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why is GM closing dealerships??
- Thread starter OutHouse
- Start date
Analog
Lifer
GM spokeswoman Susan Garontakos said the company can't maintain its current dealer network given poor sales.
"The infrastructure that's now in place is too big," she said.
"If they are not ordering cars, we can't thrive on that. Most dealers are unable today to borrow money to maintain their inventory."
The dealer network is a cost to the manufacturer, she said, in administrative expense, incentives and rewards programs, and technology infrastructure.
"They pay for some of it; not all of it," Ms. Garontakos said.
All of the costs of which Ms. Garontakos speaks are sales related, directly tied to the actual sale of the vehicles. If these costs decline sales decline. There are few if any fixed costs associated with the sales that have not already been chased out by lessened consumer demand. So if we assume that automaker selling costs are variable except for advertising, there can be no reason to screw with independently owned dealerships. If sales demand remains low for new vehicles, the market will find and take out any weak dealers.
It has been suggested that the whole dealer franchise model needs to be modernized. Changes to state laws that would permit open new car sales seven days a week by any financially stable retailer and at a service dealer location, on the internet or at the mall or almost anywhere would become permissible. Sales by Sam's Club, Costco, CarMax, Amazon, even direct sales and shipments by the automakers, come to mind. Whatever changes might come from such a rearrangement would work its way through the economy naturally. Service work has always been a mixed bag with local garages supplementing expensive dealership garages. This proposal is secondary to the consideration of deliberately putting 3,400 businesses into turmoil, facing closure or bankruptcy.
"The infrastructure that's now in place is too big," she said.
"If they are not ordering cars, we can't thrive on that. Most dealers are unable today to borrow money to maintain their inventory."
The dealer network is a cost to the manufacturer, she said, in administrative expense, incentives and rewards programs, and technology infrastructure.
"They pay for some of it; not all of it," Ms. Garontakos said.
All of the costs of which Ms. Garontakos speaks are sales related, directly tied to the actual sale of the vehicles. If these costs decline sales decline. There are few if any fixed costs associated with the sales that have not already been chased out by lessened consumer demand. So if we assume that automaker selling costs are variable except for advertising, there can be no reason to screw with independently owned dealerships. If sales demand remains low for new vehicles, the market will find and take out any weak dealers.
It has been suggested that the whole dealer franchise model needs to be modernized. Changes to state laws that would permit open new car sales seven days a week by any financially stable retailer and at a service dealer location, on the internet or at the mall or almost anywhere would become permissible. Sales by Sam's Club, Costco, CarMax, Amazon, even direct sales and shipments by the automakers, come to mind. Whatever changes might come from such a rearrangement would work its way through the economy naturally. Service work has always been a mixed bag with local garages supplementing expensive dealership garages. This proposal is secondary to the consideration of deliberately putting 3,400 businesses into turmoil, facing closure or bankruptcy.
interesting post.
i heard, at least with GM, that there were so many dealers that the competition for pricing was too steep, hence cars were being sold for much less than desired.
also, with the internet, the whole model has changed. people no longer really care if there is a dealer in their town specifically.
i heard, at least with GM, that there were so many dealers that the competition for pricing was too steep, hence cars were being sold for much less than desired.
also, with the internet, the whole model has changed. people no longer really care if there is a dealer in their town specifically.
LegendKiller
Lifer
Distribution costs can be fixed *and* variable. Maintaining a distribution network, including items such as JIT hubs, can be very costly on a fixed and variable basis. While most costs can be passed onto the consumer, not all can.
When it comes down to it, they need to simplify their distribution and financing costs. Since the dealers really don't finance the lots themselves, GM bears the brunt of those costs. Even if GM were to pass on every penny of the costs to the dealers, which they don't, it is still a burden on GM because they then have to arrainge the financings for the floorplans. If they cannot the market discounts GM debt and stock, which cannot be passed on to the dealer network. The dealers could arrange financing themselves, but then the profitabilty of the dealers would decline and more would die.
