the remaining dealers to sign contacts
governing their relationship with GM after the company emerges from bankruptcy. In addition to the 1,300 dealers
asked to terminate, GM has said that it expects an additional 1,200 or more dealers to leave through attrition in 20092010.
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the allegedly onerous terms of wind-down agreements (for dealers to be terminated) and
performance agreements (for dealers continuing with GM). Many Members of Congress have
been made aware of these concerns from dealers in their districts and states.
Dealers presented their cases before the U.S. Bankruptcy Court judges who are adjudicating the
Chrysler and GM bankruptcies, asking the court to alter the dealer terminations planned by both
companies. The bankruptcy judges rejected such changes. As part of its bankruptcy proceedings,
Chrysler rejected contracts with 789 dealers. The new entity purchased Chrysler’s assets without
assuming those rejected contracts. See Appendix B for a table showing the number and state
breakout of dealerships closed by Chrysler and announced for closure by GM. Ford Motor
Company, by contrast, which is neither receiving federal funds nor in bankruptcy, has said that it
does not intend to significantly trim its dealer network. 89
Congressional Hearings: Chrysler and General Motors Arguments
for Terminating Dealers
In June 2009, hearings on dealer closings were held by the Senate Commerce, Science, and
Transportation Committee and the House Energy and Commerce Committee’s Subcommittee on
Oversight and Investigations. GM and Chrysler leadership faced off against auto dealers and the
NADA.
At these hearings, GM’s then-president and CEO Fritz Henderson and James Press,90 then-vice
chairman and president of Chrysler LLC, addressed the importance of dealer closings to their
restructuring efforts. The main points made by the automakers91 included:
•
Market realities have changed. The companies say that cutting their dealer
network is an essential element of their restructuring and downsizing in response
to a U.S. auto market that has shrunk from 16 million light vehicle sales in 2007
to around 10 million in 2009. The automakers cite projections used in their
February 2009 viability plan that the market will recover to no more than 10.8
million units annually by 2012.
GM’s president stated that its market share has shrunk dramatically since the
1950s when many dealer franchises were opened and that GM now has too many
dealers compared to the competition. Mr. Henderson said, “GM today has
roughly 6,000 dealerships in the U.S. compared to 1,240 for Toyota and 3,358 for
Ford.”92
89
New York Times, “Ford Rejects Big Cuts in Dealer Network,” May 18, 2009.
Mr. Press left Chrysler in fall 2009. Previously, he served as deputy CEO of Chrysler and special advisor to Chrysler
CEO Sergio Marchionne, and as vice chairman and president of Chrysler from 1997 until June 2009. Before joining
Chrysler, Press was the most senior American at Toyota, serving as president and chief operating officer of Toyota
Motors North America and as a member of Toyota’s board of directors. From 2001 until 2005, he was president and
chief operating officer of Toyota Motor Sales USA, Inc.
91
The automakers’ arguments are sourced from their respective testimony before the Senate Commerce, Science and
Transportation Committee on June 3, 2009 and the House Energy and Commerce Committee’s Subcommittee on
Oversight and Investigations on June 12, 2009.
92
It is often argued that the Detroit 3 are “overdealered.” In 2008, domestic brands accounted for 60% of the
dealerships but only 48% of new-vehicle sales. BNET Auto, “Dealer Deaths Could Help GM, Ford, Chrysler,” February
(continued...)
90
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•
All segments of the GM and Chrysler auto making and auto marketing industry
are downsizing. The automakers, their employees, suppliers, and dealers are all
going through the most difficult economic climate since the Great Depression.
Sacrifices are required of all parties. Chrysler cites the remarks of Bankruptcy
Judge Gonzalez, who presided over its bankruptcy filing:
The underlying argument of many opposing the transaction is not against the
Government Entities’ involvement. Rather, it is a desire to have the Governmental
Entities protect every constituency within the auto industry from economic loss, and not
to limit the protection to those interests that the government perceives as being essential
to the survival of a successful “New Chrysler.” For example, any dealership rejection
that is approved will cause hardship to the particular dealership involved, but may well
be necessary if New Chrysler is to survive. These are the kinds of economic decisions
that have to be made in every bankruptcy case. 93
•
Parts of the current GM and Chrysler dealer networks are underperforming and
hurting sales. Mr. Press said that the Chrysler dealer network “is not profitable
and therefore not viable.” Poor performing dealers cost them customers. He
noted that in 2008, the average U.S. automotive dealer made a profit of $279,000,
according to NADA, but Chrysler dealers lost $3,431. The per-franchise annual
breakdown of sales for major automakers is shown in Table 3, showing the big
disparity between Chrysler, GM, and Ford compared to the foreign-owned car
makers. For example, Chrysler’s unit sales of 181 cars per franchise were below
Toyota’s comparable 1,523 units.
