Auto Industry Bleg

by hilzoy

I've been trying to understand the problems of the auto industry, and on a couple of points I can't quite seem to figure out what's going on. So I thought: why not ask?

(1) A quote from Business Week:

"Everyone knows that GM is over-branded. (...) At the core of GM’s problems is that it does not have, and has not had, enough resources to feed eight brands with unique products, and then the resources to feed each brand with unique and competitive brand campaigns."

I assume that having too many brands implies not just a pointless attempt to distinguish them from one another, but separate management and marketing, and to some extent separate manufacturing, that might usefully be consolidated. I imagine that having too many brands would also make it harder to establish any particular brand: when you're trying to make eight separate brands stand out, all of them probably have a harder time.

Question: are there other drawbacks to having too many brands, or is this it?

(2) Business Week again:

"The problem has long been that the company does not want to have to pay dealers to fold the brands it does not need as it did with Oldsmobile in 2001. State franchise laws prevent a car company from simply ending a brand. Closing down Oldsmobile cost the company around $2 billion."

Question: Is there any obvious reason why state laws should be able to prevent a car company from closing down a brand?

(3) The WSJ:

"GM has about 7,000 dealers. Toyota has fewer than 1,500. Honda has about 1,000. These fewer and larger dealers are better able to advertise, stock and service the cars they sell. GM knows it needs fewer brands and dealers, but the dealers are protected from termination by state laws. This makes eliminating them and the brands they sell very expensive. It would cost GM billions of dollars and many years to reduce the number of dealers it has to a number near Toyota's."

What, exactly, does it mean to say that GM "needs fewer dealers"? Dealerships are privately owned. If there are too many of them, does GM incur financial costs, over and above dealers' ability to block things like brand consolidation?

(4) In trying to answer some of these questions, I ended up reading a fair amount about state laws governing auto dealerships. (E.g., here, here, and here.) Short version: selling cars is a very, very heavily regulated activity.

Is there some reason why this makes sense? For instance, is it obvious that automobiles have to be sold in franchises, as opposed to stores in which the storeowner can stock whichever cars seem most likely to sell, the way bookstores do? Does it make any sense for Texas to prohibit this?

"Ford, an automobile manufacturer, operates the Showroom web site. At this site, Ford advertises for sale various used vehicles at set no haggle prices. At the time such advertisements are posted to the Internet, Ford holds title to the advertised vehicles. If a Texas consumer is interested in purchasing one of these vehicles, he can contact and deliver to Ford a refundable deposit. The vehicle will then be transferred to a Texas automobile dealer, who will take title to the vehicle from Ford by assignment. If the consumer, after a test drive, wishes to purchase the vehicle he will enter into a contract with the dealer at the price stated on the Showroom web site. If he elects not to purchase the vehicle, the dealer can either return it to, or purchase it from, Ford."

Aren't there better models for selling cars? Wouldn't it make sense to try some of them?

I honestly don't know the answers to any of these questions. If any of you do, let me know.

Comments

[raft]

wow, this is appalling.

just goes to show you that the government intervention vs. laissez faire debate is mostly nonsense. what we need is smart, good regulation that actually works for our society, instead of against it.

this is very dumb, bad regulation.

[Mike Schilling]

This certainly smells like featherbedding, It's similar to the laws that prevent beer companies from selling directly to retailers, this creating the lucrative profession of being a beer distributor.

But since it protects businessmen rather than workers, it's not socialistic or anything.

[liberal japonicus]

This is not directly related, but the question of branding is one that has interested me quite a bit. This pdf from an upcoming book about Nissan's turnaround has a lot of points that seem to have counterparts with the GM problems with brands. Obviously, the interaction with state laws don't apply, but I hope it is of some interest.

[DBN]

But since it protects businessmen rather than workers, it's not socialistic or anything.

A more accurate free-market perspective would be that regulations should be minimized because they are inevitably subverted by the interests of the regulated and become barriers to entry for those markets, promoting entrenched corporations, corruption and inefficiency.

After all, the average culture war/taxes voter couldn't care less about the beryllium content in their flourescent lights, the broadcast spectrum, or CAFE standards. But corporate donors care a great deal and supply the money. The combination of voter apathy towards regulation specifics and intense moneyed corporate interest in these specifics results in an inevitable shift in regulation towards protecting entrenched industries at the expense of innovation, competition and the public interest.

[sparky]

i think this particular issue needs to be understood in the context of franchising regulation more generally. i suspect that many people have no idea how many small businesses out there are really franchises, from fast food to deliveries to autos to pest control.

franchise law originally protected small owner operators from the predation of big business. as with all things legal it's gotten a bit more complex since then.

as far as this particular issue goes, i would just make two observations. first, destroying the dealer network would put some non-trivial number of people out of work. second, tinkering with franchise laws may have all kinds of unintended consequences. neither of these is a reason for not changing the laws (which are mostly state not federal rules) but they are reasons for moving carefully.

as GM historically had a gazillion brands and was historically slow to eliminate them, blaming the dealers for GM's problems looks a bit like scapegoating.

