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FACTORS AFFECTING THE DECISIONS OF
GENERAL MOTORS AND CHRYSLER TO
REDUCE THEIR DEALERSHIP NETWORKS
SIGTARP-10-008
JULY 19, 2010
SIGTARP
Office of the Special Inspector General
for the Troubled Asset Relief Program
Summary of Report: SIGTARP-10-008
Why SIGTARP Did This Study
For the U.S. automotive industry, the quarter ending
June 30, 2009, was dominated by the bankruptcy
filings of Chrysler LLC (“Chrysler”) and General
Motors Corporation (“GM”). As part of the
bankruptcy proceedings, Chrysler terminated 789
dealerships on June 10, 2009, and GM planned to
wind down 1,454 dealerships by October 2010.
The Department of the Treasury (“Treasury”), through
the Troubled Asset Relief Program (“TARP”), has
played a key role in the financing of GM and
Chrysler, both before and during their bankruptcies.
To date, Treasury has committed $80.7 billion to the
two automakers under TARP’s Automotive Industry
Financing Program (“AIFP”). On February 15, 2009,
President Obama announced the creation of an
interagency Presidential Task Force on the Auto
Industry (“Task Force”) that would review the
Chrysler and GM restructuring plans submitted as a
requirement of their loan agreements. In addition, the
Administration created a Treasury Auto Team (“Auto
Team”), which reports to the Task Force and had the
responsibility, among other things, of evaluating the
companies’ restructuring plans and negotiating the
terms of any further assistance.
Questions arose as to how GM and Chrysler selected
dealerships for termination and what benefit, if any,
the companies gained from terminating the
dealerships. SIGTARP received Congressional
requests to conduct an audit on the dealership
terminations from Senator Jay Rockefeller, Chairman
of the Senate Committee on Commerce, Science, and
Transportation, and Representative David Obey,
Chairman of the House Appropriations Committee.
This report addresses (1) the role of Treasury’s Auto
Team in the decision to reduce dealership networks,
(2) the extent to which GM and Chrysler developed
and documented processes for deciding which
dealerships to terminate and which to retain, and (3) to
what extent the dealership reductions are expected to
lead to cost savings for GM and Chrysler.
SIGTARP interviewed key GM and Chrysler officials
regarding the process and criteria used to analyze
whether dealers would be terminated or retained and
analyzed GM and Chrysler data to determine if the
companies consistently followed their criteria. We
also interviewed Treasury’s Auto Team officials, auto
industry experts, automobile dealers, and
representatives from several dealer advocacy groups.
Our work was performed in accordance with generally
accepted government auditing standards.
In commenting on a draft of this report, Treasury
stated that it strongly disagrees with many of the
statements, conclusions and lessons learned of the
report, and may respond more fully at a later date. A
fuller description of Treasury’s response is included in
the Management Comments and Audit Response
section of this report.
July 19, 2010
Factors Affecting the Decisions of General Motors and
Chrysler to Reduce their Dealership Networks
What SIGTARP Found
Pursuant to their loan agreements with Treasury, as a condition of receiving additional TARP
funding, GM and Chrysler were required to submit restructuring plans to the Treasury Auto Team in
February 2009. GM’s restructuring plan explicitly spelled out its plan to reduce its dealership
network gradually, by approximately 300 dealers per year over the next five years. In March 2009,
Treasury’s Auto Team rejected both companies’ restructuring plans. In GM’s case, the Auto Team
specifically highlighted GM’s planned “pace” of dealership closings as one of the obstacles to its
viability. In response to the Auto Team’s rejection of their restructuring plans and in light of their
intervening bankruptcies, GM and Chrysler significantly accelerated their dealership termination
timetables, with Chrysler terminating 789 dealerships by June 10, 2009, and GM announcing plans
to wind down 1,454 dealerships by October 2010.
The Auto Team’s view about the need for GM and Chrysler to reduce their dealership networks and
do so rapidly was based on a theory that, with fewer dealerships (and thus less internecine
competition), like their smaller networked foreign competitors, the remaining dealerships would be
more profitable and thus would permit the dealerships to invest more in their facilities and staff. For
GM and Chrysler, the theory goes, this would mean better brand equity and would allow the
manufacturers over time to decrease their substantial dealership incentives. In addition, the Auto
Team felt the companies’ best chance of success required “utilizing the bankruptcy code in a quick
and surgical way” and noted further that it would have been a “waste of taxpayer resources” for the
auto manufacturers to exit bankruptcy without reducing their networks.
Only time will tell whether and to what extent the rapid reduction of the number of dealerships will
improve the manufacturer’s profitability over time; SIGTARP’s audit found that there are several
aspects of how the Auto Team came to have this view about dealership reductions that are worth
noting. One, although there was broad consensus that GM and Chrysler generally needed to
decrease the number of their dealerships, there was disagreement over where, and how quickly, the
cuts should have been made. Some experts questioned whether it was appropriate to apply a foreign
model to the U.S. automakers, particularly in small markets in which the U.S. companies currently
have a competitive advantage, and one expert opined that closing dealerships in an environment
already disrupted by the recession could result in an even greater crisis in sales. Two, job losses at
terminated dealerships were apparently not a substantial factor in the Auto Team’s consideration of
the dealership termination issue. Although there is some controversy over how many jobs will be
lost per terminated dealership, it is clear that tens of thousands of dealership jobs were immediately
put in jeopardy as a result of the terminations by GM and Chrysler. Finally, the acceleration of
dealership closings was not done with any explicit cost savings to the manufacturers in mind.
Chrysler decided which dealerships to terminate based on case-by-case, market-by-market
determinations, and did not offer an appeals process. SIGTARP did not identify any instances in
which Chrysler’s termination decision varied from its stated, albeit subjective selection criteria.
GM’s approach, which was conducted in two phases, was purportedly more objective, and it offered
an appeals process. However, SIGTARP found that GM did not consistently follow its stated
criteria and that there was little or no documentation of the decision-making process to terminate or
retain dealerships with similar profiles, or of the appeals process.
Lessons Learned
Although perhaps it is inevitable that public ownership of private companies will have the effect of
blurring the Government’s appropriate role, the fact that Treasury was acting in part as an investor
in GM and Chrysler does not insulate Treasury from its responsibility to the broader economy.
