One of the big operations stories of 2009 was the upheaval in the US auto industry. Operations is closely tied to the industry both because so may operating innovations (e.g., Henry Ford’s assembly line and Toyota’s Production System) originated in the car industry and because car makers and their suppliers are always seen as the source of “good” manufacturing jobs. The importance of the industry is reflected in the number of post this blog has on car makers.
One topic we have yet to touch on is how many dealers auto dealers a manufacturer needs. This question first came to light in the spring of 2009 as both GM and Chrysler went into bankruptcy and used to the bankruptcy process to unceremoniously dump a bunch of dealers (789 for Chrysler and well over 1,000 for GM). It has been back in the news as Congress passed legislation to allow targeted dealers to appeal their closure (Threatened GM, Chrysler Dealers Can Appeal, Wall Street Journal, Dec 4). This is as much about politics as any sense of justice. All politics is local and few local businessmen spend cash like car dealers. Even large healthy dealers who are not facing closure don’t like seeing automakers throwing their weight around and are more than happy to call their friendly Congressman to stand up for their fallen brethren. This may all ultimately be much ado about nothing. Chrysler is threatened to challenge the constitutionality of the law forcing them into arbitration with the dismissed dealers (Chrysler May Challenge Dealer Legislation, Dec 17). Further, it is estimated that dealers could end up spending six-figure sums to go through the arbitration process (Dealers in arbitration could pay $100,000 in fees, Automotive News Dec 15) so it is unclear how many will actually appeal.
That said, there is an interesting supply chain design question here. What is the right number of dealers for an automaker? Does having too many dealers hurt? Here is what one well-known analyst has to say on the topic (Analyst says dealer cuts ‘didn’t make any sense’, Automotive News, Nov 2):
David Cole, chairman of the nonprofit Center for Automotive Research in Ann Arbor, Mich., said he was interviewed Tuesday, Oct. 27, by the special inspector general’s office for the federal bailout. Cole said he told auditors that the automakers are cutting into their strengths, which are in rural areas and modest-sized markets rather than large metropolitan areas. “These cuts didn’t make any sense to me,” said Cole, whose research specializes in auto manufacturers and suppliers rather than dealers. “By pulling out, GM and Chrysler are giving a beachhead to Ford and some of the imports.” Cole added that he had no quarrel with the dealer reductions in metropolitan areas. He wrote a letter to the Obama administration’s auto task force this month making similar points and calling for a review of dealer cutbacks. “The dealer is the face of the manufacturer to the average customer,” his Oct. 12 letter said. “I would suggest that the distribution network for these manufacturers be revisited by the automotive task force.”
So are GM and Chrysler shooting themselves in the foot? Let’s look at some numbers.
I made this table from data available from AutomotiveNews.com. Note that these are from 2007 before the whole market fell apart. The data clearly show that the major Japanese firms have set up their distribution networks very differently from the American firms. Of course, the Japanese firms have the advantage of setting up their networks more recently. Lexus launched in 1989 and consequently has a dealer network more reflective of current demographics and population centers. In contrast, Chevrolet launched over 90 years ago and has dealers in places that it wouldn’t choose to go to now. That has consequences. Even for Chevy and Dodge there are some high volume dealers selling thousands of units a year. That implies that there must be some dealers with much smaller sales that pull down the average. When the dealer cuts were first announced, the New York Times reported the following (G.M. Tells 1,100 Dealers It Plans to Drop Them, May 15):
Chrysler said its “rejected dealers,” as it called them, accounted for nearly a quarter of total stores, but 14 percent of sales.
Likewise, the 1,100 G.M. dealers that got a letter Friday represent 18 percent of G.M.’s 5,969 outlets, but just 7 percent of last year’s sales. Nearly 500 of them sell fewer than 35 new G.M. vehicles a year, Mr. LaNeve said.
A dealership selling 4 cars a month might well be the face of GM or Chrysler in a community, but it clearly isn’t a big community. Further, a business that small can’t justify too much of an investment in the dealership. If GM wants its dealerships to have a standard look or standard mechanic training, it would have to foot the bill for these smaller dealerships. Honda does not have that problem. Next time you are driving around, notice that almost all Honda dealerships have a common appearance to their buildings. That’s not an accident. That’s what an OEM can mandate when it’s got a strong brand and the average dealership spits out fistfuls of cash. Stated another way, lots of things are possible when both the car maker and its dealers are strong. GM and (especially) Chrysler are not strong at the moment and they have too many weak dealers. Improving the automaker’s prospects will take time — a trip through bankruptcy court does not make new car designs fall from the sky — but they can at least shed the weaker dealerships.
Two questions remain. First, what will happen to the current customers of these erstwhile dealerships? GM and Chrysler estimate that between them they have over 5 million “orphaned” customers and they are working hard to keep them (In play — GM and Chrysler ‘orphans’, Automotive News Dec 28). Cole’s point that many of the dealers being shown the door are in rural locations could matter:
Distance is a huge barrier to retaining customers at a manufacturer-designated replacement store. In some cases, particularly with GM, surviving same-brand stores are dozens of miles away.
I think this is overblown. Currently, people will drive tens if not hundreds of miles to save money on cars. Why is it unreasonable to expect the growth of large super-regional dealers that serve huge areas with widely spread populations? A number of these already exist (e.g., Dave Smith Motors in Kellogg, Idaho, or Woodhouse Auto Family in Nebraska). They address the automakers’ concerns by building scale so they can invest in the business and be successful.
The second question is “What about Ford?” Like GM, Ford has too many dealerships but without bankruptcy hasn’t been able to drop a large number of them. The company has, however, worked with local dealer groups to reorganize some markets. How this has played out in Buffalo makes for fascinating reading (FORD’S BOLD BUFFALO EXPERIMENT, Automotive News, Dec 14)