[sparky]

gaah on the "historical" overindulgence.
get me rewrite!

[d'd'd'dave]

Too many brands:
The dealer networks for each brand cannibalize sales from each other. For many years chevy camaros and pontiac firebirds were essentially the same thing. Both were GM but each brand tended to squeeze the profit margin of the other. The same is true of many other models.

Perhaps in the 50's when GM had a much bigger share of the market this made sense. But no more.

[d'd'd'dave]

// Is there any obvious reason why state laws should be able to prevent a car company from closing down a brand?//

No, but in "Workplace Safety" we learned that the goodness of government is measured by the number of regulations it writes. We must assume that these state laws are evidence of good government. Mere onlookers like us, who are uninitiated in the higher mystical levels of governance, cannot expect to understand.

[d'd'd'dave]

I suggest that GM not close the excess dealerships. It should just stop delivering cars to them.

Or better yet. GM could use a twist on Obama's plan to kill coal fired electrical plants. They could put a cap and trade system in place on the dealerships and bleed them to death in the name of the environment or something.

[snarkout]

"I suggest that GM not close the excess dealerships. It should just stop delivering cars to them."

They can't, due to the same Depression-era regulation that prevents them from just closing them down. (I believe the concern at the time of the Depression was about monopoly power being exerted by the Big Three to consolidate their control vertically, since it's not like anyone was opening up a Honda dealership in 1933. But this is a classic example of how regulatory capture works: car dealers are often wealthy small businessmen, and it's a geographically concentrated business that spreads a lot of money around in both good ways and bad. Shockingly enough, there's a lot of crazy legislation that benefits car dealers that's nigh-impossible to get off the books. Hilzoy's mention of beer distributorships is an exact parallel.)

[d'd'd'dave]

//Short version: selling cars is a very, very heavily regulated activity.//

We learned in "Workplace Safety" that regulation is good. So, this must be very very good. They have regulations to protect workers, car dealers, the environment, and many other things. All I can figure is that they forgot to make a regulation that mandated adequate profits. ... but profits are bad aren't they? Or is that only windfall profits? or oil profits? ... Now I'm getting confused.

[d'd'd'dave]

//The combination of voter apathy towards regulation specifics and intense moneyed corporate interest in these specifics results in an inevitable shift in regulation towards protecting entrenched industries at the expense of innovation, competition and the public interest.//

Sir,
While this is an excellent comment and the sort that we encourage here, I have to send it back to you for revision. You neglected to point out that this only happens during republican administrations. I realize that on this blog such a thing is presumed and goes without saying but in the interest of upholding our high standards of scholarship I must ask you to revise it and resubmit.

Thank you,
The editors.

[Roger Moore]

What, exactly, does it mean to say that GM "needs fewer dealers"? Dealerships are privately owned. If there are too many of them, does GM incur financial costs, over and above dealers' ability to block things like brand consolidation?

I think it centers around turnover. Buyers want to be able to walk out of the showroom with the car they want, so dealers have a strong incentive to keep a lot of cars on the lot. Cars are big ticket items, so that represents a lot of money in unsold inventory- money that isn't generating any direct returns to add to the bottom line. Increase the number of dealers, and you take a bigger bottom line hit.

And this problem gets worse if you have more brands and more models (or more different trim levels for each model). Even if the different models are all but identical- like Chevy and GMC trucks- you still have to stock both of them or give up whatever advantage you were supposed to have gained by having two different models in the first place.

[d'd'd'dave]

//franchise law originally protected small owner operators from the predation of big business. as with all things legal it's gotten a bit more complex since then.//

Which of course is good. As we learned in "Workplace Safety", a high volume of regulations indicates good governance. Laws and regulations cannot be judged based on their results - but only on the good intentions with which their framers were motivated. Any poor results are just a function of the extent to which they were managed by republican regimes.

//destroying the dealer network would put some non-trivial number of people out of work.//

And that's not good. We must advocate for the employment people at all costs even in useless dealerships.

//tinkering with franchise laws may have all kinds of unintended consequences//

but we never let that stop us.

[Mike Schilling]

Hilzoy's mention of beer distributorships is an exact parallel.

Ahem.

[Amos Newcombe]

they forgot to make a regulation that mandated adequate profits

Uh, d'd'd'dave, the whole point of these regulations is to mandate adequate profits -- for the dealers.

So let's learn in this thread that all this conservative obsession with deregulation and small government is just lip service. When conservative businessmen feel threatened, they run to the government with a speed and a power that puts welfare queens to shame.

[MikeF]

Aren't there better models for selling cars [than Ford's online Showroom service]? Wouldn't it make sense to try some of them?

Well, obviously Ford still does sell cars the traditional way. But Showroom actually strikes me as kind of brilliant. Sure, they have to pay to get the car shipped to the dealership - but I bet that almost no one who has gone to the trouble of finding a car online and putting down a deposit actually rejects the car during the test drive. I expect that the emotional investment and the anticipation lead people to overlook faults in the car. Plus, there's the sense of guilt if you reject the car after they went to so much trouble to bring it to you. I bet it's a hugely profitable sales tactic.

