I heard Clark Howard on the radio this evening (6/1/09) answering a callers question on his radio show about why Chrysler and GM closed dealerships across this country, as the caller did not understand how this cost the manufacturers any money, since auto dealers are independent businesses.
Clark Howard who I find entertaining in his folksy manner and who I believe normally does a good job of explaining topics, by and large I think he gets things right when he explains financial matters to his audience. However, Mr. Howard got this question wrong, dead wrong as a matter of fact.
Clark Howard explained to the caller and his audience that the cost to the manufacturer was tied directly into the inefficient distribution system that was in place when General Motors had 60 percent market share and that the cost to get the vehicle to the dealers cost the manufacturer money by shipping vehicles to all the dealers who were in place when the company enjoyed such a large market share and by comparison the imports sell more cars per dealer but had fewer dealers.
So it cost the import manufacturers less money to ship those vehicles to there dealer network (I am paraphrasing as I do not have an exact transcript). The system was inefficient to the manufacturer and cost it money with many inefficiencies in the current system so it was necessary to reduce the dealer head count to create efficiencies in the distribution system and hence save money for the manufacturer.
Clark Howard you are wrong on so many points but I will start with just the freight, the dealers pay for the freight and do you know that the freight is the same charge for a dealer that is only 50 miles away from the freight yard as it is for a dealer that is 500 miles away, the manufacturer averages the cost and splits it among the dealer body, in addition the cost is paid at delivery. But GM doesn't pay it's freight vendor for 60 - 90 days and in some cases 120 days, how is that for cash flow, most businesses would die for this kind of cash flow.
But the cost to distribute is not entirely based on shipping cost, there is the cost to order and the cost to service the dealers account (manufacturers representative), most dealers are assigned a sales representative since the dealer is the manufacturers customer. But most dealers don't have a personal representative calling on them everyday, they are assigned a telephone number that in turn has a rep assigned to it. These dealers over 60% of the dealer body do not sell enough vehicles (per GM guidelines) to warrant a weekly or monthly visit from General Motors. In addition computers print out recommend orders to the dealers and the dealer accepts or rejects the order or amends it if he wants more or less vehicles. But just because a dealer wants more vehicles does not mean that they will get it, especially of hot items, such as the new Camaro, those request tend to go to the top selling dealers.
Clark Howard did point out that the sales per dealer at import dealerships were higher than those at domestic dealerships, this point is true, but the insinuation that this cost the manufacturer money, that is not true. This cost the dealers money, since the dealer has less opportunity to sell more vehicles and has more competition within his own dealer body to make money per vehicle. More dealers benefit consumers, because if a consumer can shop multiple GM dealerships within a smaller geographical footprint, they, consumers,save money as most same make dealerships cannibalize profits by underbidding the neighboring GM or Ford or Chrysler store. It is highly naive to think that closing dealerships benefits consumers especially on price, most consumers make a vehicle decision online and then they shop that particular brand and make of vehicle and shop same make dealerships. You do not find a person once they make up there mind on a Chevrolet Silverado, comparing prices on a Ford XLT, because the consumer in most cases has made up there mind that they are purchasing a Chevrolet before they step out and shop prices, so they compare competing Chevrolet dealers.
The issue becomes only based on customer service, which he did not point out, if a dealer is not selling more he is making less money and therefore you could make an argument that his expense to provide a high level of customer service is diminished, but even in that example the cost to the manufacturer is zero, zilch, this cost rest solely on the franchised dealership.
So a computer sends out the request and a computer fulfills the request, less manpower over the years to service a large majority of the manufacturers customers, hmm, sounds like the company has figured out a way to save money in the distribution system, lets examine the cash flow portion of this equation.
Clark Howard should have pointed out that dealers pay the shipping cost and the entire cost of the vehicle owed to the manufacturer at delivery. Wow, how is that for cash flow, I am sure that every industrial manufacturer would love a sweet deal like that, but it gets better. The manufacturer is over paid, up to 102-106% (Invoice, hold back, advertising and other built in incentives and shared cost) of the manufacturers invoice to the dealer, what a great system for the manufacturer, all at the time that the vehicle gets delivered on the dealers doorstep. The dealers bank pays those cost up front, without delay. This reminds me of the airlines, oh but I digress, how do you get your cost paid up front without delay and have this kind of positive cash flow and manage to say that the distribution system is costing you money.
But it gets even better, manufacturers by and large are notorious for paying vendors 60, 90, 120 days late, oh and it gets even better, they sometimes go back and renegotiate the cost of supplies to them after they have accepted goods, services and supplies. Yes the automobile manufacturers after accepting delivery, go back and say, well I agreed that I would pay you 'X' amount, but I can only pay you this lower amount, this is said with a heavy hand by the way, and where else is a supplier to go with door panels for a Chevy Impala, GM is it's only outlet.
But it gets even better, I said that the manufacturer is overpaid by the dealer at delivery, so therefore the manufacturer owes the dealer some money. Those monies are paid through separate accounts that the dealer sees the proceeds on when they sell a vehicle or time passes (such as hold back), but these monies are not paid right away they are still being held until the sell takes place to a consumer in most cases. These funds are paid through a weekly account and monthly account, however funds are still delayed by upwards of weeks to months in some cases.
The dismantling of the dealerships by the manufacturer is designed to provide the remaining dealers better profit opportunity so that they can invest in new facilities and upgrade, not to save the manufacturer any money because it does not cost them any money.
The issue really is, the manufacturer wants a dealer body that can make investments that the manufacturer wants as the manufacturer wants them and they need a highly profitable dealer network that can fund these investments.
Yesterday it was announced that the remaining GM dealers must sign a letter that states "that if GM requests the dealer invest in there facility or programs, that they agree to make those upgrades or they will be terminated", how is that for a thanks for assisting us as we go through bankruptcy welcome letter.
In the end consumers will pay more for vehicles as there is less competition from competing same make name plates, this should have been the story that Mr. Clark Howard should have conveyed to his audience, how does it effect the consumer.
I work tirelessly to provide you the real story behind the story, and provide a forum in which I discuss and comment on topics in which the general public is not fully informed about.
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That Car Guy