Treasury should have taken special care given that the Auto Team’s determinations had the potential
to contribute to job losses, particularly given that one goal of the loan agreements was to “preserve
and promote jobs of American workers employed directly by the automakers and subsidiaries and in
related industries.” This audit concludes that before the Auto Team rejected GM’s original, more
gradual termination plan as an obstacle to its continued viability and then encouraged the companies
to accelerate their planned dealership closures in order to take advantage of bankruptcy proceedings,
Treasury (a) should have taken every reasonable step to ensure that accelerating the dealership
terminations was truly necessary for the long-term viability of the companies and (b) should have at
least considered whether the benefits to the companies from the accelerated terminations
outweighed the costs to the economy that would result from potentially tens of thousands of
accelerated job losses. Moreover, in light of the way in which the companies selected dealerships
for termination, in the future, to the extent that Treasury takes action with respect to a TARP
recipient that has the potential to affect so many jobs in so many different communities, Treasury
should monitor the recipients’ actions to ensure that they are carried out in a fair and transparent
manner.
Special Inspector General for the Troubled Asset Relief Program
OFFICE OF THE SPECIAL INSPECTOR GENERAL
FOR THE TROUBLED ASSEF RELIEF PROGRAM
0
-
1 801 L SIRE r, NW
WASHINGTON, D.C. 20220
JUL 1 9 2010
MEMORANDUM FOR:
The Honorable Timothy F. Geithner, Secretary of the Treasury
SUBJECT:
Factors Affecting the Decisions of General Motors and Chrysler to
Reduce their Dealership Networks (SIGTARP- 10-008)
We are providing this audit report for your information and use. It discusses the decisions made
by General Motors and Chrysler to reduce the number of auto dealerships in their dealership
networks, identifies the role of the Treasury Auto Team in that process, considers the estimated
cost savings that would result from decreasing the number of dealerships in each company's
network, and lessons learned from this review. The Office of the Special Inspector General for
the Troubled Asset Relief Program ("SIGTARP") conducted this audit under the authority of
Public Law 110-343, as amended, which also incorporates the duties and responsibilities of
inspectors general of the Inspector General Act of 1978, as amended.
We considered comments from the Department of the Treasury when preparing the final report.
The comments are addressed in the report, where applicable, and a copy of Treasury's response
to the audit is included in the Management Comments Appendix D of this report.
We appreciate the courtesies extended to the staff. For additional information on this report,
please contact Shannon Williams (Shannon.Williams do.treas. ov / 202-927-8732) or Kurt
e @do.treas. gov 1202-622-4633).
Hyde (Kurt. Hydd
Si
y
Neil M. Barofsky
Special Inspector General
for the Troubled Asset Relief Program
Table of Contents
Introduction
1
In Response to the Auto Team’s Determination that GM’s Proposed Pace for
Closing Dealerships Was Too Slow and an Obstacle to Its Viability, GM
Accelerated Its Dealership Closures; Chrysler Also Accelerated, and at a Faster
7
Pace
Criteria Used by GM and Chrysler To Identify Dealerships to Close
16
Dealership Termination Decisions Were Not Based on GM’s and Chrysler’s
Cost Savings Estimates
25
Conclusions and Lessons Learned
28
Management Comments and Audit Response
33
Appendices
A. Scope and Methodology
34
B. Acronyms and Definitions
36
C. Audit Team Members
37
D. Management Comments
38
E. Additional Tables
39
Introduction
For the U.S. automotive industry, the quarter ending June 30, 2009, was dominated by the
bankruptcy filings of General Motors Corporation (“GM”) and Chrysler LLC 1 (“Chrysler”). As
part of their bankruptcies, GM and Chrysler each planned to reduce dramatically the number of
dealerships in their dealer networks. On June 2, 2009, GM announced plans to “wind down” 2
1,454 (26 percent) of its 5,591 3 dealerships by October 2010, and Chrysler terminated 789 (25
percent) of its 3,181 dealerships on June 10, 2009. GM and Chrysler maintained that their preexisting dealership networks were too large and needed to be reduced for the companies to
become viable. The companies’ leaders stated that a smaller network would result in greater
sales per dealership, which would make the dealerships more profitable and thus enable them to
invest in their facilities to meet GM and Chrysler standards and retain top-tier sales and service
staffs.
In June 2009, the Senate Committee on Commerce, Science, and Transportation held a hearing
on the dealership terminations. Subsequently, Senator Jay Rockefeller sent a letter to SIGTARP
noting that the hearing demonstrated substantial confusion, even amongst dealers, as to how GM
and Chrysler selected dealerships for termination and what benefit, if any, the companies gained
from terminating the dealerships. Senator Rockefeller requested that SIGTARP review how GM
and Chrysler decided which dealerships to terminate. Representative David Obey, Chairman of
the House Committee on Appropriations, also sent a letter to SIGTARP asking for a review of
GM and Chrysler’s decision-making processes.
Consequently, SIGTARP began a review to meet the following objectives:
•
to determine the role of the U.S. Department of the Treasury (“Treasury”) Auto Team in
the decisions to reduce dealership networks
•
to determine the extent to which GM and Chrysler developed and documented processes
for deciding which dealerships to terminate and which to retain
•
to determine to what extent the dealership reductions are expected to lead to cost savings
for GM and Chrysler
For a discussion of this audit’s scope and methodology, see Appendix A. For definitions of the
acronyms used in this report, see Appendix B. For the audit team members, see Appendix C.
For management comments, see Appendix D. For additional tables, see Appendix E.
1
Chrysler’s corporate name was Chrysler LLC during much of the time period covered by this report. The
automaker’s current iteration is Chrysler Group LLC.
2
GM issued “wind-down agreements” to 1,289 dealerships carrying GM’s core brands (GMC, Chevrolet, Buick,
and Cadillac), allowing them to operate until the agreement expires in October 2010, and to 165 standalone Pontiac
and GMC Medium Duty dealerships, brands that were eventually phased out. GM also issued “partial” wind-down
notifications to 2,385 dealerships that would no longer be able to sell one or more core GM brands. GM would
later offer to restore dealer status to 216 complete wind-downs and 450 partial wind-downs, as discussed later in
this report.