The basic fact is that GM has been subsidizing the costs of the dealer network for years. If such a large dealer network were such a great idea, then Toyota and Honda wouldn't have a fraction of the dealer network that GM, Ford, and Chrysler did. However, they aren't, and neither Toyota or Honda have such large networks. Considering how much of a beating both of those companies have handed the US car companies, and how much better off those two are compared to US car companies (sure, both aren't doing great right now, but they are far better off than their US counterparts), perhaps we should stop thinking we know everything and learn how to become more efficient.
dullard
Elite Member
Scroll to almost the bottom, to my post in this thread. Dealers cost GM a lot of money. Fewer dealers = a bit more profit. Cutting dealers isn't going to be make or break for GM. But, now is the time to get this albatross off their back.
NPR did a recent series on this issue. I missed most of it, but one comment really stuck. Many of the dealers that were cut didn't just have lowered sales, instead they had NO sales. No sales for months. Given enough time (and especially once they are removed from the money tit of GM) these same dealers would close on their own. All this does is to hasten the inevitible a bit.
NPR did a recent series on this issue. I missed most of it, but one comment really stuck. Many of the dealers that were cut didn't just have lowered sales, instead they had NO sales. No sales for months. Given enough time (and especially once they are removed from the money tit of GM) these same dealers would close on their own. All this does is to hasten the inevitible a bit.
DrPizza
Administrator Elite Member Goat Whisperer
Question: how many people have chosen GM because where they live, it'd be too far to drive to take their car to a Toyota dealer for servicing?
I know people like that. No Toyota dealer in the closest city to me. One of my coworkers was just complaining about a 45 minute drive (each way) to have her brakes repaired (under warranty.) She was thrilled that she got a free loaner while they did the work, but still didn't enjoy giving up 2 evenings of the week.
I know people like that. No Toyota dealer in the closest city to me. One of my coworkers was just complaining about a 45 minute drive (each way) to have her brakes repaired (under warranty.) She was thrilled that she got a free loaner while they did the work, but still didn't enjoy giving up 2 evenings of the week.
alkemyst
No Lifer
The dealerships usually have already paid for their cars...if not they still owe GM for them.
To GM they already have made their profit on those cars, anything further are just costs; whether in warranty claims, franchise obligations, etc.
One of the oldest/largest Chrysler dealerships in our state took on double their normal allocation recently being assured by Chrysler it was OK in the downsizing. They were one of the first notified. That notification came on the day they took the last of their car order.
sucks.
Many of the franchises require you lease the properly back from them. This way you are just a tenant on their land...if you don't agree to all the terms then they simply kick you out of your own place.
Some really hit the business owners with required materials like wrappers, uniforms, etc at majorly inflated prices.
To GM they already have made their profit on those cars, anything further are just costs; whether in warranty claims, franchise obligations, etc.
One of the oldest/largest Chrysler dealerships in our state took on double their normal allocation recently being assured by Chrysler it was OK in the downsizing. They were one of the first notified. That notification came on the day they took the last of their car order.
sucks.
Many of the franchises require you lease the properly back from them. This way you are just a tenant on their land...if you don't agree to all the terms then they simply kick you out of your own place.
Some really hit the business owners with required materials like wrappers, uniforms, etc at majorly inflated prices.
LegendKiller
Lifer
No, they usually did not pay for their own cars. The vast majority of GM cars were financed through Dealer Floorplan securitizations. I know because I've looked at many (and invested in a few).
alkemyst
No Lifer
What did you look at?
Do you understand how that works? The dealer is paying on those cars. If the car sells they can pay off the debt and use that money to buy another unit.
The GM / Chrysler dealerships would still own their cars and be able to do the above, but he problem is 1) they no longer have a factory warranty and 2) those dealerships do not get any of the factory rebates/incentives allocated to them.
These dealership floorplan securitizations are being thrown around left and right as a reason the dealerships aren't really going to be hurting. I don't know if people are just stupid or simply are in agreement with something because they have been told that.
The mortgage industry and many other credit industries securitize the debts to make some cash on the backend.
The debtors do not gain anything off their terms and conditions on this backend profit.
LegendKiller
Lifer
In 2006 I looked at a Ford dealer floorplan transaction, about $1bn in size, and nearly signed my bank up for it. In 2007 I looked at transactions from GM and chrysler, both about $2bn in size. I followed that up with one from Honda and another from a large international agricultural company (tractor floorplan). All told I've looked at about $7bn in transactions. You?
