Auto Dealers Taste Victory with Arbitration Bill in House

Senate may vote on bill early next week, approval there is expected

By Brendan Moore

12.11.2009

Maybe not...

Maybe not...

In a development cheered by some American automotive dealers, the U.S. House of Representatives passed legislation that would guarantee as many as 2,150 terminated General Motors and Chrysler dealers the right to “neutral” arbitration hearings under rules defined by those dealers as more advantageous than the current criteria used by the two manufacturers.

Groups representing the terminated dealers, including the NADA (National Automobile Dealers Association) have ratcheted up the pressure on their state lawmakers to act on their behalf since GM and Chrysler sent out the notices of dealer closings.

GM and Chrysler were able to nullify the restrictive dealer agreements they had with the dealers as a result of their federal bankruptcies, but the affected dealers have since mounted a fierce effort to convince their local representatives that their franchise agreements should not be superseded by federal law, that GM and Chrysler should still have to abide by their dealer agreements.

GM and Chrysler wish to reduce their dealer ranks, arguing that more dealers cost them more money to support, and that too many dealers led to devaluing of their vehicles through price-cutting and incentives as a result of inter-brand competition.

The dealers do not see it that way; of course, they argue that they don’t cost the manufacturer anything, and that aside, that they have special “dealer rights” bestowed upon them by their respective state dealer franchise laws, which these manufacturers should not be allowed to trample on. They will also tell you that their dealership is beloved in their local community, that they represent the American ideal of the honest, hard-working independent small business, and, that most of their particular manufacturer’s problems could be solved through the simple act of reinstatement of the terminated dealers. For these dealers, the termination of their dealer franchise is a both a financial cataclysm and a highly-charged emotional issue, and their rhetoric on the subject tends to become heated. At this point, many of these dealers not only want to be reinstated, but also wish for some measure of retribution regarding their manufacturer.

Automobile dealers have been extremely successful in the past in getting state legislators to see things their way; the state laws on the books that regulate dealer franchise agreements were shaped and written by the dealers themselves, and effectively provide a monopoly on new vehicle sales, enforced by state statue. Years of unflagging campaign contributions and tax receipt income from vehicle sales have given automobile dealers in every state a tremendous amount of political muscle.

This current campaign for the arbitration bill is no different. The dealers flexed their political muscle in the name of fairness, and, here we are.

The Senate is expected to pass the bill, which is included as a provision in a piece of legislation containing six large spending bills. This arbitration provision will not be considered important enough or controversial enough to be singled out for scrutiny as the real lawmaker energy will be reserved for the main bills in the legislation. The bill would then proceed to President Obama for his signature, where the same logic in terms of relative importance will probably prevail.

After the president signs the bill, GM and Chrysler will then have 30 days to contact the affected dealerships, inform them of their rights under the new arbitration rules, and disclose to them the criteria used to identify their dealership for closure.

Many of the terminated dealerships are hoping for a positive outcome through the new arbitration process; some are of the opinion that the new process will again produce the old result, that is, closure of their dealership. Additionally, some of the terminated dealerships have already taken “wind-down” financial assistance from the manufacturer, ceased business entirely, and given up their physical locations, making potential reinstatement problematic – more or less like trying to put toothpaste back in the tube. It is not yet known what GM or Chrysler would do in these types of situations where the affected dealer has already packed it in and ceased business operations.

COPYRIGHT Autosavant – All Rights Reserved

Author: Brendan Moore

Brendan Moore is a Principal Consultant with Cedar Point Consulting , a management consulting practice based in the Washington, DC area. He also manages Autosavant Consulting, a separate practice within Cedar Point Consulting. where he advises businesses connected to the auto industry. Cedar Point Consulting can be found at http://www.cedarpointconsulting.com.

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12 Comments

  1. This is an example of politicians at their best. First, congress drags the CEOs to DC and lambasts them in hearings, calling for the companies to trim their dealer networks. Then as soon as closing dealers affects their districts, congress demands the companies keep dealers open. Why anyone wants to put these people in charge of health care is beyond me.

