Why are you wasting time looking at this? don't you know the problem is Unions, Unions, Unions? we cannot have capitalism if workers get to expecting a decent wage and retirement

Seriously,, nice piece

I don't know if it makes sense, but it's a fact that auto dealerships are heavily protected by the states from auto manufacturers. It's been that way for a long time. Auto dealers have a huge lobby at the state level and in Congress.

Sounds like a crucial part of any auto industry bailout will have to be requiring the states to modify their dealer-protection programs in accordance with a federal guideline in order to save ALL taxpayers significant money and get the auto industry profitable again. Hoping the states will do it themselves is like hoping all the neighborhood cats will suddenly form a food coop. Ain't gonna happen.

I don't have any good answers here, but you might want to also see this James Surowiecki piece for additional historical context: http://www.newyorker.com/archive/2006/09/04/060904ta_talk_surowiecki

In all fairness, books aren't cars (title, licensing, taxes), but as suggested above, car dealers probably have big lobbies that protect them from the free market.

My guess (speaking as a lawyer but not one w/ any special insight into the auto industry) is that the "state law" at issue is often just a branch of contract law- contract law is essentially all state law. Franchise agreements are types of contract law. The agreements likely say that the dealer (the franchisee) agrees to only sell certain cars in exchange for being the exclusive dealer in an area and gets other guarantees, too- such as that they type of cars offered (and the number) won't be reduced with her consent or w/o compensation w/in the terms of a certain period agreed to by the parties. So, if GM wants to get rid of Dodge, they have to compensate all the people that had contracts to sell Dodge cars. I'm not _sure_ that that's what at issue here but it would be my strong guess.

This is just another example of many that show the US does not operate a free market economy. While the Federal goverment props up rural communities by paying farmers to not grow crops, in this instance, the state government protects retail outlets for motor vehicles.

The idea that Unions are somehow responsible for this is laughable - yet also indicative of the average American's understanding of the current economic mess.

God save us all.

I imagine that significantly weakening the dealerships would have large economic effects vis a vis not just manufacturers and consumers, but also in local economies. For example, daily newspapers carry huge dealer advertising sections, and local dealership ads are a major part of local television advertising. A more streamlined business model would probably eliminate a large portion of this local ad revenue.

My guess is if a big portion of the dealerships go under, they'll pull down a number of local dailies with them.

It's worth reading the piece in today's NYT about one such auto dealer.

http://www.nytimes.com/2008/11/30/business/30dealer.html

What that piece said to me is that automobile dealerships are deeply entwined with the political economy of localities and states, that the subsidies received, implicitly, by both dealers and manufacturers are rich in detail, and that you really can't just let GM go bankrupt. Because you can't simultaneously close down all these local businesses, with millions of dollars of inventory sitting on their lots.

In answer to Hilzoy's "why" question, I think what probably happened is the Big Three tried to do this. Dealers lobbied for protection at the state level,and got it. The Big Three wrote contracts compliant with those state regs, and now they are stuck with them.

As with all such contracts, it didn't go one way; dealers were forced to accept cars they didn't want under these arrangements. (Recall disclaimer language "Applies only to cars in dealer stock.") The one time I bought a new car, I was astounded at how difficult it was to get what I wanted

"One Honda Civic, stripped."

"Not even a radio?"

"No. Stripped."

"What color?"

"I don't care."

I went through at least a dozen dealerships before I found someone who would order this car for me. The conversation had reached this level of brevity for that reason.

Now, it is true that shopping for a car requires a hands-on experience that requires expensive demonstration models to be at hand, and valuable demonstrator time. So this isn't simple. It's not like you can put together the features you want on the web, and pick your car up.

If it's just a matter of contract law, wouldn't a bankruptcy judge be able to modify the terms if GM went through bankruptcy?

I would suspect that much of it is a historic holdover from when there wasn't much foreign competition, somewhat justified (at the state level) by the title, tax and registration requirements for new cars.

Marcy Wheeler (emptywheel) has been writing a bit about the relationship between car dealers and the Big Three. She's based in Michigan and I believe has done some consulting in the auto industry in the past so maybe you could correspond with her on the internets about dealers.

A lot of dealer protection came from the fear that Big, Bad Detroit would exterminate hapless local dealers when it suited them. You need to remember the days of "Engine" Charlie Wilson and "What's good for GM is good for the country." The states sought to protect their citizens from predatory outsiders. US history is full of such attempts to regulate the big, bad outsider from destroying the local market for the benefit of "Eastern interests." These relic laws remain because of the riches and political power that locals have gained though protecting the local markets. These laws should be repealed but the car dealers have now become the dominant at the local level. Federal action, using the Interstate Commerce Clause, is probably the only total solution, but tell a member of Congress he needs to repeal local protection and you'll hear: "Are You Nuts?" What may happen in this auto sales depression is that a lot of GM dealers will just go bankrupt and disappear as a result of credit conditions. A couple of big dealers in my local area are actively talking to bankruptcy lawyers...one GM and one Ford. I remember reading that Florida lost one of its largest GM dealers about three weeks ago. Sic Transit.

It's not like you can put together the features you want on the web, and pick your car up.

Are they really? Are cars inherently more complex than, say, computers? Yet I can order a computer to my exact specs over the web (and have been able to for years). Or is the over-involved process for buying autos an overhang from an older era?