3
This figure includes the 165 standalone Pontiac and GMC Medium Duty dealerships.
1
Background
In recent years, the American automotive industry has faced challenges related to changing
consumer preferences and perceptions, growing legacy costs, rising fuel prices, and ceding of
market share to foreign competitors. During the recession, these factors coalesced into a historic
crisis that threatened the survival of the domestic auto manufacturers. According to testimony
from Ron Bloom, a Senior Advisor at the U.S. Treasury Department, in 2008 alone, the domestic
auto industry lost 50 percent of its sales volume and over 400,000 jobs. Near the end of 2008,
the financial conditions of GM and Chrysler were seriously deteriorating, and the two companies
were virtually closed out of the private capital markets, meaning that they were not able to secure
the day-to-day funding they needed to function and remain in business. Without assistance, both
companies faced liquidation bankruptcies that would have resulted in substantial job losses and
would have had a dramatic impact on the broader American economy.
As part of the Troubled Asset Relief Program (“TARP”), the Automotive Industry Financing
Program (“AIFP”) was created on December 19, 2008, to permit Treasury to invest in the
automakers and their financing arms. The program’s stated goal was to prevent a significant
disruption of the American automotive industry that would pose a systemic risk to financial
market stability and have a negative effect on the U.S. economy. To date, Treasury has
committed $80.7 billion 4 through AIFP to facilitate restructuring and to support the automotive
manufacturing companies and their financing arms to “avoid a disorderly bankruptcy of one or
more automotive companies.” On February 15, 2009, President Obama announced the creation
of an interagency Presidential Task Force on the Auto Industry (“Task Force”) that would review
the Chrysler and GM restructuring plans submitted as a requirement of their loan agreements.
Co-chaired by Treasury Secretary Timothy Geithner and National Economic Council Director
Lawrence Summers, the Task Force has 21 members, including a number of ex-officio designees
and Government staffers.
In addition to the Task Force, the Administration created a Treasury Auto Team (the “Auto
Team”), which reports to the Task Force and had the responsibility of evaluating the companies’
restructuring plans and negotiating the terms of any further assistance. Leading the Auto Team
were two advisors: Ron Bloom, a former investment banker and head of collective bargaining for
the United Steelworkers Union, and Steven Rattner, the co-founder of the Quadrangle Group, a
private-equity firm. 5 The Auto Team had a staff of 15 people who conducted analyses in order
to determine GM and Chrysler’s viability. The Auto Team included Treasury employees who
reported to Mr. Bloom and Mr. Rattner, who in turn reported to Secretary Geithner and Mr.
Summers. 6 Although this group was responsible for managing AIFP, none of the Auto Team
leaders or personnel had any experience or expertise in the auto industry.
4
The $80.7 billion figure represents the funds provided directly to the companies and does not include commitments
made under the Auto Warranty Commitment Program or the Auto Suppliers Support Program.
5
Mr. Rattner left the Treasury Auto Team on July 13, 2009, leaving Mr. Bloom as the head of the Auto Team.
6
For more information, please see the September 2009 Congressional Oversight Panel report, The Use of TARP
Funds in Support and Reorganization of the Domestic Automotive Industry.
2
TARP Assistance to General Motors and Chrysler
Under AIFP, Treasury committed to provide GM and Chrysler with financing from TARP
funds. 7 Pursuant to the loan agreements, which were both dated December 31, 2008, 8 the
financings were intended to accomplish the following goals:
•
enable the automakers and subsidiaries to develop viable and competitive businesses that
minimize adverse effects on the environment
•
enhance the ability and the capacity of the automakers and subsidiaries to pursue the
timely and aggressive production of energy-efficient, advanced-technology vehicles
•
preserve and promote jobs of American workers employed directly by the automakers
and subsidiaries and in related industries
•
safeguard the ability of the automakers and subsidiaries to provide retirement and health
care benefits for their retirees and retirees’ dependents
•
stimulate manufacturing and sales of automobiles produced by GM and Chrysler
The loan agreements, set to expire in December 2011 for GM and January 2012 for Chrysler,
included other conditions such as executive compensation limits, compliance with Federal fuel
efficiency and emissions requirements, and in the case of GM, the provision of warrants to
Treasury of non-voting stock and in the case of GM and Chrysler, additional notes.
Under their loan agreements, GM and Chrysler were required to submit to Treasury restructuring
plans to show how they would use the assistance from the Government to achieve “long-term
viability,” which was defined as “positive net present value…taking into account all current and
future costs, and can fully repay the government loan.” 9 The restructuring plans were intended
“to achieve and sustain [the automakers’] long-term viability, international competitiveness and
energy efficiency,” the loan agreements specified. President George W. Bush said that ensuring
viability would require “meaningful concessions from all involved in the automotive industry,”
including employees, dealers, suppliers, and creditors. Some of these meaningful concessions
related to issues such as wages, benefits, health care, and reductions in capacity and dealership
networks.
On February 17, 2009, both companies submitted their restructuring plans. GM’s plan called for
reducing the number of plants from 47 to 32 by the year 2014, and the number of employees
from 92,000 to 72,000 by the year 2012. GM’s restructuring plan also called for eliminating the
7
Ultimately, Treasury committed $49.5 billion to GM and $12.5 billion to Chrysler. In addition, GMAC LLC,
GM’s financing arm, received $17.2 billion, and Chrysler Financial, Chrysler’s financing arm, received $1.5
billion, for a total of $80.7 billion. As part of the companies’ bankruptcies, a substantial portion of the TARP
loans were converted into common stock, and, as a result, Treasury now owns 60.8 percent of GM’s common
stock (plus $2.1 billion in preferred) and 9.9 percent of Chrysler’s. Again, the $80.7 billion figure does not include
commitments made under the Auto Warranty Commitment Program or the Auto Suppliers Support Program.
8
The effective date of Chrysler’s agreement was amended to January 2, 2009.
9
Please see COP report referenced above.