[hilzoy]

"We learned in "Workplace Safety" that regulation is good."

Only if we take "regulations designed to protect workers from exposure to toxic chemicals" and "regulations" to be interchangeable terms.

[Amos Newcombe]

On second thought, d'd'd'dave, my use of the word "all" is an exaggeration. I don't mean to imply that you personally run to the government like that, except in the obvious case of using state power to enforce contracts if necessary.

But it is a widespread tendency among conservatives to curse the sugar teat even as they suck from it, which makes many of us cynical when we hear it. Examples grace our front pages every day lately.

[snarkout]

Ahem.

Read it as flattery, Mike!

[Mike Schilling]

Read it as flattery, Mike!

OK, you have a point.

[KCinDC]

D'd'd'dave is fighting the good fight against the straw-man liberals who view regulations as an end in themselves. No doubt he'll move on soon to tell us all about the liberals who have high taxes and big government as their goals.

At least the people who write about how all conservatives are motivated only by acquiring wealth are talking about a goal that requires less suspension of disbelief.

[d'd'd'dave]

Amos
I plan to present a real estate development project to the town for approval in January. Will this be considered 'cynically sucking at the public teat?'. The law says I can't build without approval so I can't avoid the application. I want so much for y'all to approve of me. I want my profits to be considered righteous. What must I do to be saved?

[DBN]

Only if we take "regulations designed to protect workers from exposure to toxic chemicals" and "regulations" to be interchangeable terms.

But they are. The same regulations that ensure automobile safety and protect the consumer are the ones that establish a high barrier of entry and prevent competition from startup companies. The amount of capital required to create a startup car manufacturer these days is staggering, which is one reason that we don't see many electric vehicles on the road - we're stuck waiting on the big three to deliver against their own interests - because it's nigh impossible for a new car company to be built de novo. Caveat - unless it sells its cars for well above what the average consumer can afford to pay ala Tesla motors.

[d'd'd'dave]

//D'd'd'dave is fighting the good fight against the straw-man liberals who view regulations as an end in themselves.//

Yes.

And d'd'd'dave is doing it on the "I don't know anything about the auto industry but tell me enough so I can set policy" post. Just after the "Assassinate Charles Krauthammer so we don't have to consider anything he writes" post.

I thought the came was Cartoon Liberal Meets Cartoon Conservative.

[d'd'd'dave]

came = game in last line above.

[cleek]

I thought the came was Cartoon Liberal Meets Cartoon Conservative.

it's not a game. and nobody's playing. give it a rest.

[matttbastard]

Don't disrupt or destroy meaningful conversation for its own sake.

d'd'd'dah troll's already limited appeal is starting to wear thin.

YMMV.

[d'd'd'dave]

Question: The automakers are essentially bankrupt unless the government bails them out. Is it right for ordinary taxpayers who get only social security to use their tax dollars to fund under-funded pensions and health benefits for GM retirees which benefits are in excess of social security? It is my understanding that even the Pension Benefit Guarantee Corp. reduces benefits when it steps in. What is the moral case for the general public to sacrifice in this way? Or, what would Stalin and Mao do?

[cleek]

d'd'd'dah troll's already limited appeal is starting to wear thin.

yup. into the pie factory with it.

[d'd'd'dave]

meaningful conversation.

it's not a game.

it's serious.

we don't know shit about the auto industry but we'll come to a consensus on the right policy measures - always with the assumption that we must intervene in some way. Intervention is the key. Those barbaric business people will do it wrong if we don't intervene. [and also if we do intervene ... but at least we'll justify our existence ... and have more things to publish about ... and more reasons to get grants ... which isn't sucking at the teat ... producing studies and reports is the noblest of all endeavors!!!

[Carleton Wu]

And d'd'd'dave is doing it on the "I don't know anything about the auto industry but tell me enough so I can set policy" post.

Would asking how dumb one would have to be to believe that hilzoy *SETS* auto industry policy be a violation of the posting rules?

[Dave C (the uppity newcomer)]

Those barbaric business people will do it wrong if we don't intervene. [and also if we do intervene ... but at least we'll justify our existence ... and have more things to publish about ... and more reasons to get grants ... which isn't sucking at the teat ... producing studies and reports is the noblest of all endeavors!!!

d^4ave somehow fails to note that the pleas for bailouts are coming most frequently and arduously from those same "barbaric business people." If I didn't know better, I would think he was being deliberately obtuse in failing to note this fact.

[Carleton Wu]

The amount of capital required to create a startup car manufacturer these days is staggering, which is one reason that we don't see many electric vehicles on the road - we're stuck waiting on the big three to deliver against their own interests

I dunno, I think a lot of the startup costs associated with a new auto manufacturer aren't regulatory. Some are, but I can think of a boatload that aren't. Occasionally, there's a new entry into the worldwide car market eg Lexus, but it's a rare thing.
Second, we aren't solely dependent on the big three- there are plenty of non-domestic manufacturers who could be providing electric cars. So we can't look to solely domestic reasons why they haven't caught on across the world.