Much of the mechanical complexity of today's cars comes from their use of internal combustion engines, necessitating a host of support systems (radiators and coolants, carburetor systems, air and oil filtration systems, exhaust and muffler systems, starters, transmissions, etc.) that, say, all-electric cars would eliminate. Could we see cars becoming simply a sort of mobile appliance? If so, what would be the point of these cumbersome middleman organizations like car dealers?

OK, first off:

" ... At the core of GM's problems is that it does not have, and has not had, enough resources to feed eight brands with unique products, ... "

Is just flat out wrong.

They have the story exactly backwards.

GM has all those brands because for decades, they've practiced what's known as "badge engineering". The difference between an Pontiac and & Chevy is, by and large, the badge that goes on the hood; everything else, apart from trim & options, all the expensive stuff like running gear, drivelines engines, are the same.

Amortizing costs like this helps the bottom line. GM, is, in effect only making one kind of mid-sized sedan, but selling 4 or 5 differently badged versions of that car.

This is because, and GM's problems are because, it it a car company that has, literally for decades, been run by guys that came up through the accounting department, and are not, auto engineers.

If you look at a company like Honda, all of their CEOs since the company's inception have been vehicle engineers first, and guys that run companies second.

The reason that GM (and Ford & Chrysler) are where they find themselves today is because they have been more interested in the bottom line first, and the quality of what they're building second (at best).

If a car company listens to:

1 - What the customer wants

2 - What the regulations are (safety, environmental etc.), and

3 - what the trends are

They will sell a lot of cars.

Ford, Chrysler and GM, especially GM, haven't been doing that for decades, and it's been a long steady decline for them because of it.

Look at where GM was in 1948. Look at where Toyota was.

If you were to tell someone in 1948, "In 60 years, Toyota will be the #1 car company on the planet, and General Motors will be teetering on the brink of oblivion," they would have locked you up in an asylum and thrown away the key.

GM, (and Detroit along with it) is where they are because THEY screwed up.

Not Unions.

Not because "The Japanese" cheated.

Not because of environmentalists.

Not because of Ralph Nader.

Not because of "worldwide economic downturns".

They are where they are through their own screw-ups.

Period.

> If a car company listens to:
>
> 1 - What the customer wants
> 2 - What the regulations are (safety,
> environmental etc.), and
> 3 - what the trends are
>
> They will sell a lot of cars.
>
> Ford, Chrysler and GM, especially GM, haven't
> been doing that for decades, and it's been a
> long steady decline for them because of it.

I have no brief for GM, and I have had many long arguments along these lines with my high school friends who are now high up in GM management. But you also have to consider that since 1985 GM's customer base, Middle America (both rural **and exurban**), have been telling GM that what they want it bigger vehicles with bigger engines and bigger sightlines. Absolutely no riceburner feel or features. And eff Joan Claybrook and Ralph Nader. Until just 18 months ago GM was selling megatons of such vehicles.

Now, I have argued until I am blue in the face with aforesaid friends about GM's lack of a small sedan along the lines of the Honda Accord (oops - Honda upsized it to a midsize - guess their customers want bigger too), an econbox like the Corolla (oops - upsized to a small car; let's say the Fit {which is the same size as the 1985 Civic}); as innovative as the Subaru Outback. And that they needed to get technology like the Prius in production rather than on the autoshow floor. But up until 18 months ago they could have reasonably replied that any GM or Ford executive who tried that would have been kicked out because that wasn't what the customer was actually buying.

Now, the poor quality and lack of technology (50% of the patents used in the 1st-generation Prius were licensed from GM!) are inexcusable, as was gutting the Saturn line as soon as Smith retired. But there is also a bit of a mutual hostage situation with the customer base here.

And now that gas is back to $1.75/gal, how are Prius and Fit sales doing? Same as 3 months ago?

Cranky

Fuck cars, car dealers, and car manufacturers. We need about 1% of what we have, and better mechanics.

The rest is bullshit.

My guess is if a big portion of the dealerships go under, they'll pull down a number of local dailies with them.

Good riddance. We can save trees at the same time we replant the fucking parking lots.

Are cars inherently more complex than, say, computers?

Yes. The user interface is a great deal more complicated, and not standardized. Your physical body's build comes into play. On this wheezing laptop, I'm using a 14 dollar keyboard and a 20 dollar wireless mouse, right now. That's the physical user inteface. I don't even have a cupholder here.

Also, you cannot judge, without driving a car, how it handles, how it feels. One of the interesting things about human synesthesia is that you can feel the road through the various intermediate devices. And that different people prefer to feel the road differently.

Before I went out on my mission to buy a stripped Civic, I did indeed drive other brands of car in that price range. The feature set for the Hyundai at roughly the same price point was at least as good, and it was cheaper. But when I drove it, I hated it.

OTOH, I love the feel of a VW Beetle, which is as tinny as a piece of crap as you will find. If you go to Mexico or somewhere.

I don't believe GM makes the cars people want. Rather, they convince people they want the cars GM (and the others) wants to make. Their profit margin on the high end is much greater than on the smaller vehicles, hence...big cars. Their advertising budgets tell the story and have since "See the USA in your Chevrolet." - Ted

So, if GM wants to get rid of Dodge, they have to compensate all the people that had contracts to sell Dodge cars. -- Matt at 6:19 PM

I'm sure GM would like to get rid of Dodge, but Chrysler might have something to say about it.

Good post. Good comments.

Hilzoy,

Here are a few possible guesses:

1.) The biggest problem seems to be cannibalization; if your brands can't be clearly distinguished from each other, or appeal to the same customer segments, you're going to waste a lot of time and money having them effectively compete with one another for essentially similar customers.