The dealers usually don't pay the financing costs of the cars, but it all depends on their contracts and how the financing company sets the system up. I've seen it range from direct pass-through of the cost of funds to only fixed payments, to reduction in incentives depending on the length of holding. In many cases the Holdback is what determines the cost, thus, the cost of the financing is wrapped up in the holdback, the sooner you sell, the more holdback you keep.
What really matters is that with more dealers you need bigger floorplan transactions, since you have to stock more dealers at a slower pass-through rate (turnover is lower), reducing the profitability of the vehicles. Furthermore, the floorplan loans are tied to the lender, the more risky the financing situation, like today, the more it affects the financing company. Since GM floorplans determine GM's ability to finance their own business, the risk is shifted to them and thus, the cost of the transaction not only affects GM floorplan loans, it affects *ALL* of GM's financing (since it is a general corporate risk). This is a huge problem for GM.
The even larger problem is the more marginal dealerships are the ones who depend on floorplan loans most, thus, if the floorplan loans were eliminated, they'd end up dying anyway since they couldn't organize their own financing, which would kill them anyway (economies of scale for financing a small business vs a huge corporation, especially since those loans would be more local in nature).
Contrary to your assertion, the warranties for floorplan vehicles would be carried by the manufacturer if the dealership bought it. Even with floorplan loans the dealership has to carry insurance.
Most incentives still exist for either a floorplan or non floorplan dealership.
Cash isn't made on the back-end of securitizations. If anything, cash is neutral. Securitizations are cash-in-assets-out, with a retention portion held by the issuer (overcollateralization, equity tranche, first loss piece). In some cases, such as FIN46 transactions or FAS140 transactions, there can be a gain on sale for qualifying transactions. This isn't cash but non-cash revenue (since it is forward-selling the excess spread)
The benefits of securitization are seen by borrowers. It is the main reason why mortgage rates remain very low and will continue to do so. Risk spreads on mortgages are far lower than they were in the 50 years before securitization started (in 1970s). This is mainly becaused secured borrowing has been, and will always be, cheaper.
I'd suggest you make assumptions less and read more.
alkemyst
No Lifer
oh look big words most won't know here. Sounds like you ripped something in part from a financial paper.
I have no doubt you 'looked' at things, but at the same time I don't think you understand what you are looking at.
Long and short of it is you really don't understand this argument and are perhaps relating to something you were involved in in at least a partial capacity...
Also the way you are talking above a securitization has no profitability which is pretty damn absurd. Securitizing assets is extremely profitable to those that hold shares in that securitization.
We have a credit line we use at my company it's like 12%. We much rather use our own funds and pay ourselves back, however; if sales are slow or if we over allocate we have to dip into the credit line.
This is much the same way a car dealer works. If they sell fast it's great, if the unit sits too long the dealership owns it as the funds are due. On the back end investors are making some cake on the performance of these repayments from the dealerships to the factory. It's just that simple. If one person doesn't pay up the investors are secure as they have many others in that pool. If you have what we have now in the mortgage industry then those investors are getting hit left and right with more and more in a pool not paying killing all profit and at times leaving the investors with less than they started with. This is the whole problem with court's allowing modifications of loans that investors have purchased.
The incentives are going away as the factory is not acknowledging these dealerships. The rebates as well along with the warranty on these vehicles. I don't know why you don't see this as an issue (probably because you are trying to paint an Economics 101 lesson or something)....this is a HUGE problem even if the dealership had no problem with the cost of the cars or even if they had he ability to support the warranty in-house. They can't sell them for the $20k they have into them when Mr. Joe Blow down the street can sell his for $20k + give a $5k rebate + offer a full manufacturers warranty. Even with the rebate a consumer is not going to want to trust a dealership only warranty on a vehicle they may take elsewhere.
I have no doubt you 'looked' at things, but at the same time I don't think you understand what you are looking at.
Long and short of it is you really don't understand this argument and are perhaps relating to something you were involved in in at least a partial capacity...
Also the way you are talking above a securitization has no profitability which is pretty damn absurd. Securitizing assets is extremely profitable to those that hold shares in that securitization.
We have a credit line we use at my company it's like 12%. We much rather use our own funds and pay ourselves back, however; if sales are slow or if we over allocate we have to dip into the credit line.