Chrysler asserts that even with the terminations, it is retaining 86% of its dealer
network and that customers will only have to drive an average of 11 miles to
reach a Chrysler dealer, compared with 19 and 25 miles, respectively, for Toyota
and Honda customers. GM states that the main goal of the dealer changes is not
to reduce costs, although that is a factor. The main reason is to create “a healthy,
strong and profitable dealer network …”
Table 3. Average 2008 Unit Sales Per Franchise for Major Automakers
Toyota
Honda
Nissan
Ford
GM
Chrysler
1,523
1,104
762
286
219
181
Source: Automotive News, “In Per-Store Sales, All Suffer—in Different Ways,” April 27, 2009.
•
Brand focus is part of the recovery strategy. Chrysler’s Project Genesis seeks to
increase the strategic effectiveness of the dealer network by bringing all three
brands—Chrysler, Dodge, and Jeep—under one roof. Some dealers are being
terminated because they do not fit this profile. Both companies are also seeking
to end dual dealerships, where a Chevy dealer may be paired with a Nissan
(...continued)
11, 2009.
93
The quotation is from Judge Gonzalez’s “Opinion Granting Debtors’ Motion Seeking Authority to Sell, Pursuant to
11 U.S.C. § 363, Substantially All of the Debtors’ Assets” (May 31, 2009), and was cited in the opening statement of
Chrysler Vice Chairman and President James Press, before the Senate Committee on Commerce, Science and
Transportation on June 3, 2009, p. 2.
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
dealer, for example. GM and Chrysler want their dealerships to focus solely on
their brands and some dealerships do not now fit that business model. 94
•
There are cost savings from the dealer reductions. Chrysler’s president outlined
several costs resulting from the dealer network. He said “excess dealerships are
costly in several ways.” Maintaining multiple distribution systems is inefficient
and costly. Marketing and advertising message are split among too many
products. GM also cited costs for information technology systems and sales
incentives.
Mr. Press cited these costs and lost revenues: product engineering and
development of $1.4 billion over four years to develop “sister” vehicles such as
the Dodge and Chrysler minivans; lost sales due to dealer underperformance of
$1.5 billion annually; administrative costs of $33 million annually to maintain the
789 dealers; and marketing and advertising costs of $150 million annually.
•
Process and Local Impact. The automakers say that a rigorous and thoughtful
process was used to select dealers for termination, including total sales, customer
satisfaction reports, a dealer scorecard, quality of the dealer facility and location.
GM has provided an appeals process for dealers; more than 50 have been
reinstated.
GM and Chrysler maintain that the potential job loss associated with dealer
closings has been exaggerated. Chrysler estimates that nearly 30,000 people are
employed in the 789 terminated dealerships but 44% of those dealers sell other
types of vehicles and are expected to remain in business. In addition, 84% of
dealerships sell more used vehicles than new and they are likely to retain their
profitable used-car businesses after termination.
Dealer Counterpoints to the Automakers
At the June 2009 House and Senate committee hearings, NADA also testified about the dealer
closings. 95 At those hearings, NADA Chairman John McEleney addressed the industry’s
perspective on the dealer closings and why they would be counterproductive to the recovery of
GM and Chrysler. In his testimony, he argued that:
•
Transparency of decision-making about dealers has been poor. There has been
too little transparency in the decision-making of the Treasury Department’s Auto
Task Force. While NADA criticized the Auto Task Force in May 2009 for
demanding “the rapid and disorderly elimination of thousands” of Chrysler and
General Motors dealers, relying on “a dangerous misperception that new car
dealers somehow create a cost burden to auto manufacturers.”96 NADA says that
94
Automotive News, “GM, Chrysler Duel the Duals,” June 8, 2009.