There are also major marketing problems, in that people don't buy a "GM" car, they buy one of the many sub-brands, because they don't associate them with GM as strongly as they do with, say, "Oldsmobile." I couldn't tell you what cars were made by GM off the top of my head. So you dilute your brand, making it easier for other companies to pick people off.

2.) I don't know for sure, but I could imagine those laws were put into place because the states wanted to avoid franchisors coming to town, selling a bunch of franchises, and then dropping the brand, which would leave the franchisees holding the bag for all of the activities that are handled centrally (and that make the franchise profitable), like marketing and procurement.

3.) I'm not sure how the territories work in the auto industry, but presumably too many franchisees means that the territories might overlap and they would compete for customers. Additionally, if you have a lot of competing messages out there, I can see it being much less impactful than if there were a small group of core franchisees that were effectively coordinated. Finally, you have to support all of the franchisees with various services (marketing, etc.) and you can't do that very efficiently if you have to serve a ton of geographically disparate franchises.

I can't comment on other states but since I live in Texas here's what I do know about franchise laws here. The dealers basically have lobbied the state legislature in the past to keep the manufacturers from opening their own dealerships. In effect, protecting the franchise owner's dealerships. It's not the manufacturer's who have created this monster it's their franchise system. It's so ridiculous here that you can't buy a car online from any dealership. You literally have to go in person to the dealers to buy the car. The franchise dealers seem to have much more political clot than the manufacturers so it wouldn't bother me a bit as a consumer if the big three went broke and the dealerships went down with them. Dealers here can and do screw their customers on everything they can possibly do and there's not much a buyer can do about it.

Hey, those are good observations Cranky O.

American consumers do seem to prefer, all else equal, mid sized sedans. Or SUV style cars. The 1985 Accord, which is the last car I owned was a very different vehicle from the CRV I drove over the holiday weekend.

The only thing that complicates this is that the Big Three has been on a relentless ad campaign associating the latter, the high margin SUV and no longer so light truck with some kind of core American values. It's easy to understand why someone would want to drive a nicely appointed sedan with smooth handling. It's hard to understand why someone would want to drive a truck, even a truck without a flatbed, like a Ford Explorer.

Again, I don't have the car thing at all. If I have to buy a car again, it'll be another used beater like the Accord. But the formation of consumer preferences for automobiles that have features that people never use (four wheel drive, flat bed storage instead of seats) and are less safe (minivan unibody construction is much safer than slapping a cab onto a truck chassis) did not arise out of nowhere.

Republicans like to rail against unions, but when the problem is auto dealerships GOPers would rather stick with the rich people from the sales culture.

I've been told that the biggest advantage to Chapter 11 from GM's perspective is not the idea that they could walk away from their union contracts, but that they could walk away from their dealer franchise contracts. Their current dealer contracts probably makes sense if you look at it from the perspective of 50 years ago and believe sales will go up for ever and ever amen, but not in this reality.

I don't believe GM makes the cars people want. Rather, they convince people they want the cars GM (and the others) wants to make.

There is some support for your theory. Don't SUV's get special tax treatment because they are "trucks"? I feel sure GM et al. are behind that. And they certainly are vociferously opposed to higher CAFE standards, so it does seem they want to be selling the big (high margin) cars.

But you also have to consider that since 1985 GM's customer base, Middle America (both rural **and exurban**), have been telling GM that what they want it bigger vehicles with bigger engines and bigger sightlines.

I don't think that this demand just spontaneously appeared; someone decided to sell these giant truck-derived cars (and the first ones were) to a larger market, and they marketed the bejeebers out of them. I do not recall, from living in the late 1970s and 1980s, moping to myself about the lack of a Really Big Car to drive around in (and I learned to drive in an Econoline Van and a Saab 96 sedan). People were sold on these giant cars as "safe", go-anywhere vehicles, and in practice they are neither.
(You want ground clearance, go find a split-window VW microbus.)

I grew up in "rural" (one-half mile of packed sand/shell road between home and pavement), and we got around just fine in all sorts of cars. Ford Econoline van, Saab 96 sedan, 1964 Chevy II, it was all basically ok. Certainly up through my teens, rural cars = cheap cars, and they get the shit beat out of them. Great thing about a little car is that if you end up in a pickle, you can get yourself out with hand tools, more or less (shovel, boards, come-along -- I knew how to do shovel and boards before I was ten). All that a 4-wheeler gets you, assuming you know how to drive it well, is the opportunity to get into much deeper weeds before it is finally stuck.

There are some unpleasant externalities as dealerships fail. Aside from the people directly unemployed.

I am in a retirement program/fund which includes a number of dealerships, and because of bad investments is seriously underwater. As dealerships go under, that leaves fewer and fewer employers liable for the funding gap, putting greater pressure on the survivors, just when they can't afford it. Ultimately this turkey will be dumped onto the Pension Benefit Guaranty Corp. Of course the deficit will be made up by a combination of lower benefits to retirees, and federal taxpayers.

My two cents: There are an awful lot of car dealerships in small rural communities from coast to coast. These dealers are an important part of the economy of these small towns, and most of them probably wouldn't exist today had the dealers not formed their strong lobby to get laws enacted to protect their interests.

The large number of dealerships is a holdover from an earlier time, when America's myriad small towns all had "neighborhood" dealerships. It was common to be in a small town or village, with a dealership parked right in amidst a block of homes. The showroom was about 30'x40' or so, with enough room for maybe four cars and a couple of desks. The rest of the dealership would consist of a few offices (upstairs), a single bathroom, and a two-bay service department. Behind the building, there was room for customer parking.

