WASHINGTON, D.C. — Minnesota car dealers, angry with Chrysler and General Motors for terminating their longstanding franchise agreements, are traveling here this week in a last-ditch attempt to save their businesses — some of which bring the state millions of dollars in tax revenue every year.
The move follows Monday’s announcements that GM will not renew contracts in 2010 with roughly 2,600 dealers nationwide — more than twice the number that had been anticipated in mid-May. Chrysler, meanwhile, has already moved to drop about a quarter of its dealers by roughly next week.
In Minnesota, that means that between the two manufacturers, at least 48 car dealerships are now on the chopping block and potentially more, according industry groups.
One of those dealers is Fury Dodge-Chrysler in Lake Elmo, whose owners received notice in May that their contract with Chrysler would not be renewed despite being one of the most profitable car dealerships in the state this year, according to co-owner Jim Leonard.
“I have 40 employees, and I represent an 85-year-old business in a town where I am the largest employer and largest real estate tax generator, so it is an obligation that I have” to travel to Washington and make my case, Leonard told MinnPost on Monday.
Minnesota dealers take their case to the Hill
Leonard will join a Minnesota contingent of dealers and industry reps on the Hill Wednesday for a Senate hearing about ways to protect dealers and consumers during the GM and Chrysler restructuring.
Minnesota’s Democratic Sen. Amy Klobuchar, who sits on the Senate panel that will hold the hearing, expressed concerns Monday over how the state’s dealerships had been affected.
“I’m very concerned about the impact of auto industry restructuring on our local dealerships,” she said in a statement. “This isn’t just about Detroit. It’s also about dealerships in local communities throughout Minnesota and across the country.”
In an interview with MinnPost today, Klobuchar said that most of her questions at the hearing would focus on dealership issues in Minnesota.
“Some of the questions that I have are if time can be extended for them to figure out how to sell the parts they have to, and then, why some of them would even be considered for closure, given how successful some of them have been,” Klobuchar said.
On Monday, John McEleney, chairman of the National Automobile Dealers Association, called the GM dealer cuts “drastic” and said in a statement that Chrysler’s treatment of the dealers who are being dropped is “unconscionable and outrageous.”
Leonard said that when he received the letter announcing his dealership’s termination, he thought it was a mistake. Unlike either Chrysler or GM, Leonard’s dealership has actually been profitable, generating about $3 million in tax revenue for Minnesota, according to Leonard.
“I understand if they are eliminating businesses that are about to go out of business or are in massive red ink,” Leonard said. “But, cutting the ones that are profitable? That is the math that doesn’t work for me.”
Chrysler defends process for dropping dealers
According to Chrysler, the company evaluated its dealerships nationwide using a “vigorous process” that employed a “data-driven metric,” which took into account such things as sales, share of a given market, shipments, a customer satisfaction index, a service satisfaction index, warranty repairs, facility condition, facility location and whether the dealership owned other franchises.
“Right now, the market cannot support the dealer network,” said Chrysler spokeswoman Carrie McElwee.
For example, in the Twin cities metro market in which Leonard operates, there are 16 Chrysler dealerships, compared with seven Toyota, six Nissan, and six Ford dealers, according to McElwee.
“Looking at the market, we had more than double the representation of dealerships than some of the other competitors in the market,” McElwee said.
McElwee, however, could not explain specifically why Leonard’s dealership had been chosen.
Leonard wonders if it has to do with the fact that he owns another profitable Chrysler dealership about 15 miles away. But, Leonard argues, that because the dealerships are far enough away from each other, and divided by the Mississippi River, they do not share the same customers. He hopes he will get better answers about his dismissal on Wednesday.
“Instead of using a scalpel to remove 25 percent, they used an ax and happened to get some good with the bad,” said Leonard.
Still, Leonard said that if his franchise cancellation at the one location does go through, his second dealership would come in handy because he will be able to transfer any unsold new Chrysler cars over to that store by the approximate June 9 deadline.
While GM has offered its dealers some phase-out support and a wind-down period, Chrysler notified about 789 dealers in mid-May that they should be ready to sign off by about June 9 — leaving them with just about a month to get rid of all their new Chryslers and figure out a new business plan or close shop.
Rep. Michele Bachmann, R-Minn., who represents Leonard’s 6th Congressional District, attended a rally last week in protest of his dealership closing.
“So many of these dealerships that are getting shut down are very successful,” Bachmann told a local TV news crew. “But, the main point is that these are privately owned. The federal government is disenfranchising and taking away very valuable private property rights.”
Car franchises are indeed protected under state law, but federal bankruptcy law generally supersedes the state.
“A lot of that is dependent on Fiat,” said McElwee. “Fiat would be purchasing the company, and they gave us to the middle of June to finalize everything … The reality is that if the sale to Fiat is not approved, all of the dealers will face elimination because we would then be forced into liquidation.”
Car industry’s future affects Iron Range, too
That prospect is of particular worry to those on the Iron Range, who depend heavily on U.S. car manufacturers as large buyers of American steel, according to John Schadl, spokesman for 8th District Rep. Jim Oberstar D-Minn.
“We are concerned about the dealership closings, and it is one of the things that has weighed heavily on [Oberstar],” Schadl said.
“But, it is probably a bigger risk to the Iron Range and to our part of the country to take no action … and to essentially let these manufacturers fail … If we lose the major manufacturers in Detroit, it is going to devastate the Iron Range.”
That said, as longtime Chrysler customers, some Minnesota dealers found their rejections for renewal unbelievable.
“We have been with Chrysler for 83 years. The way it was handled was so rude and impersonal. It came in the form of a form letter,” said Bill Mason who owns Bill Mason Chrysler Jeep in Excelsior. “I feel betrayed.”