NADA arguments against dealer closings are sourced from a NADA position paper, “NADA Opposes Unnecessary,
Forced Dealership Closures,” May 2009, and from the remarks of John P. McEleney, NADA chairman, before the
Senate Committee on Commerce, Science, and Transportation on June 3, 2009, and the House Energy and Commerce
Committee’s Subcommittee on Oversight and Investigations, June 12, 2009.
96
At a hearing before the Senate Banking Committee on June 10, 2009, Ron Bloom, speaking for the Auto Task Force
said, “we did not give [the companies] a numerical target, but we certainly did say, regarding plants, regarding dealers,
regarding white and blue collar headcount, regarding all these matters, that you need to be more aggressive….”
95
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
dealers are the primary source of revenue for automakers and bear most of the
costs associated with selling and servicing motor vehicles.
NADA also contends that the May 14, 2009, announcements by GM and
Chrysler that more than 1,900 dealers would be closed were drastic, and lacked
an objective standard and public accountability. The companies had not
previously indicated that such large reductions were in the works. Dealers were
under the impression that Chrysler, for example, would follow the patterns set by
its ongoing Genesis program which, NADA observed, “relies principally upon
negotiated transactions based on conditions in the local market.”
With only 26 days to dispose of inventory and close as Chrysler dealers, the 789
companies subject to termination were faced with a chaotic situation. Dealers
contend that this short wind-down period was unfair and inconsistent with state
franchise requirements. Mr. McEleney said, “the franchise agreement requires the
manufacturer to buy back vehicles, parts, and tools. No manufacturer has ever
imposed such onerous conditions on terminated dealers.”
He said that GM’s request that dealers who will be terminated sign wind-down
agreements has onerous conditions, and the performance agreements GM has
asked continuing dealers to sign are too vague, leaving dealers open to undefined
financial commitments.
•
A larger number of dealerships will lead to more sales of GM and Chrysler
products. Dealers say that cutting dealerships will not make GM or Chrysler
more successful. Mr. McEleney notes that dealers “generate more than 90% of
manufacturer revenue. Auto manufacturers created the franchise dealer network
to outsource virtually 100% of the cost associated with selling and servicing cars.
A rapid reduction in dealer numbers would further CUT [emphasis in original]
manufacturer revenue and market share.” In addition, the dealers contend that
terminating dealerships means GM and Chrysler will lose the long-standing
customer relationships those dealers have built up for their brands in their
community. The dealers have been loyal partners with the automakers and many
dealerships have been family-owned for generations.
•
Purported administrative savings will not be achieved. Because the franchise
system effectively shifts most costs to the dealers, Mr. McEleney says that
manufacturers “incur very little costs related to the dealer network. Therefore,
few savings are likely to be generated from dealer reductions.” Dealers currently
absorb costs such as state and local marketing and advertising and employee
training. In addition, manufacturers’ incentives and shipping costs are determined
by the number of vehicles sold, not the number of dealers, so this and other
similar costs will not be affected by the elimination of these dealers.
•
State franchise laws are being “eviscerated.” These structured bankruptcies are
described as having the unprecedented effect of wiping out laws enacted in the 50
states to govern manufacturer and dealer contracts and relationships.
Circumventing these laws is seen as threatening even the surviving dealerships
by raising the capital risk of future dealer investments.
•
Local impact of terminations will be severe. Mr. McEleney said that the dealer
terminations will result in the elimination of nearly 100,000 jobs at dealerships
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
across the country at a time when U.S. unemployment remains high. He asserted
“the rapid dealer reductions will adversely affect many lives and many
communities.”
According to Mr. McEleney, fewer dealers mean that state and local governments
will lose millions of dollars in auto sales tax revenue. In addition, he said, fewer
dealers will mean reduced competition and, in some communities, consumers
will have to drive much further to remaining dealers to have their cars serviced.
•
Lack of credit availability remains a challenge. The retail auto industry, says
McEleney, is highly dependent on credit availability and has been
“disproportionately hard hit by last year’s financial crisis.” Floorplan financing
for dealers “contracted dramatically and even creditworthy dealers are having
trouble finding access to floorplan financing.”