[jwo]

One thing that at least the first 10 or so commenters seem to be overlooking is the fact that a dealer has paid dearly for his franchise, for his property, for the parts in stock, for training according to what is required by the manufacturer for his shop staff, and so on and so forth. Allowing the manufacturer to just arbitrarily shut down the dealer's livelihood would and should require significant compensation. I speak strictly from the dealer's point of view, as my son-in-law has a dealership. There are any number of rules that are imposed on dealers by the manufacturers that they can do freely under the franchise system. It would be doubly unfair if they could just arbitrarily shut down the dealership whenever they wished.

All that said, clearly some revamping is badly needed and this would be a good time to do it. Many dealerships are in trouble and might be glad of the opportunity to close without too great a financial hit. In other words, the manufacturers could "make an offer" that might seem a great deal more attractive now than it would have a year ago.

[jkdbrown]

"Allowing the manufacturer to just arbitrarily shut down the dealer's livelihood would and should require significant compensation."

Shutting down dealers because you're eliminating a brand under severe financial pressure hardly seems arbitrary.

[jdkbrown]

And presumably affected dealers could switch to surviving GM brands.

[Tony P.]

I wonder what fraction of the automobile dealers in this country are Republicans who rail against meddlesome government regulations such as state franchise laws. But let that pass.

Let's ask about numbers. Honda at 1,000 dealers, Toyota at 1500, GM at 7,000, translates into this: per Congressional district, Honda 2, Toyota 3, GM 14, approximately. Does an average of over 14 dealerships per Congressional district make a whole lot of business sense?

Ford and GM are both international companies, by the way, making and selling cars in other countries. My impression is that they enjoy better reputations in at least some other countries than they do in the US. Why might that be? Is it perhaps because other countries don't have Congressional districts?

--TP

[Carleton Wu]

Sir,
While this is an excellent comment and the sort that we encourage here, I have to send it back to you for revision. You neglected to point out that this only happens during republican administrations. I realize that on this blog such a thing is presumed and goes without saying but in the interest of upholding our high standards of scholarship I must ask you to revise it and resubmit.

Let me get this straight- if people do blame everything on Republicans, then they'd be obvious partisans. But if people reasonably refrain from that sort of partisanship, you insist that they meant it anyway.
The idea that people might be interested in good policy, or a healthy economy, or just talking politely to each other- these things are beyond you. You have to insert idiotic partisanship in order to comprehend them.

[hilzoy]

Oddly enough, I thought I was asking a series of questions because I wanted to know the answer. I had no idea that I had been tasked with revamping the system of automobile distribution.

Live and learn.

[ThatLeftTurnInABQ]

OT (this seems to be the most active thread right now):

RIP Doris Dungey, AKA Tanta of the blog CalculatedRisk.

At CalculatedRisk:
Sad news, Tanta passes away

News article at the NYT:
Doris Dungey, Prescient Finance Blogger, Dies at 47

I will miss her voice greatly, and my thoughts go out to her friends and family.

Not only was she both wise in the ways of the mortgage industry and an excellent writer and tireless teacher, but what really stood out in her writing was that given a choice between slamming people or looking deeper for the complexity in a situation, she consistently took the latter route. She managed the tricky business of exposing things that were greatly amiss and doing so with integrity, while maintaining a tone of good humor, compassion and humanity.

Those are qualities which I greatly value and are not always easy to find. They are part of the reason I treasure this blog as well.

[Kenneth Almquist]

Question: are there other drawbacks to having too many brands?

It means your design resources are spread more thinly. My understanding is that, to take one example, significantly more effort goes into designing a Toyota car model than a GM car model. That extra work doesn't guarantee that Toyota will come up with a better design than GM, but it probably improves the odds.

Question: Is there any obvious reason why state laws should be able to prevent a car company from closing down a brand?

If you are a Buick dealer, and the Buick brand is discontinued, you are out of business. So this is related to the laws which prevent the automobile companies from shutting down dealerships.

Of course, GM could offer you the option of becoming a Chevy dealer, but that wouldn't work out so well if there's already a Chevy dealership down the street. Furthermore, your it's unlikely that many of your customers will want to trade in their Buick for a Chevy, so changing brands means losing a lot of your existing customers.

Question: Dealerships are privately owned. If there are too many of them, does GM incur financial costs, over and above dealers' ability to block things like brand consolidation?

I assume that the WSJ knows what it is talking about when it says that "fewer and larger dealers are better able to advertise, stock and service the cars they sell." If consumers prefer Toyota dealers, with a larger collection of cars in stock and a bigger service department, to GM dealers, that hurts GM sales.

As far as direct costs go, GM has to police its dealers (ensuring that dealers don't do things like billing the company for nonexistent warranty work), and that probably costs a bit more if there are more dealerships.

Question: Does it make any sense for Texas to prohibit this [a Ford company web site for used cars]?

This decision doesn't prevent a web site like this from existing; it prevents an automobile manufacturer from operating it. I wouldn't defend this prohibition, but I don't think it seriously limits the options for selling cars.

