May 30, 2009

Reverse Discrimination? Chrysler Minority Dealers Disproportionately Spared vs. Dealer Group’s 3X Higher Expectations

Filed under: Business Moves,Taxes & Government — Tom @ 10:02 am

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UPDATE, May 31: Not known to me at the time of the post, Jonah Goldberg at National Review and Reliapundit pointed to the convenient coincidence that the minority and non-minority Chrysler dealership termination percentage were virtually identical as too-coincidental evidence that the process wasn’t strictly business.

The post below proves that minority dealers did not expect this outcome, and for sound business reasons.

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“Dealergate” is a term referring to a collection of evidence indicating that dealership termination decisions at bankrupt Chrysler may have been based on factors other than maximizing the chances that the company, post-bankruptcy, will be viable and profitable.

Josh Painter at RedState has a roundup focusing on what have been the primary concerns, which continue to be vetted by Doug Ross (here, here, here, and here), Joey Smith, and several others. Those concerns are that dealers with records of supporting Republican candidates and organizations were disproportionately terminated in comparison to those with records of supporting Democratic candidates and causes, and that certain terminated right-leaning dealers have seen their territories gobbled up by Democratic Party-connected business cronies.

A separate but very relevant Dealergate issue should be whether minority-owned dealerships were unfairly spared at the expense of non-minority dealers.

Based on a report that originally appeared on May 25 in the Michigan Chronicle, a Detroit-based African-American weekly newspaper, Sean Parnell at the Center for Competitive Politics (HT Jonathan Adler at Volokh) doesn’t think so.

But the Chronicle’s report ignores a trade group’s early worry expressed in a Wall Street Journal article about what the level of minority-owned dealer terminations might be, as well as the realities of the business situations of many of minority-owned dealers. That worry, and those realities, strongly support a contention that many minority-owned dealerships avoided the ax for reasons that weren’t strictly business.

The Chronicle laid out the termination numbers (Parnell actually saw them in the Seattle Medium, which also carried the story):

Of the 789 Chrysler dealers who were notified that their contracts will not be renewed, 38 are minority owned…

At the end of April, there were 154 minority dealers in Chrysler’s 3,181 total U.S. dealer body network…

Parnell’s conclusion:

According to my trusty calculator, before closings 4.84% of Chrysler’s dealers were minority owned. What percentage of auto dealers receiving closure notices are minority owned? 4.82%

At this point, the case for Obama’s use of campaign disclosure reports to compile an “enemies list” for use in the closure of auto dealerships pretty much falls apart ….

Parnell and his “trusty calculator” are missing an obvious point: The “enemies list” may or may not exist, but the issue of its existence is separate from the issue of minority vs. non-minority dealer survival.

There’s a much bigger problem with Parnell’s argument. As noted in a May 15 Wall Street Journal article by Alex P. Kellogg, when the number of dealer closures was known but not the identities of all dealers axed, minority-owned dealers publicly feared a three or more times greater depletion in their ranks:

Chrysler on Thursday said it would drop 789 of its 3,200 dealers as part of its bankruptcy restructuring. GM plans to eliminate 2,600 of its more than 6,000 dealers as it reorganizes.

The National Association of Minority Automobile Dealers (NADAM) 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.

My trusty calculator tells me that the feared closure rate was 82% (140 divided by 170; NADAM’s dealer count appears to be from early 2008), while the actual closure rate was 25% (38 divided by 154).

The Journal’s Kellogg went on to cite several valid business reasons NAMAD itself and other minority dealers cited as to why they would generally be more vulnerable:

The organization said Chrysler’s minority-owned dealerships are at risk because many are small stores that offer only one of the company’s three brands, Chrysler, Dodge and Jeep. Fewer than half have converted to the company’s “Genesis” format that puts all three makes under one roof, NAMAD said. That compares to the approximately 60% of all Chrysler dealerships that have the three-brand format.

Genesis stores are usually more profitable because they sell and service more vehicles than single-brand dealerships. Chrysler plans to emphasize Genesis dealerships under its reorganization.

….. Many minority dealers operate in cramped downtown locations that are less desirable than the spacious suburban auto malls that are now popular, said Mr. (NAMAD President Damon) Lester and other dealers. Urban franchises typically draw fewer shoppers and carry less inventory for customers to choose among. Both factors tend to limit sales.

Minority dealers often don’t own the land beneath their showrooms, so the monthly rent adds to their costs, Mr. Lester said. And since many borrowed money to get into the business, they sometimes have more debt than family-run dealerships that have been in business for decades.

All other factors being equal, given NADAM’s expressed fears and the general comparative dealer profile it provided the Journal, the minority-owned dealer termination rate should have been higher — probably much higher than the 25% overall average. In fact, it’s clear that NADAM expected that outcome, even if you heavily discount their worry that over 80% of minority-owned Chrysler dealers would be told to go away as overblown hyperbole.

But it would appear that all other factors were far from equal, and that influences other than bottom-line business considerations were prominent.

The last thing a bankrupt, taxpayer-underwritten Chrysler needs as it struggles to emerge from bankruptcy and regain viability is a less than optimal dealer network. Yet it seems that the company deliberately chose exactly that — or had it chosen for them.

Cross-posted at NewsBusters.org.

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3 Comments

  1. The “enemies list” may or may not exist, but the issue of its existence is separate from the issue of minority vs. non-minority dealer survival.

    Not so much. If Chrysler rigged the closure list so that minority dealers were not disproportionately impacted, that’s probably enough to explain the entire disproportionate impact on Republican contributing dealers, as minority dealers are likely to be disproportionately Democrats.

    Comment by Anthony — May 30, 2009 @ 9:11 pm

  2. #1, I agree to an extent, but instead of it being a deliberate impact on GOP dealers, it had a deliberate impact on non-minority dealers, who more than likely are more heavily GOP than minority dealers.

    Taken in isolation, that’s a convenient coincidence as far as Obama is concerned.

    So yes, it can explain the impact, without the formality of an enemies list.

    Other factors and evidence being discussed by others point to the possibility of more deliberate targeting.

    Comment by TBlumer — May 31, 2009 @ 5:21 am

  3. SUPERB JOB PROVING THIS!

    and thanks for the link – YES: great minds think alike!

    Comment by reliapundit — May 31, 2009 @ 9:28 am

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