3
Saturn, Saab, and Hummer brands and terminating 1,650 dealerships (approximately 300 per
year) by 2014, as shown in Table 1.
Table 1—Planned Dealership Reductions in GM’s Restructuring Plan
Submitted to Treasury in February 2009
Type of
Dealership
Metroa
Hubtownb
Ruralc
Total
2009
1,890
1,210
2,650
5,750
2010
1,640
1,160
2,500
5,300
2011
1,570
1,030
2,400
5,000
2012
1,400
1,000
2,300
4,700
2013
1,250
950
2,200
4,400
2014
1,100
825
2,175
4,100
Planned
Reduction
Reduction as a Percentage
Number
of 2009 level
790
41.8
385
31.8
475
17.9
1,650
28.7
a
GM defines “Metro” as a large metropolitan area
GM defines “Hubtown” as a midsize market that is growing and attracts customers from surrounding areas
c
GM defines “Rural” as a small market with “no significant retail draw”
Note: Table includes both core and phased-out or sold brands
Source: SIGTARP analysis of GM Restructuring Plan
b
GM announced in its restructuring plan that, from 2009 to 2014, the company would “accelerate
the right-sizing and re-shaping of its dealer network in major markets, increasing volume
throughput in better locations.” Having fewer, better-located dealerships would increase dealer
profits, allowing for recruitment and retention of the best retail talent and more effective local
marketing initiatives, GM’s plan said. Improving the profitability of GM’s independent dealers
would help the company, GM said in the plan, by increasing sales, attracting private investment,
and driving greater customer loyalty. “The Company’s objective is to have the right number of
dealers in the right locations operated by the right entrepreneurs,” the restructuring plan said.
GM’s right-sizing efforts had been under way for decades. From 1970 to 2008, GM reduced the
dealership network by over 6,000 dealerships as a result of normal attrition, consolidation of
franchises in smaller markets, and the discontinuation of the Oldsmobile brand. GM planned to
continue reducing its network and also announced the phase out or sale of its Saturn, Saab, and
Hummer brands which would achieve 502 (30 percent) of the 1,650 planned dealer closings by
2014. GM assumed that the remaining reductions would be achieved by three actions:
•
consolidating dealerships in metro and suburban areas
•
consolidating GMC, Pontiac, and Buick brands in the same dealerships (GM later phased
out Pontiac and GMC Medium brands)
•
normal attrition of dealerships
On February 17, 2009, Chrysler submitted its own restructuring plan to Treasury, which
proposed measures to improve vehicle quality and fuel efficiency, as well as the overall product
mix. The plan presented three scenarios for the future of Chrysler:
•
Chrysler could continue as a standalone company with the help of $11 billion in loans
from the Government.
4
•
Chrysler could pursue a non-binding agreement already signed with the Italian automaker
Fiat S.p.A. (“Fiat”) and, with additional Government assistance, aim to sell more fuelefficient cars to a wider range of markets.
•
Chrysler could file for bankruptcy and embark on an orderly wind-down of the
company. 10
In contrast to GM’s plan, the Chrysler restructuring plan did not contain any specific details
about planned dealership closures, such as how many dealerships would close or what factors
would be considered in deciding which dealerships to retain. However, the plan referred to
Project Genesis, an ongoing Chrysler effort to reduce the number of Chrysler dealerships and to
have each surviving dealership sell all three of its brands — Chrysler, Dodge, and Jeep.
As discussed in detail in the following section, the Auto Team reviewed the companies’
proposals and rejected them, noting, among other things, that GM’s proposed “pace” of closing
dealerships was too slow and was an obstacle to its viability. Ultimately, Chrysler filed for
bankruptcy on April 30, 2009, and GM followed on June 1, 2009. During their bankruptcies,
GM and Chrysler accelerated the dealership termination process; the section beginning on page
16 details the companies’ decision-making processes and the effects of the Consolidated
Appropriations Act of 2010, which mandated arbitration for terminated dealers desiring such
arbitration. The final section of this report, beginning on page 25, discusses the companies’
estimates for how much money would be saved through the reduction of their dealership
networks.
10
Eventually Chrysler accomplished a combination of the second and third scenarios: Chrysler declared bankruptcy
with additional Government assistance and Fiat purchased Chrysler’s assets.
5
Figure 1 shows a timeline of key events discussed in this report from the formal announcement
of the Task Force in February 2009 and the signing of the Consolidated Appropriations Act of
2010 in December 2009.
Figure 1: Key Dates Regarding Dealership Terminations
President Obama announces
creation of an interagency
Presidential Task Force on
the Auto Industry; GM and
Chrysler submit restructuring
plans to the Obama
Administration
February 15 and 17, 2009
Chrysler files for
bankruptcy under
Chapter 11 of the
Bankruptcy Code
GM files for
bankruptcy under
Chapter 11 of the
Bankruptcy Code
April 30, 2009
March 30, 2009
Obama Administration lays out
framework(s) for GM and
Chrysler to restructure and
achieve viability
June 1, 2009
May 14, 2009
Bankruptcy judge
issues sale order
authorizing the sale
of the majority of
Chrysler’s assets to
Fiat; dealership
closures are a part
of sale order
June 10, 2009
Early June 2009
GM sends complete wind
down agreements to 1,454
dealerships; signed agreements
are due to GM on June 12
Chrysler sends
termination
letters to 789
dealerships
President Obama
signs the Consolidated
Appropriations Act,
2010, which allows
covered dealershipsa
to file for arbitration
December 16, 2009
July 10, 2009
Bankruptcy judge issues
sale order for GM;
dealerships that did not
sign wind-down
agreements are terminated
Source: SIGTARP
a
According to the Consolidated Appropriations Act, 2010, “The term ‘covered dealership’ means an automobile dealership that had a
franchise agreement for the sale and service of vehicles of a brand or brands with a covered manufacturer in effect as of October 3, 2008,
and such agreement was terminated, not assigned in the form existing on October 3, 2008 to another covered manufacturer in connection
with an acquisition of assets related to the manufacture of that vehicle brand or brands, not renewed, or not continued during the period
beginning on October 3, 2008, and ending on December 31, 2010.”