The whole thing would fit quite nicely on a 50'x150' city lot.

You didn't buy "from a large selection" back then---you saw the model you wanted, went through a variety of photographs showing the different color-schemes and options packages, and then you ordered the car. a few weeks later, you'd get a call that the car was in; you'd pick it up and drive home with it.

If there was a major service issue or a body-shop problem, the dealer would send you to a contract shop. He'd have a list of reputable service facilities in the area---some might even be gas stations with service bays---and you could take your pick.

(We lived in Galion, Ohio when I was a kid; my dad was partial to Barney's Sohio at the intersection of Harding Way West and Portland Way. It was a 5-minute walk north to the Dairy Queen, and a 10-minute walk to the west to the A&W.)

Anyway, a dealership with a manager/salesman, a second salesman, a secretary, and a combination mechanic/prep-guy only needed to sell five or six cars a month to stay in business; the Buick dealer that my dad always went to usually sold about twice that number.

There were no "big-box" dealerships trying to compete in size with Wally World back then---and there shouldn't be today. If they want to keep all the dealerships, then fine---just downsize the damned things. I'm tired of getting sales flyers in the mail, and listening to screaming radio ads telling me that I have to buy a $40k car for $30k now, if I really want to save money.

I see it as throwing $30k away. Our '05 Stratus has 29,000 miles on it and it runs like showroom-new. Why would I want to trade it for an overpriced piece of squirrel-vomit?

It's ridiculous that everyone is armchair CEOing the car companies. Not that we're wrong, but that we're trying to bail out the executives, who obviously don't know what they are doing, and are getting paid hundreds of millions to run their companies into the ground. They should all be fired.

But I don't agree it's because Detroit is not building 21st century cars. Americans don't want 21st century cars. If they did, you wouldn't see all these monster pickup trucks and SUV behemoths hogging the roads. Americans love their big, tough, macho gas guzzling cars.

If you ask them why they buy these huge clunkers, they'll tell you, "Safety." But that's not it. That's BS. It's that swaggering, cowboy attitude we have.

And that's gotta change, along with Detroit's management, which has to go. But neither will change or go, I'm afraid.

We are too set in our ways here in America for serious change. This is what happens to nations. They eventually collapse under the weight of their own entrenched interests. Just like an old car, nations eventually rot and decay and cost more to maintain than to scrap, and cross an ocean to start over again. Only we don't have anymore oceans to cross.

Hell, soon we won't have anymore oceans to fish, the way we're polluting.

bigTom, you have really identified the central issue of this crisis and all the rest. Everything is connected and we are all impacted to some degree. It is up to those with the most to share with those with less. If you want to call that socialism or communism or any other ism, go ahead. Just remember, at some point those without much will have to be dealt with and there are not enough prisons to hold them, and the prison guards, at some point, will recognize they are at the mercy of those with the money and they will have friends and family members in their prisons. What do you think will happen? What would you do if your friends and family were being dispossessed because of the greed of the financiers and auto makers? WE ARE ONE! We all share this spaceship earth and are in its care, one way or the other.

peace,
st john

Selling cars is a bit more complicated than selling books. You depend on the dealer to have the parts and expertise to fix your car when something goes wrong. At least some of the franchise laws are there in part to insure service after the sale. Cars are becoming more like appliances: plug them in, drive 180,000 miles and throw them away. But we are not quite there yet.

Wow, the more you dig the more barriers there are to getting the US automakers back on track. Never mind a calcified management structure and expensive pension costs, they're stuck with a dealer setup over which they have little control.
Unfortunately, bankruptcy may be the only way GM and Ford and Chrysler will get straightened out. Yes, they will use it to bust the unions, but apparently that will happen as the companies try to shrink to profitability. They probably hoped they could roll Congress before anybody looked too closely at the predicament they are in.

The auto industry in the US was in a much slower motion downward spiral then people believe -- before the financial crisis. I don't know if they'd have pulled themselves out absent the crisis. But of the ~17 million cars sold last year, something like half were American made. They might have sucked, but they were sold.

THe problem is that we're on pace to have maybe 65% of that demand for cars in the next few months.

Given that the people responsible for this are on Wall Street, and we're bailing out wall street. I find the focus on Detroits problems to be misplaced.

The dealer mfg relationship has nothing to do with the UAW. If any body has evidence pls supply

> I don't think that this demand just spontaneously
> appeared; someone decided to sell these giant
> truck-derived cars (and the first ones were) to a
> larger market, and they marketed the bejeebers out
> of them.

This is the eternal question of whether marketing creates or follows demand. I won't disagree with you, but somewhere in there you have to account for the Honda Civic increasing in size/weight by 100% and the Toyota Camry by 10% (and engine power for both even more) over the last 20 years. Every Toyota, Honda, and Nissan introduced since 1980 has been larger than the previous years' version of the same nameplate.

Now, I read that when the Honda America designers presented a monster SUV to the home office that Honda's chief designer simply said "That isn't really in keeping with the Honda Way, is it?" and the project died. But Honda still has its pickup, Pilot, and CRV which are a looong way from the 1972 Civic.

Cranky

Six times as many dealers selling brands that don't sell as well means fewer thriving dealerships and many that struggle.