[DBN]

I dunno, I think a lot of the startup costs associated with a new auto manufacturer aren't regulatory. Some are, but I can think of a boatload that aren't. Occasionally, there's a new entry into the worldwide car market eg Lexus, but it's a rare thing.

There are a number of them - BYD auto, for example, or other chinese compaines (Shaanxi, Geely, Chery, etc.), they just don't sell cars in the United States. And it's not just the small ones, but some of the largest automakers in the world (Renault, FIat, PSA) don't have an American presence. It's very difficult to break into the US market unless you're partnered with one of the big three. The Japanese are the major exception to this rule, and it took them years and vast amounts of capital for them to earn their position.

[freelunch]

And presumably affected dealers could switch to surviving GM brands.

No, because the dealers with the other models have various contractual protections in place to keep GM or others from helping a new dealer get started in their protected market area.

Dealership law is complicated because it arrives from real problems but the solutions all seem to have been developed in a mercantilist environment. There is the added problem that dealers and manufacturers are basically Burton and Taylor (though the dealers have their own problems as a group, I'm not sure if that makes them Burton or Taylor). The manufacturer needed a seller and the dealer needed inventory. That should lead to happy people if you don't have too many people squabbling over the pie and most dealers of imports are happy -- possibly because the contracts that were written 50 years ago had been improved over the ones written 80 or 100 years ago.

The dealers also have to work together with each other to ever maintain an upper hand and almost all dealer groups tend to be one dealer, one vote sort -- leaving the smaller, weaker dealers in charge of the organization. Historically, the better run dealers hadn't been harmed by the needs of the weaker dealers.

GM needs fewer brands and fewer dealers because the weaker the brand and the weaker the dealer the more GM has to spend to keep either afloat. GM floor plans (carrying the loans for the autos still in inventory) tend to be targeted at the weaker dealers. Regional dealer advertising is generally coop from GM and every brand expects to get its 'fair share' along with national advertising.

Right now, they are losing some of their dealers to bankruptcy. However much they might be pleased to see some go, the losses are not targeted and the results are erratic. The difference from past recessions is that they really aren't in position to step in and find a buyer to take over.

Saturn, which appears to be on the way to becoming Opel USA, started a differing approach, with fewer dealers and stronger agreements, modeled on the agreements that imports have had for years. It still didn't help because GM could never figure out how to provide enough quality product to let it get the million cars a year that it needs to have an impact.

Why can't you just close out brands if you aren't in bankruptcy? Let's say you have a brand, call it Oakland, and you don't like the dealers who are selling it, or you don't like enough of the dealers, so you shut the brand down, but create a new brand, let's call it Pontiac, and you only let some of the Oakland dealers have the Pontiac. I'm not familiar enough with GM history to know how that particular change actually affected dealers, but I do know that it's the kind of change that scares dealers a lot. Dealers and manufacturers have had a long history of distrust, not only in the auto industry, so writing statutes that protect the local little guy against the big bad manufacturer were pretty easy to get passed.

Aside from the fact that GM was cobbled together from a lot of brands, the reason it stayed with them all was because they thought, possibly correctly at the time, that they needed to blanket the country with dealers. Every town of 5,000 and some smaller had a couple of dealers. In the cities that were car oriented, you wouldn't have had to go far to get to a dealer. Multiple brands gave you a lot of leverage with the dealer. Ford added Lincoln and Mercury (and Edsel for a while) to use the same approach, even though Ford was originally the largest by focusing on one brand. Chrysler, which had merged with Dodge, brought out Plymouth, DeSoto, and Imperial as separate lines -- though they tended not to have separate dealers for all.

The imports, not in the position to push dealers around tended to give larger protected markets and stick with one brand. Economics of industries change over time, but laws designed to deal with one, may not do well with others.

[Carleton Wu]

The Japanese are the major exception to this rule, and it took them years and vast amounts of capital for them to earn their position.

And the Germans, but point taken- there are many big car manufacturers who don't make any attempt to sell in the US market. In some cases (eg Peugeot) they were in the US market but didn't last.
Not sure why- there's always been a strong buy-US trend among US car buyers (as opposed to electronics, etc), which could be part of the problem. Or, as you say, US regulation of the auto industry could be an issue.

But that still doesn't address the argument that Europe and China don't have electric cars either- so it's not just the inefficiencies of the big three keeping the electric car down. Maybe if we generalize the argument to the other major car manufacturers ie that it hasn't been in the interests of any of the major players to move towards electric cars.

[freelunch]

The problem electric cars have is that they are not practical as primary vehicles for a family or anyone who wants to drive out of town. They can be fine as commuter cars, but they don't have range. A tank of gasoline is generally enough to get you 300-400 miles or more on the road, E-85 gets about 250-340. Propane or LNG about the same. Electricity? Not unless you put a lot of money into storage -- tens of thousands. Of course batteries weigh a lot, so the advantage of the lighter motor is quickly swamped by the added weight of enough batteries to go 250 miles.

I can gas up in five minutes. How long would it take to recharge the batteries?