This is much the same way a car dealer works. If they sell fast it's great, if the unit sits too long the dealership owns it as the funds are due. On the back end investors are making some cake on the performance of these repayments from the dealerships to the factory. It's just that simple. If one person doesn't pay up the investors are secure as they have many others in that pool. If you have what we have now in the mortgage industry then those investors are getting hit left and right with more and more in a pool not paying killing all profit and at times leaving the investors with less than they started with. This is the whole problem with court's allowing modifications of loans that investors have purchased.
The incentives are going away as the factory is not acknowledging these dealerships. The rebates as well along with the warranty on these vehicles. I don't know why you don't see this as an issue (probably because you are trying to paint an Economics 101 lesson or something)....this is a HUGE problem even if the dealership had no problem with the cost of the cars or even if they had he ability to support the warranty in-house. They can't sell them for the $20k they have into them when Mr. Joe Blow down the street can sell his for $20k + give a $5k rebate + offer a full manufacturers warranty. Even with the rebate a consumer is not going to want to trust a dealership only warranty on a vehicle they may take elsewhere.
LegendKiller
Lifer
And you sound like some loon on the outside of the capital markets who read a blog and thinks he's king shit of the market. Guess what sparky, you don't know what you're talking about. You're some guy at a mortgage originating sweatshop who picked up on a ppt the treasurer put out in some corporate event (go go magic FL mortgage originators!). Wow, rip on me for putting something up that you couldn't even comprehend given 10 years and an open-book exam. Did you even graduate from DeVry yet?
I've worked in the sec'n market for about 6 years now. 3 spent at a timeshare sec'n issuer creating default curves, prepayment curves, running strats, and spinning off about 1bn in deals and annually renewing a 1bn conduit. Then I worked a year at a CC issuer, closed $4bn of the first-ever AAA de-linked conduit bonds. You can find my work in the Capital One COMET monthly report (you know where to find that, right? Do you even know what a RegAB website is???), 2006-A-E series were my projects in the year I was there. I closed more than $3bn in conduit capacity in 6 weeks.
I followed that up by switching sides and working for an international investment bank, closing more than 1bn in capacity, dealer floorplan, trade receivables, agricultural loans, infrastructure loans...etc, in a $3bn program.
And you've....what? Ohh, you work at a mortgage issuer. Wow, you go girl!
First off, you don't hold "shares" you douchenozzle, you hold bonds.
Securitizing assets are only massively profitable for lawyers and underwriters. Conduit banks don't make a whole lot. Most ABCP programs make somewhere between, in this market, 100-600bps over Cost of Funds (ABCP funds usually at LIBOR flat, you do the math). The absolute worst conduit funding I've seen right now is COF+700. Yeah, that's a rich deal, ROE is probably 3000% on it (considering it is an Off-BS deal, LIQ/LOC capital costs under BASEL II are minmal, thus, high ROE).
Bull-fucking-shit your revolving securitization line runs 12%. The *VERY* highest I've seen in this market is a 2 year WAL, full turbo, AAA (46% enhancement), consumer loan term securitization bond go out at 10%. That's for a 4-year term bond on a distressed asset to a lower-end unsecured consumer loan. Your conduit line is most likely a 1-year revolving committment with a specifc term-out period against moretgages secured by real property. Let's say, for the sake of argument, your company had a 12% conduit line, I'd laugh my ass off because you've got the shittiest pricing on the 'Street, great company you work for!
Your shitstain for a brain is lying.
You've got no idea how dealer floorplan securitizations work. I doubt you've even seen a loan agreement for a floorplan between the dealer and manufacturer, let alone seen an indenture for a securitization (you probably can't even find on on Edgar). You come on here blasting people for "not knowing how these things work", when you've really got no idea yourself.
Phokus
Lifer
What about factory incentives... if you have 2 dealers within close distance to each other, they're going to have to fight with each other to get that sale because most consumers know to check edmunds for those incentives online... without the 2 dealers close to each other, the consumer doesn't have as much bargaining power.
That's how i got my car cheap, i just found out the incentives and made all the volvo dealers (and there were several within a 50 mile radius) fight each other for my purchase and i got a great deal.
LegendKiller
Lifer
You might lose some money on that, depending on how many dealerships are in your area. If you're in a rural area with one in 50mi, then that's not their fault for not wanting to subsidize everything if it isn't profitable.
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