Opinion

Felix Salmon

Why Chrysler needs to declare bankruptcy

By Felix Salmon
April 24, 2009

If Chrysler does come to some kind of agreement with its banks — which is by no means a foregone conclusion — then why would it still want to declare bankrutpcy next week? The WSJ gets half of the story when it says that bankruptcy “would let Fiat pick and choose which operations it wants”, but then goes and confuses matters by saying that Fiat is interested in Chrysler “in its totality.”

The answer is that it’s all about the dealers — which are the reason why I said GM should declare bankruptcy as long ago as last July. Detroit is hobbled greatly by its legacy contracts with its dealers, and bankruptcy is the only way of getting out of those contracts. In many ways, I suspect that the dealers have the most to lose from bankruptcy proceedings. Lucky they don’t have a particularly strong and unified lobby, I guess.

Update: Jeffrey Cane, who knows everything, tells me that Chrysler can only file for bankrupcy. It can’t declare bankrutpy, only a judge can do that.

Comments
18 comments so far | RSS Comments RSS

Car dealers are a big reason Fiat would want Chrysler. We have spent our lives building a family business that is often one of the best employers and highest taxpayers in town. For Felix Salmon to say dealers are a legacy problem reflects arrogance for the hard work and sacrifice many hard working entreupreneurs have put in building their business. Without an established strong dealer network to sell and service the cars how would Fiat, or GM stay in business ?

Kevin Eller, Ocala FL

 

Kevin, Felix is not at all implying that dealers are lazy bloodsuckers. Nor that there should be no dealers. He is simply saying that there are too many dealers given GM’s and Chrysler’s shrinking sales and onerous financial problems.

Posted by Murray | Report as abusive
 

Based on the NY Times article it seems like the Pension and healthcare benefits are being made whole by the government, something that didn’t happen with the airlines. Meanwhile the dealers have to take a (necessary) cut. Any take on the discrepancy in treatment between the two groups (dealers vs pensioners/healthcare)?

Posted by Rustbelt | Report as abusive
 

I am right there with Kevin on this, we have a similar dealership to that which he described right here in our town. They’ve been here for 50+ years and they’ve kept it small because we’re in a rural area. I’m sure they’ve made millions of dollars for chrysler during that span of time, and now they will be a dealership with a target on their head because of bad financial advising telling Chrysler to kill off the small dealerships. In the 80s when Chrysler was in a similar situation it was Lee Iacocca that said the small dealerships were the ones that pulled them out of their mess. They’ve killed off most of the small dealerships now and look what happened to them. Buying a car isn’t like shopping for groceries. I don’t mind going to Wal-mart when I have to spend $100, but I won’t shop anywhere but my neighborhood dealer for a $40,000 new car.

Posted by John Thompson | Report as abusive
 

John, why is it okay for you to shop at walmart, and let them run the small grocery, sporting goods, clothing, anything, stores out of business? If you don’t care about the small town stores they displace, why should anyone care about small town car dealerships? What will you do when Walmart decides to sell cars, and eliminates the small car dealers within 50 miles of their megastores?

Posted by KenG | Report as abusive
 

Well, Kevin and John, I’d like to live near your pleasant neighborhood dealers. My experience is quite the opposite. Dealers where I live are money grabbing, high pressure, sales machines. For example, after making a deal with a sales person, I’m handed over to the finance guy to sign the contract, but of course, he’s just another sales person wanting to sell me more stuff. In fact he tried to sell me an after market keyless entry alarm for $500. THE VEHICLE CAME WITH ONE ALREADY.

Posted by James | Report as abusive
 

While I can understand the frustration of the dealers, I think they are misunderstanding Felix’s comments, and Chrysler’s ultimate goals.

Chrysler (& GM) dont want to push out the small or legacy dealers, they want to push out the under-performing and non-performing dealers, which I am sure there are plenty. This is not much different from any retailer closing stores that are not profitable. In this case, the “stores” are not centrally owned, but franchises which does complicate the scenario.

Nevertheless, I think that Chrysler will re-emerge as a combined entity, that is more of a division or brand, than a independent corporation. Honestly, this result will be far more manageable and profitable than Chrysler could ever be as a standalone company.

The remaining dealers will benefit two-fold in that they will have a better managed corporate sponsor, and they will have new lines of vehicles to sell, particularly in the sub-compact and compact markets, which are their most obvious weaknesses.

Posted by Greg | Report as abusive
 

The car companies have a staggering variety of liabilities. Bankruptcy is the way in which they get dealt with in an approximately fair, uniform manner.

 

I hear you loud and clear KenG and I promise you I speand much more money at the local mom and pops places than I spend at wal-mart. However, I do realize the wal-mart employees work and live in this community as well.