If you have to carry your electricity with you, you are at a disadvantage in comparison with energy dense sources like gasoline, propane, LNG, alcohol, or hydrogen. None are perfect, but they have physical advantages over electricity that cannot easily be overcome.

[hilzoy]

freelunch: thanks; that helps a lot.

[(The Original) Francis]

I plan to present a real estate development project to the town for approval in January. ... What must I do to be saved?

Comply with the Subdivision Map Act. Comply with the Water Supply Adequacy statutes. Comply with the California Environmental Quality Act.

Most of all, comply with the rule of three. (Most city councils have five members; the rule of three states that you need three votes to get a majority.) I'm a specialist in this sort of thing; if you have any problems, feel free to retain me.

[Catsy]

I assume that having too many brands implies not just a pointless attempt to distinguish them from one another, but separate management and marketing, and to some extent separate manufacturing, that might usefully be consolidated. I imagine that having too many brands would also make it harder to establish any particular brand: when you're trying to make eight separate brands stand out, all of them probably have a harder time.

Question: are there other drawbacks to having too many brands, or is this it?

In my opinion you've pretty much got a grasp on this. The company I work for has the same problem, but in a different industry: we own a large number of different brands (some of which you wouldn't imagine were all owned by the same company) that are all in the same industry and, on some level, competing with each other. This didn't happen by design, it happened because we acquired this company or spun off that side business over a course of years, and each of these acquired brands have their own existing customer base and contractual agreements.

They all do in fact have their own marketing and business teams, and no, they don't always talk to each other--nor would it necessarily even be useful or a good idea for them to do so.

The restructuring we just went through, siloing all teams by line of business rather than skill set and service--e.g. with me one of two engineers and five devs that supports widgets.com, rather than a team of twenty engineers who support widgets, doohickeys and foo, able to cross-train and make our personnel resources fungible based on business need--is only going to make this problem much worse.

[Free Lunch]

Catsy, GM was such a cobbled together company as well. Unlike Ford, which had been developed as a fully integrated manufacturer from the beginning, GM was assembled from existing brands and suppliers, a real Wall Street operation. With the success of the company, the inherent limitations of the approach weren't fixed, even though these separate divisions became increasingly irrelevent as time went on. People might have thought that "Body by Fisher" was an important selling point around WWI when Fisher still had the reputation it had developed before it had been bought by GM, but 75 years later, its value was purely for internal infighting.

Eventually, GM did try to reform, creating two separate manufacturing groups (Buick-Olds-Cadillac and Chevy-Pontiac-GMC, if I recall correctly) but they didn't really cut back on the power of the brand managers, they only made certain that there were even fewer differences among the brands, particularly in the Pontiac-Oldsmobile-Buick range, eventually killing Olds, whose Cutlass had been the best selling brand only a couple of decades earlier.

Many brands make sense if there is strong customer loyalty or a strong sense that the product differentiation makes sense in the market. When both distinctions are gone you need to be able to integrate them quickly.

[jdkbrown]

"No, because the dealers with the other models have various contractual protections in place to keep GM or others from helping a new dealer get started in their protected market area."

Ah. Thanks for the correction. It seems to me GM ought to have been thinking ahead and provided itself various outs when writing its contracts. Is there any law that would have prevented GM from engaging in contracts that said, in effect, "If we fold one of our brands, we retain the right to offer all affected dealers a new brand, without regard to market areas and other dealer protections"?

[someBrad]

Not only are the regulation in place to create the lucrative business of car dealer, once that group is created, they have both the incentive and the political power to refine the regulations in their favor. Illinois has a law that prevents the selling of cars on Sunday. The story behind this law is that the big dealers wanted to have this day off, but nobody wanted to be the only one to shut down and lose business to competitors. Even if all the big dealers had an agreement, they couldn't stop the independent dealers. So they used their influence in the state legislature to get the law passed. I would assume that many of the state-level regulations on car dealerships have similar stories.

The comparison to beer distributors is pretty good, with the exception that any laws or regulations regarding the sale of alcohol is going to have more interests organized to influence the outcome than just the distributors.

[Free Lunch]

"If we fold one of our brands, we retain the right to offer all affected dealers a new brand, without regard to market areas and other dealer protections"

As far as I am aware, this one is straight contract protection of dealers. Since GM never bothered to consider the possibility until relatively recently (say the last two decades) that they would be shutting down brands, I would guess that the dealers would have wanted to get paid something to accept the language even though it also protects them if it is their brand that is shut down. Still, if you have the Pontiac franchise across the street from the Chevy and Buick dealers, the right to sell Chevy or Buick if they shut down Pontiac is a very limited value. Buying out the franchise, in many ways, is the most sensible means of dealing with the problem.

[Free Lunch]

The comparison to beer distributors is pretty good, with the exception that any laws or regulations regarding the sale of alcohol is going to have more interests organized to influence the outcome than just the distributors.

The independent garages used to play the role filled by tavern owners in the alcohol business when almost every gasoline seller was also a repair center. There just aren't that many left today to change the statehouse dynamic.

[Sebastian]

"But since it protects businessmen rather than workers, it's not socialistic or anything."

