Dealergate: Center-Right Bloggers Doing the Establishment Media’s Work, with Larger Lessons (Topside Updates: More Evidence; Reverse Discrimination?)
TOPSIDE UPDATE, May 30: Apparently, the Leftosphere is engaging in one of its typical tactics — “You don’t have courtroom-level proof, therefore it’s all made up.” Well, patterns are patterns, and acknowledging their existence isn’t a sin — yet.
Meanwhile the evidence, and concerns expressed by adults, mounts:
- Doug Ross — “Dealergate: 40 Democrat-friendly Dealerships Become 42 After The Dust Settles; Their Competition Gutted As Well”
- IBDeditorials.com — “Has our political class grown so petty that it would use the power of government to punish the political opposition? We hope this isn’t true. If it is, the country’s in more trouble than we thought.”
- Doug Ross — “Awesome: Olbermann and 538.com echo-chambers inadvertently confirm Dealergate findings!”
The Volokh post showing that the percentage of terminated dealers who were minority-owned is the same as their percentage of the dealer universe proves nothing, and actually may support the favoritism claim. If minority dealers in general have outperformed all others or have more attractive prospects, fewer of them should have been terminated. If minority dealers in general have underperformed all others or have less attractive prospects, more of them should have been axed.
Based on business considerations, it’s obvious from this May 15 Wall Street Journal report that the a minority dealership group thought that the latter would be the case:
The National Association of Minority Automobile Dealers (NAMAD) estimates that 140 of Chrysler’s 170 to 175 minority-owned franchises could be closed, and at least 174 of GM’s 300 minority-owned dealers could shut their doors.
The NAMAD estimate was presumably based on the group’s assessment of the business factors Chrysler would consider in dealership termination decisions.
Even conceding that the group’s statement has some attention-seeking hyperbole, it’s difficult to get from NADAM’s 82% “could be closed” estimate (140 divided by 175; NADAM’s total dealership count appears to be as of early 2008) to the final result of about 25% (38 divided by 154) without raising the possibility that minority Chrysler dealerships were unfairly spared in the name of something other than business-related factors.
I cover the reverse discrimination issue more fully here.
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TOPSIDE UPDATE 2, May 30: Why won’t anyone own up to being responsible for the dealer termination decisions? Joey Smith’s Chrysler Dealer Shutdown blog points out that White House spokesman Robert Gibbs claims that “We don’t make those decisions. Ok?” But a lawyer for Chrysler dealers who deposed Chrysler President Jim Press believes, based on that deposition and despite management’s official denials, that “Chrysler (management) does not see the wisdom of terminating 25 percent of its dealers …. They are under enormous pressure from the President’s automotive task force.” Separately, Smith notes an LA Times story reporing that General Motors CEO Fritz Henderson has “acknowledged (Obama administration) pressure to make ‘faster and deeper’ cuts to the company’s distribution network.” So there was pressure at GM, while Gibbs implies there was none at Chrysler. Uh-huh.
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(begins original post)
Doug Ross has done yeoman investigative work (here and here) looking into something the establishment media apparently won’t touch — and, as Michelle Malkin noted, is even mocking. Now that Drudge has flagged Mark Tapscott’s piece, further attempts to sweep the matter under the rug will be painfully obvious.
What Doug and others have found reveals a pattern of Chrysler dealer terminations that, despite assurances that they were based on “sales volume, customer service scores, local market share and average household income in the immediate area,” seems divorced from valid business considerations. Many star dealers who have moved a lot of merchandise have been nixed, while a number of underperformers have been allowed to stay on board.
Why?
Doug, with lots of help, notes that “Dealers on the closing list donated millions to Republicans, $200 for Obama.” Meanwhile, certain dealers who are either Democratic donors or have Democratic connections have been spared. The possibility also exists Gateway Pundit also has compelling evidence that certain terminated right-leaning dealers have seen their territories gobbled up by Democratic business cronies.
How convenient.
