Industry trade publication Automotive News is reporting that Chrysler has banned 464 of its 3700 dealers – about one seventh of the total number of dealers – from participating in the dealer-only used car auctions run by the corporation. 

The dealers were barred because they did not meet 50% of the new car sales quota imposed by Chrysler. The effect is to deprive those dealers of the best used vehicles at the best prices to the dealer.

Though the action seems odd – Chrysler is still trying to dispose of the overproduction of 2006 models and the end of the current model year means the 2007’s have to be moved out, as well – this may be the first step in an overall scheme to eliminate the smaller and weaker dealers without having to pay money to buy them out.

A new car dealer has three sources of income: the repair shop, the used car lot, and the new car showroom. Contrary to the opinion of the general public, it’s not the new car sales operation that makes the big money. Traditionally, it was the shop that paid the overhead and the used car lot that supplied the profit. 

New cars generated business for the shop and trade-ins for the used car lot, but were not themselves particularly profitable. As the emphasis on reliability and longer service intervals has eliminated the 20,000 mile tune up and brake job, the importance of used car sales to a dealership’s bottom line has grown.

That’s particularly true at Chrysler dealers. A representative of the 463 barred dealers complained that many dealers had been reduced to, in essence, used car dealers because the Chrysler product line was so weak and uncompetitive. A Chrysler representative responded by saying, in essence, that the dealers weren’t trying hard enough, that the mere threat of the ban had boosted a surprising number of dealers over the 50% mark.

But the implication of the Chrysler spokesperson’s statement isn’t particularly flattering to the company. It suggests that dealers had been moving new car prospects into buying used cars, making it relatively easy for the dealership to regain the 50% of quota target when it became necessary to do so. Since the primary reason for meeting that target is to maintain access to a stream of good used cars, this merely suggests that the company has been able to strong-arm its dealers again.
That approach worked wonders for the company with the 2006 model line: as the company shoved cars onto dealers that they could not sell, the new cars which the company continued to build filled up in lots all over Detroit. Those are the cars the company is still trying to sell, recently electing to permit dealers to sell them, in effect, as used cars.

Chrysler’s real motivation may be to drive certain dealers out of the franchise. They can’t just dump them. Every state has franchise laws which protect dealers against most efforts of an auto manufacturer to strip them of the franchise. When GM elected to eliminate the Oldsmobile brand, it ended up paying huge settlements to Oldsmobile dealers. Chrysler would face the same issue were it to simply try to eliminate weak dealers in order to build volume at the stronger ones.

On the other hand, a Chrysler dealer making no money from selling new cars and who no longer has any better access to used cars than does Joe’s Friendly Auto Sales down the street has little incentive to keep being a Chrysler dealer, particularly if the dealer already has a franchise for some other brand or can get one.

The underlying story in all of this is the effect that divorcing Chrysler from Daimler is having on the management of the company. Indications are that Cerebus, the new owners, have told Chrysler’s management to get it done and given them a free hand in doing it. The green light appears to have been given to new product projects which had been stalled under prior ownership. Within the past several days, Chrysler announced the 2008 minivan line with increased standard equipment at drastically lower prices than the 2007 models. That move was not designed merely to compete. That move was designed to preempt. Chrysler sees this as a profitable segment and it appears to intend to keep it to itself. Now it seems that it is engaged in a calculated campaign to cull non-producing dealers.

These are all moves that publicly owned corporations whose management must focus on quarterly earnings reports, in order to maintain the stock price, find difficult to make.

The people that run and own Cerebus are rich. They didn’t get that way by being stupid.

Remember that as you watch developments at the new Chrysler.

What do you think?
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