Struggling dealerships are poorly positioned to market themselves or their products. They may understaff themselves causing long delays in repairs and distant appointment times. This causes customer frustration. They may be unable to afford good mechanics. They may cut corners or invent repair jobs that aren't necessary tp pull in extra profits.

"For instance, is it obvious that automobiles have to be sold in franchises, as opposed to stores in which the storeowner can stock whichever cars seem most likely to sell, the way bookstores do?"

What an extremely creative idea! I would love to buy my next car by going to a "car shop" where I could look at models by different car manufacturers under one roof. It would make buying a car comparable to buying a TV at Best Buy.

So... you want less regulation?

The pretty obvious concept of prohibiting ending brands is to protect franchisees from bastards who might deliberately scrap a brand and move on to another to sell to more franchisees.

If a car salesman wants to sell a Chinese car, or Tesla, Ronn, Motors or a specialist upstrat, couldn't that introduce unwanted thriving in new competitors?

Thus, requirements that only car companies big enough to HAVE franchising can sell cars.

Are there better models? For customers maybe. For salesmen, maybe. But for bloated antiquated big business oligopoly wannabes? No way.

> nd the Toyota Camry by 10%

should be "by 50%"

Cranky

Hate to admit is but we just bought a Prius. I test drove the Escape Hybrid to give Ford a shot. When I found out that you couldn't have the A/C or defroster on in order to go to battery only mode, that pretty much hosed Ford's faux hybrid from serious consideration. JFC, almost every car is a fortune now compared to the price I paid for one 10 years ago. Get ready for sticker shock!

Perhaps Cranky. But the civic has been replaced by the accord. The corolla has been replaced by the yaris. Both are relatively well known and have been heavily advertised. They 'fit' the toyota and honda brands. Detroit has made token head feints in this direction, but hasn't created a culture that embraces this model.

I think an obvious point is being overlooked. At one time the "Big Three" had close to a 90% market share in the US, and GM itself had over 50%. This has eroded as imports, or US-assembled versions of foreign brands, have taken away a lot of the "Big Three's" market share. That erosion has happened a lot faster than population growth, so it follows that there is less room for GM, or for that matter the other two US companies, to have so many brands.

Regarding the dealer system, I think a key point is that it takes a lot of investment to put together a dealership, both in the sense of the service function and in financially managing a large inventory. I think the need for service after the sale, warranty work, and handling recalls combine to make any comparison to a computer dealer meaningless.

To some degree technology has changed this area, as the cars have gotten so much more reliable and needing of less frequent maintenance. These factors may be slowly eroding the relevance of the franchise model a bit.

Jeff N., yes. NADA is one of the best known acronyms in the biz world.

JimBOB, we're ALREADY feeling the hit. (I'm the editor of a suburban Dallas weekly.) And, Iacocaleaf, non-dailies, especially, are read by people for local school news, local high school sports and more. Many readers still WANT paper.

OH, and it ain't just the American auto industry that’s in serious trouble. And for similar reasons.

Living in a small Metro area, we have quite a few dealerships in town. There are multiple GM dealerships but only 1 Toyota dealership. One of my friends happens to be one of those loathed car salesmen. He works at one of the Big 3 lots, and as far as the dealership is concerned, they need to sell at least 20 cars a week (more is preferable). He looked into moving to the Toyota dealership, where his commission would be smaller on a 'per car' deal, but he could be looking at selling a lot more cars; there quota was an 'easy 50' sold per month. Since he was the top salesman at the Big 3 dealership, he figured he could make a lot more money at Toyota.

Commission structure plays a big role with the Big 3 as well. Remember the prosperous days, when a new car would come out (PT Cruiser as an example) and Chrysler 'supposedly' could not produce enough of them to satisfy demand. (I think it was intentional) Dealers made a killing by selling the PT Cruisers for up to $8,000 above MSRP; that is the way the Big 3 keep their dealers happy.

These seem to me like very strong reasons for putting GM through bankruptcy, which would either give the court the power to circumvent onerous contracts in an orderly way, or (by throwing the fear of God into local dealers) create the political will to remove state legislative constraints.

In response to TB @ 6:51,

The difference between an Pontiac and & Chevy is, by and large, the badge that goes on the hood; everything else, apart from trim & options, all the expensive stuff like running gear, drivelines engines, are the same.

The other signficant fact from that story is that the station wagon was a massive, gas-guzzling "Vista Cruiser", which got somewhere in the neighbourhood of 9 miles to the gallon, and surely represents a significant portion of my own personal contribution to global warming over the course of an otherwise modest lifetime.

"But you also have to consider that since 1985 GM's customer base, Middle America (both rural **and exurban**), have been telling GM that what they want it bigger vehicles with bigger engines and bigger sightlines"

Really ? How does fit with the hard facts that Accord, Civic, and Corolla are top sellers ? And the general decline in GM's share of the US market ?
And the fact that a large proportion (40-50%) of sales of GM's smaller cars go to fleets, rather than to individual buyers.

GM couldn't, or wouldn't, make competitive small cars. Other companies making better small cars have grabbed a large and growing share of the US market. I think your argument is circular: "Middle America" likes big vehicles, GM builds what "Middle America" wants, "Middle America" buys GM vehicles. But evidently, that "Middle America" is a not-big-enough, and shrinking, fraction of the US market. More and more Americans buy Japanese and European and Korean cars. And they're just as American as the "Middle America" buyers of GM vehicles.

Nothing national healthcare won't cure.

Richard Cownie--

You should finish reading Cranky Observers post. He says the reason Americans are buying those Japanese cars in such large numbers is because they've made them bigger. Much bigger.