All of this is an object lesson as to why the government shouldn’t have tried to “save” Chrysler, or General Motors, in the first place.
In a private business, owners’ decisions are often arbitrary, and sometimes even stupid. Heck, there may even be a few that are based on partisanship, or disagreements over religion. But in general, the decisions are made based on business considerations with an eye towards current or future profitability. If the decisions are wrong, the primary and unpleasant damage is limited to the company itself, the owners, company employees, and other stakeholders.
But when government makes business decisions, even angelically-intentioned (which seems very dubious in the case of Chrysler), factors other than current or future profitability become more important than they should be. Sometimes the other factors become paramount. History has shown that the government-made decisions are on average be much worse for the business and for society as a whole than decisions made by business owners themselves.
When the government is an actual owner, the entire country pays the price for bad business decisions. That’s why government should stay away from running businesses.
That we have to re-learn this obvious lesson because of an administration that either believes it can transcend history, or doesn’t care about the damage it is doing as long as its power is enhanced, is extremely frustrating.
Milton Friedman had something to say about all of this many years ago (”The Social Responsibility of Business is to Increase its Profits”). He was right then, and he is still right today.
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UPDATE: Comment #1 brings up important constitutional issues. In fact, Wolf Howling’s post is a must-read, and has many other good links.
This is a bit worse than simple favortism. If Chrysler and GM were simply taking orders on which dealerships to close, then they become a government proxy and Constitutional safeguards apply. A very strong argument can be made that this then violates both the 1st Amendment right of free speech – i.e., punishing people for their political speech – and the 5th Amendment public use provision, if not others. To put this into some perspective, Watergate involved simple spying and a coverup. This involves a violation of Constitutional rights on a huge scale.
Comment by GW — May 28, 2009 @ 4:03 pm
#1, great points, and yes it does. This is what statists do.
Comment by TBlumer — May 28, 2009 @ 4:05 pm
I’m not convinced – yet – that this isn’t just statistical noise. If 88% of auto dealers are Republican, and they are closing 90%+ Republican dealers, that’s not much. The proof is that if of the 12% Dem dealers, 90%+ stay open, then you have a case. The question remains though, “Why is the government closing down any of them (i.e. not renewing franchise agreements)?” Dealers are a revenue source, not a cost. It is this question that makes the conspiracy theory plausible.
Comment by Joe C. — May 28, 2009 @ 6:55 pm
They should also stay away from running companies because unlike business, government is slow, inefficient and sucks up money from the citizens involuntarily in the form of taxes.
Comment by zf — May 28, 2009 @ 8:16 pm
#3, that’s the real issue isn’t it? If GOP supporters constitute 88% of all dealerships, then basic math says 88% of the ones let go should be GOP supporters. However, one caveat, on average does a Dem supporter do as good of business as a GOP supporter? The premise of the basic math approach assumes all things are equal…
Are Dems better at sales? Intuitively I would say yes, because they tell people what they want to hear. Are GOP people better at business, intuitively I would say yes, because practicality and bottom line comes before emotional considerations.
All these issues aside, what were the criteria for keeping a dealership? Selling the most cars in a given area? Doing the least amount of warranty work? Having the best customer service rating? Having the least complaints?
Actually, what I want to know is on what basis does a dealership cost something to a car company??? I believe there is the real criteria for keeping or getting rid of a dealership. For months everyone pointed the finger of the car manufacturers being partially unprofitable because of the dealerships and State laws preventing it from being dropped. So what was the cost?
Comment by dscott — May 29, 2009 @ 10:38 am
I think I have a possible answer, it has to do with “hold back”. http://www.safecarguide.com/gui/neg/holdback.htm
Dealers must pay the manufacturers when they order a vehicle, not when it is sold. To provide adequate numbers of new vehicles whose options satisfy most customers, dealers finance this excess inventory through the financial arm of their manufacturer or through a local bank. This financing procedure is called a floor plan. To help their dealers keep up their inventory, manufacturers return the interest the dealer has to pay on those loans (floor plan) for the first 90 days by issuing them a “holdback” check every 90 days. The amount is based on the either the base MSRP or total MSRP or the base invoice or total invoice – less destination charges and averages between 2% and 3%, depending on the manufacturer. In addition some Ford-Lincoln-Mercury dealers who excel in Ford’s dealer service ratings (those that are Blue Oval certified) receive an additional 1% to 2% rebate as a further incentive to keep up their good service record.