Look, I realize that you like to be able to blame Republicans for EVERYTHING, but it is getting in the way of useful analysis.

1. The dealership protection laws are an extension of Depression-era laws and were designed to protect small dealerships from being pushed around by the seemingly omnipotent Detroit car companies. The fact that they are helping to strangle the Detroit car companies to death would almost be a funny comment on the inflexibility problem of law writing if it weren't so sad. Suggesting that they are the fault of the people who call other types of regulation 'socialist' is failing to note the history.

2. The common conservative criticism of over-regulation is that it almost never strikes a good balance between being out to get the regulated companies on the one hand and being captured by the allegedly regulated entities so as to subvert the regulation to destroy competition. So if you are more philosophically inclined toward regulation, it might be good to try learn from the problems created by these regulations rather than try to just throw it all in the laps of conservatives.

[Ginger Yellow]

"Cars are big ticket items, so that represents a lot of money in unsold inventory- money that isn't generating any direct returns to add to the bottom line. Increase the number of dealers, and you take a bigger bottom line hit."

Except that the car manufacturers (well, their captive finance arms anyway) give dealers floorplan loans to finance that inventory. So they're making money off them that way even if the cars are just sitting on the lot.

[Francis D]

We learned in "Workplace Safety" that regulation is good.

Strawman 1. Some regulation is good, some isn't. Preventing the manager from using firing employees using a .44 magnum is good. Forcing all Jewish employees to wear a golden Star of David is bad. And there's a lot of room for quibble in the middle.

You neglected to point out that this only happens during republican administrations. I realize that on this blog such a thing is presumed and goes without saying

Strawman 2. Most things happen in both Republican and Democratic administrations. It's just that the current Republican administration encourages such corporate capture. I doubt there are many on this blog who would consider the Democratic party to be angels (or indeed have enough of a spine).

Just after the "Assassinate Charles Krauthammer so we don't have to consider anything he writes" post.

Strawman 3. Krauthammer is an idiot who needs to learn the maxim 'it is better to stay silent and have others think you a fool than to open your mouth and have them know you a fool' (something you might do well to learn). We just want him to shut up and go away.

Either you are completely failing to read with understanding or you are deliberately misinterpreting in as simplistic and cartoonish a manner as possible. Either way that's three strikes in one thread saying you are not worth engaging with.

*ploink*

(Pity Usenet-style killfiles don't work on the web)

[Tony P.]

Sebastian,

The "Depression-era laws" protecting franchisees did not force GM to open any franchises. And GM could have chosen to sell its vehicles out of company-owned stores, staffed by direct employees, if it considered the franchise laws too onerous. To the extent that part of GM's problem, now, is too many dealerships, the cost of closing excess ones would not be zero even if they were company-owned -- and to that extent "Depression-era laws" are irrelevant to the problem.

And I still bet that franchise owners are more "conservative" than the general population. I should think "conservative" means, at the very least, an inclination to adhere to voluntary contracts like the ones I imagine franchise deals to involve. If those contracts include clauses required by "Depression-era laws", and if those clauses are too onerous, you'd think those contracts would be voluntarily NOT entered into. The Depression era was a few generations ago. The "Depression-era laws" have been on the books for a long while. Did "conservatives" not notice them in all that time?

--TP

[bedtimeforbonzo]

//"And presumably affected dealers could switch to surviving GM brands."//

I think someone touched on why this isn't so. But to amplify, the Chevy dealership where I work sits on the same strip as a Pontiac-Buick-GMC dealer, a 5-minute walk. We anchor one end, they anchor the other -- in between, you have Nissan, Infiniti, Honda, Mazda, Jeep.

Contractual obligations would prevent two Chevy dealers being within miles from one another, much less on the same strip. Plus, if you are downsizing, creating more Chevrolet dealers would not make sense.

To survive, GM needs to downsize. So I think the Pontiac-Buick-GMC brands will disappear sooner or later -- as the result of downsizing, or they will sink under the weight of their own feet.

But that doesn't mitigate the pain that will be felt at dealers such as jwo's son-in-law's. The complex up the street employs a couple hundred.

Now -- risk GM going out of business altogether -- if our store goes under (we employ a few hundred), that's a huge hit to the local economy of a small town. Add in the ripple effect to car rentals, restaurants, parts suppliers, gas stations (not to mention the hundreds of assembly-line workers) and then magnify it by the thousands. Suddenly, a world without GM takes the current recession to a new level.

This whole franchise issue -- which, frankly, I wish I could get my arms around better -- makes an auto bailout even more challenging.

It was easy to save banks -- just hand them several billion dollars.

With the auto industry, you're talking about real estate (which would be turned into acres of vacant lots across the country), real inventory and real working-class jobs.

[bedtimeforbonzo]

//Ginger Yellow: "Except that the car manufacturers (well, their captive finance arms anyway) give dealers floorplan loans to finance that inventory. So they're making money off them that way even if the cars are just sitting on the lot."//

Not exactly.

Our owner, for instance, finances his floor plan through a local bank (obviously, they give him a better deal than GMAC), plus this relationship has been forged over decades and he values it.

