Darned If They Do...

The fall-out from the collapse of the American Auto Industry really began leaking out of Detroit and hitting small towns across the country this week with the announcement of the nearly 800 dealerships that Chrysler is cutting loose as soon as June. GM hasn't announced their list, but it is expected to include 1,100 dealerships.

I'm not an expert on the inner-workings of the contractual relationships between the auto-makers and their dealers. My understanding is that the dealerships have contracts with the auto-maker that establish how sales of cars from the maker to the dealer will be handled and give the dealer the right to sell new cars from the maker.

Chrysler being in bankruptcy has more leverage to alter these agreements than they would have otherwise and GM apparently operates on yearly agreements with dealers (which they simply won't renew for the ones they're cutting loose).

The part that I don't fully understand is this: What is the liability to the auto-maker that is posed by having more dealers than are "needed"?

The coverage on this hasn't even mentioned how cutting these loose will help the makers. I am guessing that it has to do with branding and a desire to protect the better performing dealerships more than it is a direct financial impact on the auto-makers. The dealers buy cars from the makers. The makers don't own the dealers, so cutting them loose doesn't reduce the payroll of the auto-maker.

I'm usually the last one suggesting that failing businesses be propped up - and that's not what I'm suggesting here. What I am suggesting is that it might be less damaging to the economy and a more equitable situation to allow the dealerships to battle it out.

What I mean is this, if there are too many dealerships, some will eventually go under on their own - and that poses no cost (that I can see) to the auto-makers. Let capitalism take its course. What that does is gives the low performing dealers a chance to fight their way out of this and avoids thousands of simultaneous layoffs.

I certainly support the right of the auto-makers to decide which dealers they will let sell their new cars, my issue here is the massive slashing that is about to take place. If they need to set some standards and go through eliminating some dealers over some period of time that's fine. But to redefine the rules and dump 1/3 of the dealers over night is pretty rough.

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