Posted by John Thompson | Report as abusive
 

dwj, are they really able to deal with them in a uniform manner with the government agreeing in advance with one party that they will ensure that 100% of that liability is covered (UAW)? This is a case where every party will not be sharing equally in the pain of a restructure

Posted by Rustbelt | Report as abusive
 

John,

You say, “I won’t shop anywhere but my neighborhood dealer for a $40,000 new car.” This is a very strange attitude to me. I purchased a new car last week, and my process involved getting about ten different quotes from local dealers and internet car-buying services, after I had researched the invoice and market prices.

Walking into a dealership makes the dealer strong and me weak. I can’t imagine beginning an important negotiation from a position of weakness.

As I can have the car serviced anywhere, it seems to me that one dealer is much like another; they are selling a commodity (all the cars come out of the same factory) and I don’t know why I’d base my purchasing decision on anything but price.

All this talk of dealerships as pillars of their communities seems a bit wide of the mark to me. Of course they provide a place for me to take a test drive, and go pick up the car I’ve selected, but they make their money by pulling as much of it as is humanly possible out of our wallets. As I said–the cars are the same at any dealer; the only question is their profit margin.

The salesman I ended up working with seemed a nice enough fellow, but as we got to talking he told me the sad story of how tight the Internet had squeezed the margins for dealerships in the last decade. I nodded sympathetically, but I was smiling on the inside.

Posted by Craig | Report as abusive
 

Oh, and Felix, right on as always. A bankruptcy court is the only place GM and Chrysler can go to work out the tough issues of debt, compensation, pensions, supplier issues and dealership agreements and emerge as viable concerns. It’s almost like bankruptcy courts were designed for that sort of thing, no?

Posted by Craig | Report as abusive
 

Craig,

point blank, the large dealerships around this area jack up the interest costs, they are impatient with customers (i.e. if you’re looking, you’re wasting their time) and they don’t give back to the community like the smaller dealerships. Most of them strategically place themselves outside city limits (like wal-mart) so they don’t pay taxes the same either.

Your stand-point is like many others in the economy today from my interpretation of your comment… “Money in my pocket is what’s important.” The big picture is what everyone forgets to see in this fast pace life we’re living now. The big picture these CEOs (and the government) are forgetting to see as well… i.e. David Kellermann. Maybe he finally saw the big picture during his last moments here…

Posted by John Thompson | Report as abusive
 

Your association, in even a tangential fashion, of me with David Kellerman is beyond grotesque. I take offense to your suggestion that I am harming the country by shopping around for a good price on a car. Most disinterested observers would call that frugality and sound financial management.

Your treatment in this thread of “small” dealerships as apple pie vendors from a Norman Rockwell painting is not only questionable but deeply suspicious as well. Again, most disinterested observers recognize dealerships for middlemen who add modest value to the car distribution process while protecting their guild with anti-competitive laws.

I would call on you to divulge your interests in the automobile industry, if there were any point in making such a demand in this forum.

Posted by Craig | Report as abusive
 

Craig, in essence, your laughter inside while an indivual shares their woes with you is as equally grotesque and offends me as much as the above comparison with Mr. Kellerman (the comparison, which any reader can cleary see, was not with you but with Americans as a majority). I think it best this article/thread be left to the original topic and not trail off onto our disagreements. It’s clear that we share two completely different view points and although I apreciate you sharing yours and asking me to look at my perspecive from another lens, I highly doubt that you have done the same.

Posted by John Thompson | Report as abusive
 

What I have figured out is that bankruptcy is a legal tool whereby one can shuck themselves of debt and contractural obligations.

BUt that doens’t bring me to defending dealerships. It has been one of the most frustrating experiences of my life to attempt to shop for a new vehicle. It is almost impossible to do real comparison on quality, equipment or price.

The sales system is insulting in my opinion. Being taken from one sales pitch to the next on up to the Manager and being given either incorrect information or stats and being flim flammed for a couple of hours or more was pretty much how I would describe the experience.

Better to have a WalMart dealership…or to be able to order online from the factory.

 

You cannot make a Walmart style automobile dealership work. Walmart works on volume and slim margins. they accept several different kinds of “cash” payments. Autodealers on the other hand, handle used cars as cash, many with hidden problems the customer failed to mention. Walmart will not tackle trade-ins and keep prices low. New car franshise dealers are the only way the “business plan” works for new automobiles. Don’t you think the manufacturers have thought of “Walmart” sales tactics? they can’t handle the trade-ins either!

Posted by MIKE J | Report as abusive
 

someone tell me how cutting half the dealerships is going to help Chrysler. Dealers pay for all of the transportation getting vehicles to their lots, all of the sales/service training, all the promotional materials, they fund their local ad associations with no money from Chrysler, and fill sold units with no money from Chrysler.

When Chrysler made big money , so did their dealers. The problem isnt the dealers.

Posted by bob | Report as abusive
 

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