6
In Response to the Auto Team’s Determination that GM’s
Proposed Pace for Closing Dealerships Was Too Slow and
an Obstacle to Its Viability, GM Accelerated Its Dealership
Closures; Chrysler Also Accelerated, and at a Faster Pace
This section discusses the role of the Auto Team and its advisors in the decision-making process
to terminate dealerships.
In response to Treasury’s finding that GM’s “pace” of planned dealership terminations was too
slow and an obstacle to its viability, GM substantially accelerated its terminations. In its
restructuring plan, GM initially proposed closing 1,650 dealers by 2014, but following the Auto
Team’s response, it instead identified 1,454 dealerships to be wound down by 2010 during its
2009 bankruptcy proceedings. Chrysler also accelerated its dealership terminations – it had
planned to reduce its network from 3,181 in 2009 to about 2,000 dealerships by 2014 through
Project Genesis (its effort at consolidating dealerships) and instead immediately terminated 789
dealerships during bankruptcy proceedings. The Auto Team encouraged network reduction for
both companies based on advice they received from some industry experts that smaller
dealership networks would allow GM and Chrysler to improve sales volume and better compete
with import companies such as Toyota and Honda, as well as improve brand equity and the
overall health of the remaining network. The Auto Team also encouraged the companies to
terminate dealerships during bankruptcy proceedings, which provided the opportunity to close
dealerships outside of state franchise laws, which could have made involuntary dealer closings
more difficult and costly for the two companies.
Between February 17, 2009, the date that the auto companies released their restructuring plans,
and March 30, 2009, the date that Treasury released its Viability Determinations in response to
the plans, the Auto Team conducted a review of GM and Chrysler’s submitted plans and
prospects. According to the Viability Determinations, there were many individual considerations
and no single factor was critical to the assessment, and the ultimate determination of viability
was based upon a total consideration of all relevant factors, which differed for each company.
Future Government assistance to GM and Chrysler was conditional on their resubmitting plans
that demonstrated they could be viable.
For GM, the five key factors for the company’s viability identified by Treasury were: adopting a
more realistic assumption of GM’s market share, which had been declining in recent years;
improving pricing; improving the mix of products to steer the company away from trucks and
sport utility vehicles (“SUVs”), which had high margins but were declining in popularity;
reducing legacy liabilities such as employee pensions and health care costs; and reducing the
number of brands and dealerships.
For Chrysler, the five key factors that Chrysler had to improve to ensure the company’s viability
were: dedicating more research and development to each platform; increasing product quality
scores; improving the product mix (for example, adding more fuel-efficient autos); increasing
7
manufacturing capability; and expanding outside of North America to take advantage of
developing markets.
For help in assessing the companies’ plans, the Auto Team contracted with Boston Consulting
Group (“BCG”), an advisor on business strategy, and the Rothschild North America
(“Rothschild”), a financial advisor, to assess the automotive sector and to help evaluate GM’s
restructuring plan and the proposed Chrysler alliance with Fiat. Treasury specified in the
contract with BCG that BCG have extensive auto industry expertise. 11 The contract with
Rothschild likewise stipulated that “[t]he Treasury Secretary needs to acquire specialized
financial analysis and advice for the automobile industry that is beyond the purview and
expertise of Treasury Department personnel.” 12 BCG provided data comparing average number
of vehicles sold per dealership for GM, Chrysler and their competitors. Rothschild provided the
Auto Team with information that included its projections of the overall growth in auto sales in
the United States from 2009 to 2014 and GM’s projected share of that market.
Treasury Auto Team Reviewed Restructuring Plans
With the Help of Outside Experts
Following the submission of the February 17 restructuring plans, the Treasury Auto Team, along
with their external advisors, developed Viability Determinations for each company based on
their review of the plans. The Viability Determinations, released on March 30, 2009, reflected
the Auto Team’s evaluation of the extent to which the restructuring plans would, if followed,
allow GM and Chrysler to become viable companies. BCG and Rothschild were contracted to
provide the Auto Team with feedback on the financial viability of the two companies. Following
its Viability Determinations, the Auto Team also conducted its own research about potential job
losses resulting from dealership closures and a study of the impact of terminations in Montana.
Much of the information that the Auto Team received about the benefits for dealership
determinations was based on the “Toyota Model,” which suggested that smaller dealership
networks would reduce competition among dealerships and increase sales volume for the
remaining dealerships. It was believed that this would then allow the dealerships to invest more
in their facilities, thus improving the brand equity of GM and Chrysler.
Rothschild created a Cost Benchmarking Analysis presentation in December 2008 that provided
detailed information about GM, Chrysler and Ford’s dealership network size and productivity
measured against their top foreign competitors Toyota, Nissan, and Honda. An appendix to the
presentation identified that, although the domestic manufacturers have significantly larger
dealership networks, dealership network productivity data for 2007 U.S. new car and light truck
11
Treasury signed its contract with Boston Consulting Group on April 3, 2009, and the contract was to run through
October 2, 2009. The overall guaranteed minimum for this contract was $50,000 and the overall maximum for this
contract was $7,000,000. According to the contract, its objectives were to provide management consulting
services to: a) assist in Treasury’s continued assessment of the automotive sector generally; b) assist in Treasury’s
work with GM to develop and evaluate a comprehensive restructuring and business plan acceptable to the
government; and c) advise Treasury on the viability of the announced alliance between Fiat and Chrysler.
12
Treasury engaged Rothschild through an Interagency Agreement with the Pension Benefit Guarantee Corporation
(“PBGC”). The Interagency Agreement was signed by Treasury on February 25, 2009, and terminated on
December 11, 2009. The total value of the agreement was $7,770,000.
8
sales per franchise shows that “foreign transplant [dealer] networks are significantly more
productive” than their U.S. counterparts.
In March 2009, BCG provided Treasury with an analysis that compared the average annual sales
of GM and Chrysler dealerships with those of their foreign competitors from 2005 through 2008.
This analysis showed that on average GM and Chrysler dealerships sold fewer than 500 new
vehicles per year, while Toyota and Honda dealerships averaged more than 1,000 new vehicles
per year, as shown in Figure 2.