Although Mason said that his business has not been profitable recently (sales from 2007 to 2008 decreased by 35 percent) and he was considering eliminating his new car department all together, the notice of termination and the short time frame given to wrap up operations was still a jolt.
Rep. Erik Paulsen, R-Minn., who represents Mason’s 3rd Congressional District, has also expressed concerns over the closing of dealerships.
After GM filed for bankruptcy on Monday, Paulsen issued the following statement: “I fear that this bankruptcy filing will give the government even greater power over business decisions, while also placing a heavier burden on Minnesota taxpayers as the government continues its massive expansion into the private sector.”
Because dealerships are, in fact, the customers of the manufacturer, some wondered on Monday why it even made economic sense for Chrysler and GM to eliminate dealers, especially ones that seemed to still be pulling a profit.
“For the life of me, I don’t understand why it is in Chrysler or GM’s interest to have fewer dealers, the dealers are the customers,” said Christopher Phelan, a professor of economics at the University of Minnesota.
Mark Saliterman, who co-owns Shakopee Chevrolet, another profitable dealership, which was recently notified by GM that its franchise would be terminated, said that dealers pay the manufacturers significant fees for training, support and access to advertising materials.
Saliterman’s business partner will also be attending the hearing on Wednesday.
“There is no free lunch with general motors,” Saliterman said.
Dealerships carry ‘hidden costs’ for Chrysler, GM
But, according to Chrysler and GM, dealership support still costs the manufacturer money. For example, the larger the dealership base, the more customer service representatives the manufacturer needs to hire, according to GM spokeswoman Susan Garontakos, who described the dealership contribution for training and technical support as more of a co-pay.
“There are some savings [associated with trimming the dealer base] that dealers don’t see, that they don’t recognize,” said Garontakos.
In addition, both Chrysler and GM have said that the competition resulting from an oversized network of dealerships caused prices to drop, further harming their operations. Thus, by eliminating competition through a diminished dealership network, the manufacturers hope that profits will increase.
“This is something that we feel we must do,” said Garontakos. “Sales just aren’t there.”
Paul Rubin, who owns two GM dealerships in a northern suburb of St. Paul and expects to have his franchise continue, called the shrinkage “inevitable.”
“It was inevitable that the dealership body had to shrink for the rest to survive,” said Rubin, who has seen his business decrease by 24 percent over about the last year but is still one of the top profit generators in his area.
Public dollars criticized by some
At the same time, the notion that taxpayer dollars are now being used to prop up Chrysler and GM, which in turn have moved to eliminate competition in the hopes of increasing prices on consumers, strikes some as profoundly ironic.
“There is a big difference between saving the financial system and saving industrial firms — a very bright line — and this administration has crossed it,” said Bob Kudrle, an economist and public policy professor at the Humphrey Institute.
In addition to the $19.4 billion in taxpayer money that the U.S. government previously gave GM, it will now provide $30.1 billion in financing for GM to restructure, earning the government a 60 percent majority owner stake.
“Generally speaking, capitalism is based on people making bets about the economic reality of the world. But, having at the same time to bet about the political reality just increases the level of uncertainty and turns it more into a lottery than a market.”
In this particular lottery, which could result in losses in the end or potentially large dividends for the taxpayer (a la Chrysler’s 1980 bailout), the manufacturers have pulled better numbers than some of the dealers, said the economist Phelan.
If anything, Phelan sees the current situation as an opportunity for manufacturers to make changes they have wanted to make in their franchise network, but could not because of political and legal restrictions. Chrysler, for instance, said that it has been trying for many years to make sure that dealerships sell only their three brands — Chrysler, Dodge, and Jeep. That became a factor when deciding with which dealerships to move forward, according to McElwee.
“Car dealers are big contributors to political campaigns on both sides, usually one of the biggest businesses and a tough lobby to take on,” said Phelan. “But the manufacturers [are in a position to] use this crisis to find a way to get to do what they wanted to do anyway but couldn’t do with political or legal constraints.”
Other reactions from state’s congressional delegation
But 1st District Rep. Tim Walz, D-Minn., who voted against the auto industry bailout in December, warned at the time that the situation provided “no guarantee that spending $15 billion in taxpayers’ money will actually solve the Big Three’s problems.”
“I voted against the auto industry bailout for the same reason I voted against the Wall Street bailout: because it doesn’t do enough to protect the taxpayers who are footing the bill,” Walz said in a statement.
In a statement on Monday, 2nd District Rep. John Kline, R-Minn., called the strategy “a bad business model.”
“When the President fired the CEO of GM, he put the federal government in the management business, which means political decisions will be made in the board room,” Kline said.
In December, Kline and Walz voted against the Auto Industry Financing and Restructuring Act, along with Bachmann and 7th District Democratic Rep. Collin Peterson.
Meanwhile, former 3rd District Republican Rep. Jim Ramstad voted in favor of the bill, along with Oberstar and 4th district Democrat Rep. Betty McCollum.
Minnesota’s 5th District Democratic Rep. Keith Ellison did not vote.
In the Senate, Klobuchar voted to end debate on the measure, but the effort failed on a 52-35 vote.
Later that month, however, then-President George Bush authorized that $13.4 billion be pumped into Chrysler and GM through the fund that Congress approved to rescue the financial industry.
On Wednesday, Fritz Henderson, the CEO of GM; James Press, president of Chrysler; and John McEleney, chairman of the National Automobile Dealers Association, are expected to be among those testifying before the Senate Committee on Commerce, Science and Transportation.
Cynthia Dizikes covers Minnesota’s congressional delegation and reports on issues and developments in Washington, D.C. She can be reached at cdizikes[at]minnpost[dot]com.