[Sebastian]

Tony: "I should think "conservative" means, at the very least, an inclination to adhere to voluntary contracts like the ones I imagine franchise deals to involve."

Huh? Are you seriously suggesting that people who sign and adhere to contracts tend to be conservative? I suspect there are a lot of university professors with tenure who might think otherwise.

And I don't see how your point about the potential for GM to open its own dealerships (which I'm not even sure is legally correct) helps what you seem to be trying to say. Are you saying that GM made a poor choice? GM made lots of poor choices so I wouldn't be shocked by another one. Which is why it probably shouldn't survive as a company.

Bedtimeforbonzo:

To survive, GM needs to downsize. So I think the Pontiac-Buick-GMC brands will disappear sooner or later -- as the result of downsizing, or they will sink under the weight of their own feet.

But that doesn't mitigate the pain that will be felt at dealers such as jwo's son-in-law's. The complex up the street employs a couple hundred.

Now -- risk GM going out of business altogether -- if our store goes under (we employ a few hundred), that's a huge hit to the local economy of a small town. Add in the ripple effect to car rentals, restaurants, parts suppliers, gas stations (not to mention the hundreds of assembly-line workers) and then magnify it by the thousands. Suddenly, a world without GM takes the current recession to a new level.

I’m not sure what you are trying to say here. You seem to acknowledge that GM has to shed brands in order to survive. But you don’t seem to want that to involve shedding jobs. Am I misreading you? Maybe you are just saying that it sucks that it will involve shedding jobs? That we should do something for the people whose jobs are going to be hit? (That is my position). The problem with continuing to prop up GM is that it continues lots of jobs, yes, but they are jobs which are economically unproductive.
Government bailouts really should be about keeping a generally functioning business alive through an unexpected and temporary problem. (If they ought to be done at all. I’m not totally sure that we should do bailouts at all, but if we are going to do them, they only make sense to keep generally functioning businesses alive. ) So far as I can tell, AIG for example, has a very profitable long term business model. It has a long history of large profits. It has a short term likelihood of large profits. It has a long term business model with a likelihood of large profits. It hit an ugly and relatively unexpected liquidity problem, and the government bailout is charging it an extremely high rate of interest to get it past that. GM on the other hand has a long history of frighteningly immense losses, and only a very few recent years of profit (with the rest of the profitable years being almost a generation past)—predicated largely on the sale of SUVs which don’t look likely to be a very profitable base in the future. There are very few scenarios that I’ve seen leading to it having a successful business future, and all of those involve shedding a large number of jobs—which is exactly the thing that mooted bailouts seem to be most interested in avoiding.
Should we just screw the workers who will be impacted? No. Should we help them in ways that don’t involve propping up GM? Probably.

[tgirsch]

And it's not just the small ones, but some of the largest automakers in the world (Renault, FIat, PSA) don't have an American presence.

I believe it is still required that in order to sell cars in the US, you must build some percentage of your cars in the US. Or, at least, there's some sort of cap on how many cars you can import if you aren't building them here.

[tgirsch]

eventually killing Olds, whose Cutlass had been the best selling brand only a couple of decades earlier

Cutlass was a model, not a brand.

[/Farber]

[3legcat]

If there are too many of them, does GM incur financial costs, over and above dealers' ability to block things like brand consolidation?

in my 23 years plus as a dealership controller, i can't think of very many costs for the manufacturers caused by having too many dealerships (perhaps technician training and field staff, however those have been centralized over the years, anyway). i can think of many ways in which over dealerization has benefited the manufacturers: increased competition/advertising, lower retail margins, increased free inventory storage, marked up mandatory tool packages, floorplan interest, marked up promo materials, free parts warehousing, and more. this is why the manufacturers awarded so many franchises in the first place.

as far as reducing the number of dealers goes, it has already begun. 13 dealers were padlocked in my market in the last six months, merely by enforcing the floorplan and dealer agreements and actually conducting the required audits which haven't been done in years, which should tell you another thing about GM and Ford.

this is mere diversion, there are real problems at the big three, but the highest priorities are not the UAW or the dealers, it is manufacturers not being innovative engineers or inspired developers of great manufacturing techniques and products. when Ford, GM, and Chrysler were rolling in cash a few years back, did they introduce new market dominating products? no, they went shopping for synergy. they bought, saab, volvo jaguar, and mazda and then eff'd them up.

Nassar tried buying up the dealers and selling direct, it was a disaster, same for Michael Dell.

If the UAW and the dealers are the problem, Why does Saturn lose 9 billion per year?

[3legcat]

For instance, is it obvious that automobiles have to be sold in franchises, as opposed to stores in which the storeowner can stock whichever cars seem most likely to sell, the way bookstores do?

it isn't tenable for parts and service, so repair shops would need to be separated from sales floors.

[Joe Bakaitis]

I didn't have time to read all the responses, but traditionally, once a car reaches a dealers lot the car is bought and owned by the dealer. He finances it, the car, through the financial arm of the car producer. Cars on the dealers lot are not own by the car companies.