Figure 2: Average Annual Sales for GM, Chrysler Dealerships and Their
Competitors (2005-2008)
Source: Boston Consulting Group
In an interview with SIGTARP staff, a BCG managing director said that, in theory, if GM and
Chrysler reduced the number of dealerships, the average sales at the remaining dealerships
should increase, which would make them more profitable and enable them to invest more in their
facilities. According to an Auto Team memo dated May 11, 2009, five weeks after it wrote its
Viability Determination, dealership reductions generally involve near-term sacrifice and longterm gain. The memo notes that, according to BCG, the remaining dealerships typically
recapture only 75 percent of the business of the terminated dealerships in year 1. By year 3, the
Auto Team estimated, the sales would have returned to 100 percent. By year 5, the long-term
gain would materialize as sales in the remaining dealerships would reach 125 percent of sales
accomplished with the larger network as the benefits of a healthy dealership network start to
materialize.
Rothschild provided the Auto Team with information that showed the anticipated growth in
overall auto sales in the United States and GM’s projected U.S. market share from 2009 to 2014.
Rothschild assumed that overall new vehicle sales would grow from 10.5 million in 2009 to 16.8
million in 2014, but that GM’s U.S. market share would fall from 19.5 percent to 18.3 percent
during this period, as shown in Table 2.
9
Table 2—Projected U.S. Auto Sales and GM’s U.S. Market Share 2009-2014
Category
U.S. Market (SAAR1) (units in
millions)
GM Market Share (percent)
GM Sales — U.S. Market (SAAR)
(units in millions)
Increase in GM Sales (percent)
2009
2010
2011
2012
2013
2014
10.5
19.5%
12.5
18.9%
14.3
18.6%
16.0
18.4%
16.4
18.5%
16.8
18.3%
2.0
-
2.4
20%
2.7
12.5%
2.9
7.4%
3.0
3.4%
3.1
3.3%
1
Seasonally Adjusted Annual Rate
Source: SIGTARP analysis of data provided by Rothschild
Therefore, GM’s U.S. market share would continue to decline, but its overall sales would
increase, based on the assumption that overall new vehicle sales would substantially increase.
Following the release of the Viability Determinations, Rothschild and BCG continued to provide
updated information to the Treasury Auto Team regarding modifications to GM’s restructuring
plan and Chrysler-Fiat due diligence, focusing on products, new product development, brands,
technology, and turnaround practices.
The Auto Team also consulted with automotive financial industry experts from Bain Consulting,
UBS, A.T. Kearney, JP Morgan, Deutsche Bank, Barclays Capital, Roland Berger, and Auto
Nation. Mr. Bloom stated that these conversations were not limited to dealership terminations,
but also covered issues related to the overall viability of GM and Chrysler. Mr. Bloom noted
that these were off-the-record conversations and were not documented. However, according to
Mr. Bloom, the experts supported dealership terminations as a necessary part of GM and
Chrysler’s restructuring.
Experts from four of the firms offered SIGTARP the following observations about reducing the
number of dealerships:
•
A UBS official stated that terminating GM and Chrysler dealerships was necessary to
increase the companies’ profitability. Dealerships tend to carry “buffer stock” or excess
stock when competing with nearby dealers of the same brand. Fewer dealerships would
lead to reduced inventory levels which, in turn, would reduce the amount of floor plan
financing.
The reduction in floor plan financing and the
Floor Plan Financing
corresponding manufacturer assistance needed by all
dealerships would increase the profitability of the
Revolving lines of credit used to
overall network and the manufacturer as well. An
finance inventories of items, in
expert from Bain Consulting also stated many
this case, autos.
dealerships have too much inventory relative to their
market area, particularly in smaller markets or
markets where there are more dealers than necessary, because they have to have
sufficient diversity in their inventory to cover the manufacturer's entire portfolio and to
meet varied customer needs. This leads to higher floor plan financing costs per vehicle.
In addition, because it is difficult for a smaller dealership to match its mix of inventory
with actual customer demand, they end up with higher quantities of slow moving
10
inventory that can lead to a need for increased customer and dealer incentives to sell their
vehicles.
•
An official from A.T. Kearney said that the large networks have resulted in more
dealerships competing for a smaller share of the auto market, which keeps prices lower.
An expert from UBS also stated that reducing the number of dealerships will reduce
inter-brand competition, and would result in the dealerships being able to sell new
vehicles more quickly, which would increase the profitability of the whole network.
•
An expert from JP Morgan noted that although GM and Chrysler have lost significant
market share over the past few decades, the size of their dealership networks has not
decreased accordingly. The expert also noted that some dealerships derive a large portion
of revenue from used cars, service, and parts — not from new vehicle sales — and
therefore do not invest in facilities to support new vehicle sales. As a result, some
dealerships have improperly trained sales people and poor facilities, which can affect
customer service. Having better facilities and trained staff will improve the overall image
of the dealerships and the brands they sell. The official stated that the most significant
anticipated benefit of the closures will be an increase in brand equity. 13
Based on the analysis provided by the contractors and conversations with industry experts, the
Auto Team issued its Viability Determination that GM’s proposed “pace” of closing dealerships
was too slow and was an obstacle to its viability, and GM and Chrysler accelerated their planned
dealership closures. SIGTARP found that the Auto Team was not involved in determining
which dealerships to terminate.
According to Mr. Bloom, of the experts that he consulted, only one — from the Center for
Automotive Research — voiced opposition, as noted below, to dealership terminations.
However, SIGTARP interviewed that expert and one from J.D. Power and Associates, who was
not consulted by the Auto Team. Both experts said that while metro areas were oversaturated
with GM and Chrysler dealerships and reductions were needed in these areas, this was not the
case in rural areas where GM and Chrysler had an advantage over their import competitors.
Those two experts told SIGTARP that import dealerships such as Toyota, Honda, and Nissan are
not generally located in rural areas. The representative from the Center for Automotive Research
disputed the Auto Team’s assumption that closing rural dealerships would not affect sales in
rural areas. 14 He noted that it was not likely that someone would drive 80 miles to buy a
Cadillac when they could simply buy another vehicle at a closer dealership.
13
14
The interview with the JP Morgan official was conducted on November 16, 2009.