"But of the ~17 million cars sold last year, something like half were American made. They might have sucked, but they were sold."

Yes, but it's worse than those raw numbers would suggest. The American companies - especially GM - shift those vehicles by having a high proportion of fleet sales - low-spec, heavily discounted. Honda and Toyota hardly do that at all. I still shudder when I think of the Chevy Malibu I rented a few years back: it seemed to have a wet sponge somewhere between the gas pedal and the wheels.
But GM "sold" it to the rental companies.

"He says the reason Americans are buying those Japanese cars in such large numbers is because they've made them bigger"

So what ? The Japanese cars sold here are about the same size as the American cars. But they're better: more reliable, more efficient, more enjoyable to drive.

It's crazy to argue that the American manufacturers are giving American buyers what they want. Detroit's market share has been shrinking, Toyota's and Honda's has grown. Evidently people like what the Japanese companies are offering.

I am 6'1" with longish legs. When I replaced my 1990-vintage Ford Taurus, which I liked a lot, one of the cars I looked at was a new Ford Taurus. They had shrunk it, and shrunk the driver's leg room at the same time. I couldn't drive it for any distance without great discomfort in my legs. Losing this sale for this reason was clearly gross incompetence on Ford's part.

The Ford Taurus was the second-largest Ford sedan at the time, and I wasn't about to buy a bigger car than I wanted just for the extra legroom. I bought a Japanese car around the same size as the shrunken Taurus that had adequate legroom (not as much as the 1990 Taurus, but enough that I can go on long trips without leg cramps.

The state laws are to protect the dealers from the car companies. The dealers sell you the car, not GM or Ford. If the dealers weren't protected, the car companies could treat them the way Anheuser-Busch (the former) treats its distributors.
The car companies are nefarious. I'm familiar with the way they treat suppliers, (for example, the tools and dies used by the suppliers are actually owned by the car companies) and the suppliers don't have those protections.

Oh, and all the issues identified play a role in the car company problems including the union contracts. The unions have perfectly good reasons why they ended up where they did considering Ford was killing strikers in the early 40s for criminy.....
What the car companies need are single product lines with long production runs. They could call it the people's car (der not das.)

These laws are designed to stop new auto dealers from being created. To 'protect' people from dealers who sold cars that didn't exist - which is reasonable, hence the agents and titles. However, why do the titles exist before the cars have been sold the first time?

Why should the state be able to lock down brands?

And why is it that brands are what is holding GM down? How about, none of the brands actually offer anything unique? None of them have used any new technology. They are just rebadges versions of each other. Technically this should be an advantage, not a disadvantage.

GM is just a terrible car company. Sure, laws have kept it alive, but blaming the laws upon its failure? Lame.

The car industry is weird. Where's the 'free enterprise' and 'free markets' and 'competition'?

1) In addition to the management and marketing overlap, there's design and testing. While a Saturn Vue is the same as a GMC Terrain, someone has to design the different sheet metal, the EPA has to test the two models for fuel efficiency, multiple interiors have to be designed, multiple crash test regimens run, and so on. These are incremental costs compared to building an all-new car, but they are still very significant.

There's also the danger that efforts to differentiate two GM models will make each one inferior to a single model from another manufacturer. If you say that the GMC version offers bigger motors, but the Saturn version has a better interior, what do you do when Toyota comes along and offers a competitor with a bigger motor than your Saturn and a better interior than your GMC model?

2) No laws except contract law. When a dealer opens, they expect their investment in showroom space, branding, etc, to be worthwhile, and that's codified in contracts. The automakers can't walk away from that.

3) Too many dealers means that competition among dealers is stronger, which means that they are hungrier and bargain harder with GM. Also, since dealership contracts often involve matching funds for advertising, GM is spending a lot of money helping its dealers advertise against each other rather than against other brands.

4) Sure there are, for consumers. If you're a dealer in Texas, though, you're going to lobby pretty hard against changes that make consumers more likely to bypass you. And if you're Ford, you're not going to lobby hard on the other side, because you need good relationships with your dealers. If you lose too many dealers, customers won't have service in their area, and won't buy your car directly.

These are all thorny issues, and I'm not sure there are good solutions. It's a good conversation to have, though.

Believe it or not Texas Consumer protection laws are very good, well minus the wrecking ball BigInsurance is currently swinging.

The purpose of these consumer protection laws was too ensure fairness throughout the market which would ensure fairness to the consumer. It ensures car dealers charge the same price and provide the same cars to all dealerships. Rewarding the best dealership with 50 special edition corvettes/vipers or all the black trucks to said dealer for a discounted price would lead to few dealers who would eventually raise prices. They are good laws that are having unseen consequences.

That being said, there have been a lot of dealers for other car companies that do not seem to be having the issues the American car companies are having. All the Japanese cars have multiple brands (ie Honda/Acura) and the Germans have Porsche/Audi/VW, why are they not begging Congress for cash ?

The laws, the unions, the cost of candy in the vending machines, it all the same for all the auto makers in the US. $2/hr wage difference or consumer laws are not what ran these companies into the ground, it was management. I wish the country would quit looking for a reason to let these idiot CEO's off the hook.

I bought my last car through a credit union. A thousand times more pleasant than going to a dealer. They got the car for me, handled all the paperwork, arranged the loan. Worked out very well.

mickscottty -

I don't know about your state, but mine has plenty of laws to make sure that A-B or Miller or Coors or the liquor companies don't push their distributors around.