Legislation in the 111th Congress
Congressional Hearings Held
After the mid-May 2009 announcement by GM and Chrysler that they planned to close
approximately 2,000 dealers between them, many Members of Congress began to hear from
dealers in their districts and states who were slated for termination. As mentioned in the previous
section of this report, committees in both the House of Representatives and Senate held lengthy
hearings where GM and Chrysler executives testified, as well as the NADA chairman and several
owners of automotive dealerships. At the hearings, some Members of Congress were sympathetic
to the concerns of the dealers, citing instances in their districts and states where long-standing
dealers had been notified of termination. These hearings served to raise the visibility of the
dealers’ concerns in Congress and with the media.
Legislative Activity
The rising visibility of the dealers’ concerns has led to the introduction of a wide range of
legislative proposals. These follow on more limited steps to help dealers that Congress has taken
this year, including:
1. SBA Loans. Expanding the SBA 7(a) loan program in the American Recovery and
Reinvestment Act of 2009 (P.L. 111-5), to establish a Dealer Floorplan Financing
program.
2. “Cash for Clunkers.” Passage of a $1 billion, four-month fleet modernization
program (also known as cash for clunkers) in the Supplemental Appropriations
Act of 2009 (P.L. 111-32).97 (A similar $4 billion, year-long program was
approved by the House prior to the vote on the Supplemental Appropriations, but
97
The program was authorized to run from July 1, 2009, until November 1, 2009, or until the $1 billion was exhausted.
For more information on this program, see CRS Report R40654, Accelerated Vehicle Retirement for Fuel Economy:
“Cash for Clunkers,” by (name redacted) and (name redacted).
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
this provision was not enacted into law.)98 Congress passed an emergency $2
billion extension of the program when it became clear that the $1 billion limit
had been reached in only one week; H.R. 3435 was signed by the President on
August 7, 2009 (P.L. 111-47), and ran until late August 2009, when the funds
were exhausted.99
3. Reversing Dealer Terminations. On July 7, 2009, the House Appropriations
Committee adopted by voice vote an amendment offered by Representative
LaTourette that would require automobile companies that receive federal funds
and are partially owned by the federal government to reinstate agreements with
franchise dealerships to the extent that a valid dealer agreement existed prior to a
Chapter 11 proceeding. This amendment to the Financial Services and General
Government Appropriations Act, 2010 (H.R. 3170), was reported out of the
Appropriations Committee on July 10 and approved by the House on July 16,
2009. Newspaper articles have indicated that the provisions of the amendment
would apply to General Motors and Chrysler and their dealers; however, CRS
legal analyses question whether it could effect that result.100
Representative LaTourette said that the amendment was needed because the bankruptcy
judge had undercut state franchise laws and the dealerships have been closed in a
“punitive and secretive” manner. 101
GM and Chrysler opposed the amendment. A Chrysler statement said that it “would
jeopardize the new company” and that Chrysler used “sound business judgment” to
eliminate 789 dealers.102 GM issued a similar statement saying that failure to complete
dealer restructuring would jeopardize its long-term viability.103 The Obama
Administration also opposed the amendment.104 The House passed the Financial Services
and General Government Appropriations Act, 2010 (H.R. 3170), on July 16, 2009, by a
vote of 219-208.
Final legislation affecting the terminated dealers was passed in December 2009 in the
FY2010 Consolidated Appropriations Act (H.R. 3288);105 the earlier LaTourette
amendment was replaced in conference committee with an entirely new provision.
President Obama signed this appropriations bill on December 16, 2009 (P.L. 111-117).
98
H.R. 2751, Consumer Assistance to Recycle and Save, introduced by Representative Sutton, passed the House on
June 9, 2009, based on her earlier proposal, H.R. 1550. The American Clean Energy and Security Act (H.R. 2454),
included a similar one-year cash for clunkers provision when it was reported from the House Energy and Commerce
Committee in May 2009.
99
UPI.com, “Obama signs ‘clunkers’ funding extension,” August 7, 2009.
100
See CRS Report R40736, Mandating Dealership Agreements for Automakers Receiving Federal Funds:
Constitutional Analysis, by (name redacted), (name redacted), and (name redacted).
101
Representative LaTourette, “Panel Approves LaTourette Effort to Help Auto Dealers,” News Release, July 8, 2009.
