Friday, May 15, 2009

Chrysler Dealership Downsizing Creates Many Legal And Human Problems

All of the claimed money saving reasons for Chrysler closing 789 dealers nationwide are not entirely clear. However, many dealers in business for 50 or more years are now finding themselves in difficult straits where Chrysler now seeks to break state franchise laws in federal court through bankruptcy proceedings and leave about 75 employees per dealership without jobs.

Some dealers like Timberline Dodge in Portland, Oregon is a popular dealership with aggressive local TV advertising. Timberline Dodge has been in business over 60 years, yet finds itself on the cut list by Chrysler.

Chrysler's claim that cutting dealerships will save them money is a highly suspect claim to some such as Albany New York attorney for local new car dealers, Jonathan Harvey. Harvey claims that these dealerships don't cost the auto manufacturers any money to operate. All of the operating expenses and the franchise costs are paid for by the dealers themselves. If the auto manufacturers plan to sell more cars in the future, then they'll need the dealerships to sell them. Further, the cost of paying for advertising might be a huge expense for Chrysler, however Chrysler could trim back on this co-op advertising with the dealers to save some money, rather than simply entirely close the dealership itself.

Co-op advertising works like this. The manufacturers give an advertising allowance to dealers based on their sales volume for TV or print ads to help to support more vehicle sales. However, many ads that run nationally by the manufacturers are not aimed in the support of a single dealership, but for the corporate fleet sales as a whole, where the dealers will indirectly benefit.

Part of the problem here as well is that the so-called "wisdom of the marketplace" due to the recession has already forced many less productive car dealerships to close. A form of Darwinism factor always works to close weaker businesses during bad economic times. The dealerships that Chrysler is seeking to close are largely marginally to moderately profitable ones, although not as more productive or profitable as some larger dealerships. Chrysler claims that it wants to concentrate on the more productive dealerships, and that the less productive ones are only hurting sales at the higher sales volume dealerships. However that is a strange argument fails when the fact that Chrysler is not paying for any of the operating expenses for these dealerships. These dealerships pay all their own rent, lights and salaries.

By using federal bankruptcy law, Chrysler might be able to legally get away with their plans to ax so many local car dealerships. However, many of these dealers will not go away with a fight, and since state franchise laws vary from state to state and could offer some extensive legal protections for the dealers, Chrysler could be spending a lot of time in courts at the state or local levels as dealers file lawsuits in hopes of staying in business. The other possibility is that some dealers might be able to survive by switching to upstart Korean brands such as Hyundai and Kia who seek to build a stronger American dealership network. In Vancouver, Washington a major Ford dealer switched to Toyota a few years ago as an example.
Because of all the local impact creating more unemployment and economic damage to the local business communities, the Chrysler decision to close so many dealerships will remain one of the most controversial parts of their corporate reorganization plans. And this will be especially suspect in the light that Chrysler hasn't really presented credible claims why the closing of these dealerships is so essential to their continued survival. Chrysler is only setting themselves up for some legal battles with many outraged dealers over this issue.
Chrysler and many dealers may not have real great business right now due to the recession. But business for lawyers involved in business litigation issues is certainly looking up right now.


At 1:21 PM, Blogger Tom Mertens said...

Chrysler is not truthful with their dealers


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