Here's a google scholar link to research on franchising in the auto industry. It's not my field of research; there has been a ton of research on it.

http://scholar.google.com/scholar?as_q=dealer+franchising+automobile+retailing&num=10&btnG=Search+Scholar&as_epq=&as_oq=&as_eq=&as_occt=any&as_sauthors=&as_publication=&as_ylo=&as_yhi=&as_allsubj=all&hl=en&lr=

I blame the consumers. The domestic market for the Big Three really has been persistently different to the home markets that the European and Japanese manufacturers have faced.

The Big Three have been the only ones to capitalize on the huge domestic demand for Texas belt-buckles on wheels. They found it made no difference to sales if your drive train had not changed since the 1950s, or your vehicle looked like a diesel locomotive, or if it got single-digit mileage. In fact, these were virtues. Traditional, tough, manly, American virtues.

The more fragile consumers could even find themselves challenged to buy a Ram, Hummer, or Excursion in order to prove they were not nerdy effeminate tree-hugging import-drivers.

In short, the big three have built their business model on, and made a packet at, catering to wingnuts. They've built cars that are big-assed, brash-mouthed, and dumb as rocks, and they've sold them on cheap bubble-driven credit at by far the fattest profit margins in the industry. Any wingnut could express his independent streak and his hate for hippies simply by over-paying for super-sized badly-engineered crap. The automakers have done this for years. Who can blame them for thinking that the domestic supply of wingnuts would never be exhausted?

It's been an aspect of the market that the Japanese and European manufacturers could never really believe was actually happening.

Sure, now everyone wants Civics and Priuses, after gas hit $4/gallon, peak oil has arrived, the planet is on a death-track, and the economy moved into the Depression lane. Sure, we could all see it coming. But no-one has ever accused wingnuts of being possessed of an excess of foresight.

Will just add a couple of thoughts to all the terrific comments already posted.

People have gravitated to Japanese cars because of their reputation for quality. Most buyers of Japanese cars, myself included, probably don't even know that the size of the cars has gotten bigger over time.

As to demand for SUV's and large trucks, I would lean toward the side of the argument that says demand followed supply (i.e. was a result of marketing). Minivans and pickup trucks did exist in the 70's and 80's, but they were much smaller. Every so often I see a present-day truck in a lane next to a twenty-year old on the freeway and am amazed at how much bigger today's versions are compared to older trucks.

threegoal, the reason that GM has been taking moreso over a period of time, is that they make a crappy entry level vehicle. People become brand loyal and if you don't start out with young people in good cars, they won't grow into the companies larger cars or more expensive brands.

If you're a young person who buys a Chevy Cav (or whatever they have now) and you think it sucks, what is the likelihood that you will buy a larger Chevy or escalate to their Cadillac brand?

Plus, I think almost all of the American cars are dog ugly. There is a new Saturn out that looks good, but for the most part, ugh. The grilles are ginormous and overpower the entire car. Ugly, ugly.

People buy cars for a lot of reasons above and beyond buying a car for transportation. Those people want exceptional reliability (which the big 3 do not have). Other's want status (Cadillac or Lincoln are not the prestige they once were). For the price of either, you can get into a Saab, Audi, or even a Benz or Bimmer, depending on which vehicle you get.

Hilzoy, sorry that I have nothing to add to your query. :-)

Max Power has a point. I've compared the Big 2.5 as 'America's crackwhores' elseblog, and the reason I use that term is that the Detroit makers have to feed their habit, but they also have to have johns, and the people buying SUVs with chassis design straight off the Oregon Trail are those johns. GM/Ford needed to sell vehicles with decent margins; they got that market; that market fed their habit.

(Closing down a marque means killing off the dealer franchises; that's why it costs big money. In the rest of the world, GM basically has one marque: depending on where you are, it's Chevy, Opel, Vauxhall, Holden.)

Now, GM makes pretty successful small cars, and sells them in Brazil or France or Australia. It just doesn't sell them in the US.

Lemon Laws were passed in many states, because the dealers saw the immediate benefit to them--the manufacturer had to take responsibility for the lemons, not the dealers. It's a solid illustration of the outsize influence that car dealers have with the state legislatures around the country.

@TB above.

Spot on.
Not much I can add, and I've been directly involved with GM (a nightmare) and Toyota/Lexus (brilliant people.)

Cross-platform synergies and badge engineering killed GM. It looked good on paper: achieve uniformity of parts and platforms, do some cosmetic surgery to help customers pretend the brands are different. Make the advertising for the brands be the only real difference.

Trouble is, customers didn't buy it, literally. And Detroit fell about three generations behind compared to the competition, as it tried to suck as much profit out of each model before re-upping.

In the end, GM became a financial company, financing its dealers/customers, to get them to buy cars they would otherwise not have bothered with. 0% for 72 months really means that what you are building sucks lemons.

Rick Wagoner is an accountant, and for a while his accounting trick worked, but a mountain of problems built up in the background, and now they're done.

As to the dealers - they have contracts. Many people do not get it into their heads that GM, Ford and Chrysler do not own the dealerships. In fact, the car "holding companies" have stuck it to the dealers as much and as often as they can, and vice versa. It's probably the most contentious relationship on the planet, bar South/North Korea.

Check out the Denny Hecker story in the Twin Cities for some background on how that relationship works. The Star Tribune should have some details.