In August 2009, well after issuing its Viability Determinations, and in response to a meeting with U.S. Senator
Jon Tester of Montana, the Auto Team analyzed the impact of dealership terminations in Montana. They
concluded that the average drive to a GM dealership for a Montana resident, including residents of extremely
remote areas, was 21.9 miles prior to the dealership terminations and increased only to 24.6 miles after
terminations. Based on this analysis, the Auto Team said, GM and Chrysler would not be giving up market share
even if they closed rural dealerships, although the Auto Team did not validate this study to determine if average
driving distance can predict future auto brand loyalty, nor did they replicate this study in any other state.
11
He also noted that although sales volume in small towns may be lower, the cost of operating
dealerships in small towns is lower as well. In addition, closing dealerships in small towns could
ruin the “historic relationship” that GM has had with residents in small towns and force buyers to
drive to metro areas, where there are more competitors. In the worst case, the loss of market
share in small and medium-sized markets could “jeopardize the return to profitability” for GM
and Chrysler, the representative said. Representatives from the National Automobile Dealers
Association also concurred that dealership terminations would cause GM and Chrysler to lose
market share in rural areas.
A former Chrysler Deputy CEO told SIGTARP that the “Toyota model” studied by the Auto
Team — that fewer dealerships, located mostly in metro areas, would lead to higher sales and
profitability for the remaining dealerships — would not work for Chrysler. This is because
Chrysler sells trucks in rural markets as well as cars in Midwestern states where imported cars
are less popular. He said that Chrysler will “never” get to the same throughput level as its import
competitors. The former Chrysler Deputy CEO likened applying the Toyota model to Chrysler
to “trying to turn our sons into daughters.”
Some automotive industry experts also disagreed with the Auto Team’s position. The
representative from J.D. Power and Associates, for example, said that Chrysler’s decision to
terminate 789 dealerships within three weeks in an environment that was already disrupted by
the poor economy could bring about an even greater crisis in sales. Although he did not disagree
from a business standpoint that terminating some dealerships was necessary, he asked why
Chrysler would want to “create a wave of chaos amidst [an economic] crisis.” Indeed, in
September 2009, Chrysler officials themselves told SIGTARP that closing dealerships too
quickly would have an adverse effect on sales. Chrysler officials said that they expected that
their rapid terminations would result in lost sales in the short term, that Chrysler will take several
years to recover lost sales, and that future increases in market share will depend on penetrating
new markets.
Auto Team Determined that GM’s and Chrysler’s
Restructuring Plans Were Not Viable; Companies Entered
Bankruptcy and Terminated Dealerships
Based on the input from the experts it consulted and its own research, the Auto Team found that
GM’s overall plan was “not viable as it is currently structured,” in part because GM relied on
overly optimistic assumptions about the recovery of the company and the economy. In its
Viability Determination dated March 30, 2009, Treasury listed five areas in which GM needed to
improve its restructuring plan in order to become a viable company: more realistic assumption
of its cash needs associated with legacy liabilities, reassessment of its market share assumption,
improvement in prices, improved mix of products to steer the company away from high-margin
trucks and SUVs, and an excess of brands and dealers.
Specifically with regard to GM dealerships, the Auto Team indicated that the automaker should
accelerate the pace of dealership closings:
12
GM has been successfully pruning unprofitable or underperforming dealers for several
years. However, its current pace will leave it with too many such dealers for a long
period of time while requiring significant closure costs that its competitors will not incur.
These underperforming dealers create a drag on the overall brand equity of GM and hurt
the prospects of the many stronger dealers who could help GM drive incremental sales.
GM was given 60 days to submit a “more aggressive plan” overall, including planning for their
dealership terminations, and was provided an additional $6 billion of TARP funds as working
capital.
Treasury also listed five challenges for Chrysler in a separate Viability Determination: too small
of a scale to dedicate enough research and development to each platform; low quality scores;
insufficient product mix (for example, too few fuel-efficient autos); inflexible manufacturing
capability; and too much geographic concentration in North America, which prevented Chrysler
from taking advantage of developing markets. The Viability Determination for Chrysler did not
address dealership terminations. The Auto Team concluded that Chrysler could succeed only if
it developed a partnership with another automotive company.
Mr. Bloom stated that GM and Chrysler could use the terms of bankruptcy to eliminate
dealerships quickly, and that it would have been a “waste of taxpayer resources” for the auto
manufacturers to exit bankruptcy when they knew the networks would still have to be
rationalized. Mr. Bloom referred to this as “taking the pain and getting past it.”
Mr. Bloom also said that the Auto Team considered dealership reductions to be “consistent with
overall industry thinking.” He told SIGTARP that the Auto Team assumed that GM’s and
Chrysler’s remaining dealerships would perform better and that the brand equity for both
companies would improve if GM and Chrysler terminated dealerships.
A Treasury document summarizing the efforts of the AIFP noted that, although Chrysler and GM
were on two different paths, “their best chance of success may well require utilizing the
bankruptcy code in a quick and surgical way.” According to Treasury, this would not entail
liquidation or a conventional bankruptcy. Instead a “structured” bankruptcy would function as a
tool to “make it easier for Chrysler and General Motors to clear away old liabilities.” One effect
of this strategy is that dealerships could be closed more quickly. In an internal memo, Auto
Team officials reiterated that their goal was to take advantage of the bankruptcy code to reject
dealership franchise agreements without significant up-front costs.
However, Treasury officials knew that there might be difficulties with closing dealerships
quickly. According to an internal Auto Team memo, “(t)he decision to terminate such a large
number of distribution points in a very short time is arguably the most challenging component of
the revised plan…Despite the significant execution risk, the management team believes it is
imperative that the company capitalize on this unique opportunity to reconfigure the dealer
network outside the confines of restrictive state franchise law.”
The impact of job losses was not a significant factor in the Auto Team’s findings that GM’s
proposed pace would be an obstacle to its viability. Indeed, it was only after the decision was
made that the Auto Team considered the impact its decision would have on job losses. In an
internal memo dated April 20, 2009, the Auto Team estimated that GM dealership terminations
13
would result in a short-term loss of 43,081 jobs and a long-term loss of 25,597 jobs. The memo
also assumed that Chrysler would go out of business completely, resulting in 72,620 jobs lost in
the short term and 43,580 jobs lost over the long term.