102
Associated Press, “GM, Chrysler Fight Reopening of Closed Dealerships,” July 10, 2009.
103
The Plain Dealer, “LaTourette Bill Would Give Canceled GM, Chrysler Auto Dealers a Second Chance,” July 10,
2009 and Bloomberg.com, “GM Says Dealer Restructuring Would Be Stalled by Legislation,” July 9, 2009.
104
Detroit Free Press, “House Panel Votes to Undo GM, Chrysler Dealer Shutdowns,” July 8, 2009.
105
H.R. 3288 included the FY2010 Financial Services and General Government appropriations, among other agencies
funded by this legislation.
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U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Under the new law, terminated GM and Chrysler dealers are provided the opportunity to
participate in a binding arbitration process that must be completed by June 2010.106
Under this provision (Section 747 of the Consolidated Appropriations Act), GM and
Chrysler must provide each terminated dealer by mid-January 2010 a letter explaining
why it was terminated and a summary of this new arbitration process. Affected dealers
have 40 days to decide whether to seek arbitration, the costs of which will be split equally
between the dealer and the manufacturer. Arbitrators are to be selected jointly by the
dealer and manufacturer; negotiations will be held in the state where the dealership is
located and, in general, must be concluded by June 2010. The law specifies seven factors
that arbitrators must evaluate, some of which were not part of the original criteria used by
GM and Chrysler when they developed their original list of dealer terminations. If the
arbitrator finds on behalf of a terminated dealer, GM or Chrysler has seven days to send
those dealers a letter of intent to enter into business.
4. Administration’s Auto Task Force Activities. On July 17, 2009, the House
Committee on Financial Services agreed to H.Res. 591 (Boehner), requesting that
the President report to the House of Representatives on the work of the Auto Task
Force within 14 days of passage of the resolution. It requests that the President
transmit to the House all information in his possession relating to specific
communication with and financial assistance provided to General Motors
Corporation and Chrysler LLC. The legislation specifically asks for all records
pertaining to Auto Task Force actions with regard to dealer closures, retiree
pensions, and allocation to labor unions of ownership of GM and Chrysler and
other restructuring decisions. A similar resolution, H.Res. 462 (LaTourette),
requests information relating to Chrysler’s restructuring. The committee reported
it without recommendation on June 10, 2009.
Other legislation addressing dealer concerns includes:
•
H.R. 2743 (Maffei), the Auto Dealer Economic Rights Restoration Act and the
companion Senate bill, S. 1304 (Grassley). This legislation would restore the
“economic rights” of GM and Chrysler dealers, seeking to ensure that state
franchise laws would still protect them as the automakers go through bankruptcy
proceedings.107
•
H.R. 2793 (Kline), the Auto Dealers Pension Fairness Act, would require a report
to Congress from the auto task force on GM and Chrysler dealer closings and
suspension of certain pension actions until that report is delivered.
•
S. 1253 (Corker), the Auto Dealers Assistance Act, would require reimbursement
by GM and Chrysler to closed dealerships, through their federal loans.
•
S. 247 (Feinstein), the Accelerated Retirement of Inefficient Vehicles Act of
2009, a one-year cash for clunkers program that would require the purchase of
new vehicles with higher fuel economy standards than some other proposals. Its
106
Automotive News, “Obama’s Signature Kicks Off Arbitration Process for Rejected GM, Chrysler Dealers,”
December 17, 2009.
107
See CRS Report R40736, Mandating Dealership Agreements for Automakers Receiving Federal Funds:
Constitutional Analysis, by (name redacted), (name redacted), and (name redacted).
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companion bill is H.R. 520 (Israel). Subsequently, Senator Feinstein introduced
S. 1200, the Short Term Accelerated Retirement of Inefficient Vehicles Act of
2009, which would establish a temporary cash for clunkers program similar to
the plan in S. 247.
•
S. 1135 (Stabenow), the Drive America Forward Act, a cash for clunkers
proposal similar to the plan passed in the House in H.R. 2751. This legislation
would authorize $4 billion for a one-year program.
•
H.R. 1606 (Manzullo), the New Automobile Voucher Act, to encourage purchase
of new cars.
•
H.R. 2224 (Terry), which would direct SBA to provide dealer inventory financing
through the 7(a) program.