Click the stories - and start reading - Denny Hecker closing and selling dealerships, suing GM and being sued right back.

http://pd.startribune.com/sp?aff=3&keywords=denny%20hecker

Sorry for the post-storm here - but what's really interesting in the Star-Trib stories are the comments to the various articles.

For a capsule description of what's wrong with the US automobile industry, you need go no further.

Max Power is completely correct:

"In short, the big three have built their business model on, and made a packet at, catering to wingnuts."

When is the last time you saw an advertisement from one of the Big 3 during a major sporting event that was a fuel-efficient sedan and not an SUV or truck ?

If you build a business with long product development/production lead times on an emotional and political fad, then you deserve to fail. While it is prudent to offer products that people want, you also need to offer products that people *need*.

And Steve W.,

"We lived in Galion, Ohio when I was a kid; my dad was partial to Barney's Sohio at the intersection of Harding Way West and Portland Way. It was a 5-minute walk north to the Dairy Queen, and a 10-minute walk to the west to the A&W."

I grew up in Marion, so those Sohio and Harding references brought back some memories. I'm pretty sure that we (Pleasant Township school system) played Galion at least once. :-)

If GM is too big to fail, and it is, then why does the taxpayer's interest not demand that it be divided as part of any major bail out? There may be other logical divisions, but it would seem reasonable that brands be spun off, and that Buick, Chevy, etc. actually compete with each other. The same would be true for Ford and Mercury. The Big Three becomes the Big Ten or Big Twelve. Several of them will almost surely fail, since failure (and fear of failure) is an essential part of capitalism. But, when they do, they can't say "stick 'em up" again.

I believe it was Bardsher's(sp) "High and Mighty" which told the story of the Texas truck. In Texas, a huge truck market, and probably much of the Southwest as well, you can't sell a truck with a cab too low for a cowboy hat to be worn by the driver. No doubt there's a formula to determine how much energy/money is wasted by the extra cab height so that Bubba can sport his brushpopper.

Clearly we're not talking about a rational market.

"High and Mighty" is also pretty good on the irrationality of the SUV chain, from concept to driver.

Rational? Car Market?

How are you going to sell cars by being rational??

Really, don't even think about it.

'Cause that's exactly how they are sold.

Right now the owners of large car dealerships are what the owners of Coca Cola bottling plants used to be: good old boys with many connections at the state capitol. Any state senator wishing to change a very lucrative system would soon find himself an ex-state senator.

Maybe we'll see some change now that the model isn't working for either the dealers or the automakers. Heaven knows the model has never worked very well for the car buyer.

I used to work for GM in the late 1980s. I'd travel through the midwest training mechanics/technicians and fixing the problems they couldn't. Some of the really small towns had dealerships that - I think - reflected what many dealerships were like in the olden days. One, for example, in Nebraska was a Pontiac and Zenith store. Car dealership and TV store? Um. Well. Those weren't unusual in small town America.

Two comments.

1) There are special laws in most (if not all states) the protect automobile franchisees. The car companies are forbidden, for the most part, from terminating franchises except for "cause," narrowly defined. That's a principal reason GM still has Pontiac, Buick, etc.

2) I'm not sure how many of you are aware of the "two fleet" rule. This is a law, enacted by Congress at the UAW's bidding, that has contributed significantly to GM's financial problems.

The two fleet rule says that in calculating average fleet MPG to determine compliance with the CAFE rules, domestic car manufacturers must do separate calculations for cars they make in the US and cars they make abroad and import into the US. Now as it happens, GM makes lots of excellent small, fuel efficient cars overseas, which it sells profitably, overseas. It doesn't import those cars into the US because of the two fleet rule. If it imported them, they would steal sales away from the small cars that GM makes in the US, making it that much harder for GM to meet the CAFE standards.

The only purpose of the two fleet rule, as was admitted by Sen. Carl Levin, is to protect UAW jobs in US factories. It has nothing to do with fuel economy or saving the environment. Without the two fleet rule, GM could stop making small cars in the US (on which it loses money on each car) and instead import cheaper, more fuel efficient cars that it makes overseas. That would be a win for the environment, but a loss for union workers.

So I would suggest that any Government "bailout" of the auto industry has to include two additional features: (a) a federal law preempting state franchise laws and allowing auto manufacturers to terminate dealers in accordance with the franchise contracts between them, and (b) a repeal of the "two fleets" rule. It's hard to see how any effective restructuring would be possible without these legislative fixes.

One other thought: Without state laws protecting franchisees, it's possible that the car industry would move towards radically new ways of selling cars, e.g., the way Dell sells computers, by special order over the net. I don't know if that would work, but I do know that currently the car companies are legally prohibited from trying it.

Kevin-
At least in California, one of the reasons for state/local government favoring car dealers is actually Prop 13. Since local government can't make money on property tax (it goes to the state and doesn't increase anyways), their only method of raising funds is sales tax. Car dealers pay a lot of sales tax, hence the proliferation of big strips of car dealers (Car Country Carlsbad, the National City Mile of Cars, etc.). As an aside, California's attraction to innumerable God-awful stip malls and big-box shopping has the same root cause.

re: heathwood : "Nothing national healthcare won't cure." Amen!
But also, remember that the $70/hr autoworker wage you hear quoted includes not only that healthcare (paid for by the gov. in outher countries (which is why so many "American" car factories are in Canada now)) but it also includes the pension benefits for all the workers who have already retired which striles me as a misleading and patently dishonest accounting trick.

Oops! Sorry Hilzoy - this isn't Kevin's place anymore... my bad.