So the more dealers you have, the more inventory that potentially sits idle because of giving the customer a choice of color, options, etc. One dealer with a full selection is cheaper on the first 90 days interest to the car manufacturers than two dealers since there would be two times the inventory to give the selection.
So the criteria maybe the dealership with who has the least hold back expenses is the one they want to keep. This leads me to believe the process might favor the sales abilities of Dems. Not the profitability of the dealership per say, since a hold back payment adds to the profit of the dealership. Sales versus business.
Comment by dscott — May 29, 2009 @ 10:50 am
Misc thoughts:
Normally, I would guess that the dealership closings would be business-internal proprietary information. However, since the GOVERNMENT was involved, could the questions in #5 be required to be answered by a Freedom of Information Act request?
Completely changing inquisitive perspective: How do we get the government to CUT OUR LOSSES NOW!! Do not invest more. Let the bankruptcy become a pure sale; not emerging from it? My concern is the “protecting the taxpayers investment” will be a continuous government excuse to continue pouring more of my money down the drain. Simple investment rules: Buy the stock at Price A. Price drops 10% from A, so you buy more. If a stock you own drops once, consider double-down to reduce your overall basis (like dollar cost averaging with dividend reinvestment purchases). BUT, if it stays down for calendar time T and/or drops more to now down P%, then SELL OUT. Cut your losses. Break the emotional temptation to stay in, holding on to salve your ego from the initial purchasing mistake. Follow the cold rule: SELL, quit and cut bait.
Now the problem: Some percent of the public is SICK of the bailouts, and therefore won’t buy a Chryler or GM vehicle for a lifetime. How do we the taxpayers get the Congress (or some other way) to get a TARP cease-and-desist order for NO MORE $$ into these two companies?
Sigh, probably a lost cause to influence the politicians on this; but thought I’d pose the question. Crumbs for thought.
Have a nice weekend. Positivity: My Autoliv (ALV. airbags and such) seems to be doing okay, and thinking of buying some Ford (F) sometime this calendar year. :-> And, probably a Ford F-150 truck purchase is on the horizon, to replace our non-big3 pickup.
Comment by Cornfed — May 29, 2009 @ 7:13 pm
Now that you have updated the thread and noted that sales volume may have been a criteria and local area household income, let’s consider an implication. I would assume when considering household income, they would prefer to save the dealership in the lower income area as a social responsibility issue. This means the dealership in the lower income area is in all probability was the weaker of those selected to stay a dealership. This is clearly a poor business decision in regards to Chrysler as a manufacturer. It’s the weaker ones that need to be cut loose in order to optimize the sales and survivability of Chrysler.
The other implication is sales volume, how did they define sales volume? By dollar amount or by units sold? What sells the most? Isn’t that the high dollar car which gets the least mileage? So imagine if you will when Chrysler sells only little cars of Fiat design, what’s the outcome compared to Ford and others selling bigger vehicles competing with those not under government/union/eco-nutcase control? Yeah, the outcome is assured, Chrysler and GM are done in two to three years even with billions in government money. The new CAFE standards effective 2016 won’t be on line soon enough to save them.
The irony of this situation is the 789 Chrysler & 2600 GM dealers cut loose will become competitors to the remaining since they will be either selling used cars or those from other manufacturers. So instead of making the situation better, they actually made it worse…
Comment by dscott — May 30, 2009 @ 3:39 pm
#8, my Saturday post addresses the minority dealer situation.
