Engines of Main Street: You Can't Help Detroit If You Hurt Car Dealers

The Somerset Pontiac dealership in Troy, Mich.
The Somerset Pontiac dealership in Troy, Mich. (By Jeff Kowalsky -- Bloomberg News)
By Mack McLarty
Thursday, April 30, 2009

My family has been in the automobile business since 1921, when my grandfather opened a Ford dealership in Hope, Ark. My father sold cars, I sold cars, and my sons are in the business. We've been fortunate to build our enterprise at home and overseas even as that original dealership in Hope is still going strong.

Not surprisingly, I am closely following the Obama administration's plans for restructuring and renewing our nation's auto industry. I have proudly served presidents of both parties, including as White House chief of staff in the Clinton administration, and I think my family's history gives me a somewhat different perspective from that of most Washington observers.

The auto industry needs a viable plan for long-term, durable success as the administration strives to revitalize our nation's economy. The president's task force has rightly focused on resetting the balance sheets of General Motors and Chrysler, and working with labor, management and retirees to make these iconic American companies more competitive globally. The task force aims to retool GM and Chrysler as quickly and cleanly as possible; there are no painless solutions, but it is trying hard to be fair.

I commend the progress being made. Success is possible if all stakeholders work together. I take issue with those who say bankruptcy may be necessary as the best option among bad choices. Bankruptcy should be our last resort, not our first.

The relationships between automobile manufacturers, suppliers and franchised dealers are more complex and interconnected than those of any other U.S. industry. No one knows what will happen if a shock like bankruptcy is imposed. Just the declaration of bankruptcy by a manufacturer could further damage the already dysfunctional credit markets. It could also wipe out the dealerships at the heart of many local communities and economies.

Remember, automotive dealers are automakers' only customers. Dealers buy cars and trucks from manufacturers; consumers buy from dealers, who spend billions annually advertising the vehicles they sell, plus more than $300 million to train sales personnel -- all at no cost to the automakers.

Auto dealers understand that the U.S. franchise network must be streamlined, consistent with the geographic characteristics of today's marketplace. Yet without a strategic plan to ensure that the remaining dealerships can thrive, a rapid "rationalization" could wipe out dealers and further weaken manufacturers, with negative repercussions throughout the economy, especially in the Midwest.

Dealers rely on the credit markets to finance 95 percent of consumer auto sales. America's dealers also need credit, known as floorplan vehicle inventory credit, to buy vehicles from manufacturers. Yet since the financial crisis began, dealers -- especially those with domestic brands -- have had a much harder time securing this financing.

Pushing GM or Chrysler into bankruptcy would worsen the situation. Lenders look to the manufacturers to buy back inventory if a dealer goes out of business. What banker would lend to a GM or Chrysler dealer if the manufacturer had declared bankruptcy? And if dealers no longer order vehicles, the result would be terrible for manufacturers. Dealers are already holding off on purchases for fear that customers won't buy autos made by a bankrupt automaker.

A better approach would be for the task force to be as evenhanded and supportive of auto dealers as it has been of other stakeholders, such as by guaranteeing the $20 billion in inventory financing loans that dealers -- and by extension, auto manufacturers -- depend on to keep vehicles on sales floors. It would be bad, but manageable, if dealerships were forced to close. But if dealers were also stuck with millions of dollars' worth of car inventory they couldn't move, it could break them and cause further instability throughout the economy.

Making it impossible for automotive dealers to stay in business would have implications nationwide. Auto sales account for nearly 20 percent of all domestic retail sales. The franchised automobile dealer is one of America's strongest engines of economic development. U.S. auto dealers have invested more than $200 billion in their businesses. They employ and train more than a million people in communities nationwide and pay billions in annual state and local taxes.

The vast majority of auto dealers are cornerstones of their communities -- men and women who sponsor Little League teams, who lead and donate to civic organizations, who support the places they live and the people they employ. Who will fill the void if these hardworking, dedicated, locally focused entrepreneurs are obliged to shut down?

We need a careful approach to streamlining the dealer network, not abrupt, forced closures. Strong dealer networks are not a burden to the auto industry; they are its lifeline. Indeed, dealers and their employees are part of the solid foundation that President Obama spoke of recently -- the rock upon which all Americans must work together to rebuild our economic future. An improvident resolution could jeopardize all that.

The writer is chairman of the RLJ-McLarty-Landers Automotive Group and president of the Washington-based international advisory firm McLarty Associates.

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