  2. Was eating my lunch while I read and I almost spit out my chicken salad sandwich when I came to ” beloved in their community”.

    Thanks for the laugh today.

  3. Car dealers and politicians, who is more trustworthy? Both of them working together on something is scary.

  4. The only connection I can work between this and healthcare is that there are business interests with a lot of money (auto dealers in this case, health insurance companies in the healthcare issue) using lots of money to influence politicians to get what they want. Which isn’t the best thing for everyone else, but they have the money to get the decision they want.

    That’s the connection I see. Well, that, and both a health insurance company and a car dealer is likely to change the rules on you if it’s in their benefit to do so and they can get away with it.

    Did I miss anything?

  5. Yeah, the dealers say they don’t cost the manufacturer anything, but obviously if the company has to pay out more incentives because there is too much product being sold too cheap by dealers competing with each other, that’s a problem. That’s not money like a check going to the dealer, but it’s still money the factory has to pay.

  6. My goodness, how do you choose sides in this battle between a company like Chrysler and someone like a car dealer? Neither one of them exhibit what you call admirable qualities.

    What the manufacturers need is more service centers and many less dealerships. And they should keep the remaining dealerships that sell new cars on a much shorter leash regarding how they treat the manufacturer’s customers. That’s a better plan for the Detroit car companies.

  7. Why don’t we make it simple. Set up dealers for service and set up some examples on the lot then the customer comes in and looks at the examples and orders off the internet at an agreed price. The factory makes your choice and ships it in a couple of weeks. No more interest on unwanted inventory, customer is happpy ordered exactly the way they wanted it the factory only runs as needed. I know the banks would go broke because most of these are finaced from the factory floor for 3-10 years are we smart or what?

  8. If you didn’t have dealers, who would sell you credit life and paint sealant for your new car? They’re a valuable part of the social fabric of America.

  9. Yep. I’m sure that we can all do without more competition in the car business and the insurance industry, right? Don’t you think that having more dealers (which don’t cost the manufacturer a DIME, unless they are co-opting the ad budget) will drive down costs for the consumers?? Don’t you think that having the ability to shop across state lines for insurance would drive down the costs?? If you are thinking “no” then go back to the office at the White House or at the DNC… COMPETITION DRIVES AMERICA AND DRIVES PRICES DOWN AND SERVICES UP!! GO TAKE AN ECON 201 CLASS IF YOU DOUBT THIS!!

  10. Car Dealer, you seem to think that the Dems have it in for you, but I’m a Repub and if it was up to me, we wouldn’t even be having this discussion, because I would have let both GM and Chrysler go under in bankruptcy and the dealers for those two would have gotten nothing. This would all be real academic.

    Both of those companies deserved to die and if you as a businessman couldn’t see that your supplier was in trouble and was going to go under, then shame on you.

    And I’m not worried about competition for car sales, because there’s plenty of companies selling new cars in America. Plenty of competition out there in the marketplace.

    All we did with taxpayer money was delay what will surely happen to Chrysler and probably happen to GM.

    Final bankruptcy!

  11. I don’t understand this. Didn’t the federal bankruptcy that both Chrysler and GM went through nullify any contracts the companies had with their dealers?

    Why would the dealers think they are exempt from federal law? And why would Congress agree with that approach? This isn’t making sense to me. Is there another part of this puzzle?

  12. Flinty realist, I’m with you. That guy Car Dealer should get down on his knees and thank god there was a Dem Obama in office when it came time to decide to use all that taxpayer money to keep GM and Chrysler afloat. I would have shut down Chrysler for sure and probably GM too. There wouldn’t be any Chrysler dealers complaining about being closed, because there would be any damn Chrysler. Probably same for GM. Obama and his auto task force was your savior, Car Dealer. It’s a good thing for you Obama saved those inept companies

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