•
H.R. 2285 (Peters), the Vehicle Efficiency Heightening Investment Credit to Lift
our Economy Act of 2009, which would provide a tax break for a new-car
purchase.
•
H.R. 2750 and H.R. 2796 (LaTourette), the Automobile Dealer Economic Rights
Restoration Act of 2009, which would require restoration of franchise law
protections to GM and Chrysler dealers, prior to bankruptcy.108
•
H.R. 3088 (Carson), the Jeremy Warriner Consumer Protection Act, which would
require the newly restructured GM and Chrysler to carry liability insurance to
cover claims made against them for any defective products produced by their
predecessor companies.
•
S.Amdt. 1189, offered by Senator Hutchison in May 2009 during Senate
consideration of H.R. 2346, the Supplemental Appropriations Act, would have
called on Chrysler to allow for a 60-day wind-down of its 789 terminated dealers.
The amendment was withdrawn after reassurances about the company’s dealer
closing process, from then-Chrysler President James Press.
108
See CRS Report R40736, Mandating Dealership Agreements for Automakers Receiving Federal Funds:
Constitutional Analysis, by (name redacted), (name redacted), and (name redacted).
Congressional Research Service
29
U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Appendix A. New-car Dealerships by State
(January 1, 2009)
State
Total
State
Total
Alabama
343
Montana
129
Alaska
35
Nebraska
207
Arizona
253
Nevada
116
Arkansas
257
New Hampshire
163
California
1,492
New Jersey
548
Colorado
280
New Mexico
137
Connecticut
302
New York
1,058
Delaware
62
North Carolina
656
District of Columbia
1
North Dakota
95
Florida
923
Ohio
901
Georgia
576
Oklahoma
296
Hawaii
64
Oregon
264
Idaho
121
Pennsylvania
1,097
Illinois
903
Rhode Island
60
Indiana
503
South Carolina
318
Iowa
358
South Dakota
114
Kansas
256
Tennessee
410
Kentucky
291
Texas
1,312
Louisiana
332
Utah
152
Maine
142
Vermont
91
Maryland
342
Virginia
537
Massachusetts
459
Washington
371
Michigan
745
West Virginia
170
Minnesota
412
Wisconsin
574
Mississippi
232
Wyoming
70
Missouri
480
Total
20,010
Source: NADA Industry Analysis Division.
Congressional Research Service
30
U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Appendix B. Dealerships Announced for Closure by
GM and Chrysler
(number of dealers affected, by state)
State
GM
Chrysler
State
GM
Chrysler
Alabama
33
12
Montana
16
4
Alaska
0
0
Nebraska
21
8
Arizona
11
5
Nevada
3
5
Arkansas
17
8
New Hampshire
6
6
California
65
32
New Jersey
33
30
Colorado
15
12
New Mexico
10
4
Connecticut
11
7
New York
60
28
Delaware
2
3
North Carolina
36
14
District of Columbia
0
0
North Dakota
6
8
Florida
35
35
Ohio
79
47
Georgia
24
13
Oklahoma
17
12
Hawaii
2
1
Oregon
21
9
Idaho
8
3
Pennsylvania
90
53
Illinois
66
44
Rhode Island
3
1
Indiana
48
21
South Carolina
24
11
Iowa
46
22
South Dakota
16
7
Kansas
29
16
Tennessee
30
14
Kentucky
23
9
Texas
55
50
Louisiana
10
17
Utah
6
10
Maine
14
4
Vermont
8
2
Maryland
21
17
Virginia
26
26
Massachusetts
29
12
Washington
18
14
Michigan
58
40
West Virginia
25
18
Minnesota
39
19
Wisconsin
50
18
Mississippi
14
6
Wyoming
6
5
Missouri
38
27
U.S. Total
1,323
789
Source: General Motors and Chrysler, August 2009.
Congressional Research Service
31
U.S. Motor Vehicle Industry Restructuring and Dealership Terminations
Author Contact Information
(name redacted)
Specialist in Industrial Organization and Business
[redacted]@crs.loc.gov, 7-....
Congressional Research Service
(name redacted)
Specialist in Industrial Organization and Business
[redacted]@crs.loc.gov, 7-....
32
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