I think in many cases your last para will be true. In others, where the market is already well-served by other dealers and no new opportunities are available, they’re just going to close their doors. It would be a tragedy if the termination decisions were based on merit. But they’re not, making it a travesty.
Also, the fact that as I understand it, the dealers have to totally close by June 9 might have something to do with preventing them from becoming competitors, because they’ll have to go months before getting a sale of whateve new brand they might have wanted to sell, and most won’t be able to hold out that long.
Comment by TBlumer — May 31, 2009 @ 5:37 am
#6, I think your explanation of the holdback is incorrect. The “holdback” is 2% – 3% of the vehicle cost, and is totally independent of the amount of interest paid during the floor plan period.
If you go to consumer reports or sites like that, they will tell you what the holdback % is on a given vehicle.
Better question, which should have occurred to me earlier: Are the 3200 dealers being screwed out of their holdbacks because of the bankruptcy filing? Wow.
Comment by TBlumer — May 31, 2009 @ 5:40 am
#9, I think we need to confirm whether the closing is “permanent” versus not allowed to sell the new vehicle. Unless the dealership signed a “non compete” contract with manufacturer there is no way a dealer can be shut down permanently. Since these dealers have a given period of time to effect the orderly transfer of inventory, they will have the cash from that transfer or freed up credit line to purchase other vehicles whether used or another manufacturer. If I were the dealer, I would be scrambling to contact Toyota, Kia, and many others prior to the final date.
If the Obama Admin political hacks were so foolish as to use “social responsibility” criteria instead of a strict business decision, then what they have done is to keep the under performing dealer and unleashed a fierce competitor.
Comment by dscott — May 31, 2009 @ 9:04 am
#10, According to Edmunds.com The 2 to 3% is paid back to the dealers in periodic payments as long as the car is unsold.
What Are Holdbacks For?
Dealerships must have an inventory on hand so that consumers can browse and ultimately select a vehicle. Dealerships must pay for this inventory when it is obtained from the manufacturer, and the amount the dealer pays is the price reflected on the invoice from the manufacturer to the dealer, the so-called “invoice price.”
Now the twist: with the introduction of holdbacks some years ago, most manufacturers inflated the invoice prices for every vehicle by a predetermined amount (2-3% of MSRP is typical). The dealer pays that inflated amount when it buys the car from the manufacturer. But later, at predetermined times (usually quarterly), the manufacturer reimburses the dealer for that excess amount. This is the “holdback,” so named because funds are “held back” by the manufacturer and released only some time after the vehicle is invoiced to the dealership.
Why the sleight-of-hand you might ask? Because holdbacks can benefit dealers in three ways:
1. Dealerships borrow money to finance cars based on an invoiced amount that includes the holdback. So the higher the invoiced amount, the more the dealership can borrow from its lender.
2. Inflating the dealership’s “cost” can have the effect of increasing profit, since sales personnel are paid commissions based on the “gross profit” of each sale. Holdbacks have the effect of lowering the gross profit and thus the sales commissions.
3. Holdbacks enable dealerships to advertise “invoice price” sales and sell their vehicles at or near invoice and still make hundreds of dollars on the transaction.
http://www.edmunds.com/advice/incentives/holdback/index.html
Comment by dscott — May 31, 2009 @ 9:11 am
Jack Fitzgerald (owner of a number of car dealerships some of which he is losing the brand) made a good point on Cavuto today, less dealerships mean less car sales period. He mentioned an interesting fact, when he started out in the business there were 40,000 dealerships nationwide, now there are only one third left. After the shedding of GM and Chrysler dealers there will be less dealers selling domestics than imports.
So my question is this, if the hold backs were so onerous to the manufacturers, why didn’t they just drop the hold back provision during bankruptcy and just keep the status quo? Outside of the hold back the dealerships don’t cost the manufacturer at all. Some manufacturers don’t do the hold back at all. Sure all the dealers use to the hold back would have squawked but at least they would still have the brand to sell.
Comment by dscott — June 3, 2009 @ 4:50 pm