The memo notes that the average dealership employs 52 employees. The memo assumes that, at
closed dealerships, about half of these employees (namely, the service professionals) would find
other work quickly. Sales, managerial, and clerical staff, however, would have a more difficult
time finding new jobs or would be permanently displaced. A Chrysler official cited a National
Automobile Dealers Association statistic that 50 jobs might be lost for each dealership
terminated, but also said that service or technical staff would find re-employment easily. GM
officials disputed the NADA figure because many of the low-performing dealerships it
terminated had fewer than 50 employees.
As a result of the comments in the Viability Determination, GM officials said their conclusion
was to “move now” and quickly to “right-size” the dealership network. GM officials stated that
it was their own decision to make the cuts by December 2010. GM accelerated its planned
closings of dealerships during bankruptcy proceedings in June 2009 when it announced plans to
close 1,454 dealerships by October 2010, rather than its originally planned closure of
approximately 450 in the same time period. GM initially planned to close 1,650 dealers through
2014 (see Figure 3).
Figure 3: Planned GM Dealership Reductions Pre- and Post-Bankruptcy
Source: SIGTARP analysis of data from GM
In response to verbal feedback from the Auto Team, Chrysler also accelerated its dealership
closings. Chrysler officials said that bankruptcy offered Chrysler the opportunity to speed up
14
their plans for Project Genesis by reducing costs through closing dealerships. Prior to
bankruptcy, the officials said that they had a difficult time closing dealerships because of state
franchise laws. During its 2009 bankruptcy proceedings, Chrysler eliminated 789 of 3,181
dealerships — almost 25 percent of its dealership network. Chrysler officials also noted that
bankruptcy offered an opportunity to speed up the existing strategic plan to consolidate its three
brands (i.e., Chrysler, Dodge, and Jeep) within one dealership, Project Genesis. Under Project
Genesis, Chrysler had planned to reduce its network over time to about 2,000 dealerships by
2014. Chrysler asserted that the percentage of dealerships that sold all of its three brands
increased from 62 percent to 84 percent as a result of eliminating 789 dealerships. The retained
dealerships had generated 86 percent of new vehicle sales in 2008.
15
Criteria Used by GM and Chrysler to Identify
Dealerships to Close
This section describes the processes that GM and Chrysler used to identify dealerships to
terminate, GM’s appeals process, and the status of the arbitration process for both GM and
Chrysler.
In June 2009, GM notified 1,454 dealerships that they would be wound down (terminated) in
October 2010, and Chrysler notified 789 dealerships that they would be wound down in 22 days.
GM allowed dealerships to appeal the wind-down decision; Chrysler did not allow appeals. In
December 2009, legislation was enacted to allow dealerships to file for arbitration regarding
these decisions.
GM Wind-Down Decisions Were Made in Two Phases
In April 2009, before entering bankruptcy, GM officials met to determine the size and scope of
dealer network reductions. GM’s Dealership Network Planning and Investments team developed
the methodology used to select which dealerships to wind down and which to retain. As part of
this process, the Dealership Network Planning and Investments team also worked in
coordination with executive leadership, legal counsel, regional managers (“zone” managers), and
other GM personnel working for each brand (for example, Chevrolet, Buick, GMC, and
Cadillac). According to testimony given by GM officials and documents presented during that
testimony, the company’s approach to reducing the dealership network involved applying
“objective performance criteria” such as dealership sales, profitability, customer convenience,
and market demographics. Excluding the reduction from the sale or phase out of Saab, Saturn
and Hummer, GM sought to reduce its remaining dealership network from 5,591 dealerships to
4,137. GM expected that normal attrition would eventually lead to an “ideal” network of
approximately 3,300 dealerships.
GM selected dealerships that would receive complete wind-down notices in two phases, but all
the dealerships were provided wind-down agreements at the same time. During phase one in
May 2009, GM identified 1,071 dealerships that it would not likely include in its network going
forward. 15 These dealerships were notified of GM’s intent in letters dated May 14, 2009, but did
not receive official wind-down agreements until the following month. GM officials stated that
these dealerships were selected to receive the May 14 letter (and subsequent wind-down) based
on one of two criteria that provided an objective framework to evaluate all 5,591 dealerships:
15
Of 1,096 dealerships initially identified for termination in phase one, 14 of the termination decisions were
reversed before the official wind-down agreements were sent out, and 11 dealers voluntarily terminated before
bankruptcy. The remaining 1,071 dealerships received wind-down agreements in June 2010.
16
•
Dealer Performance Summary Score (“DPS”) of less than 70
Or
•
annual sales of less than 50 new vehicles in 2008
GM officials noted that the DPS score has been used since 2002 as a measure of dealership
performance and that dealerships can access their score on the same website they use to order
vehicles and perform other sales-related functions. Our review confirmed that dealerships could
access their scores through the website. SIGTARP found that only 26.1 percent of terminated
dealerships viewed their DPS score on the website in 2008, and 47.5 percent did so in 2009. The
DPS score is the sum of four weighted category scores: sales, customer satisfaction,
capitalization, and profitability. GM arrived at each category score by applying a weighting to
the ratio of actual performance to the expected performance, as described in Table 3:
Table 3—GM DPS Score Categories
Category
Retail Sales Index
(RSI)
Weighting
50 percent
Customer Satisfaction
Index (CSI)
30 percent
Capitalization
10 percent
Profitability
10 percent
Description
Ratio of actual sales to expected sales. GM
calculates expected salesa based on a segmentadjusted state average.
Ratio of actual score to expected score. GM
calculates expected score based on a regional
average.
Ratio of actual working capital to standard
working capital. GM calculates standard by
averaging a dealership’s needs for working
capital over a year.
Ratio of actual dealer return on sales to expected
return on sales. GM calculates expected return
based on a regional average.
a
GM calculates expected annual sales, CSI, capitalization, and profitability, based on vehicle
registrations, industry averages, and other historical data
Source: SIGTARP analysis of GM data
GM determined that dealerships with a DPS Score of 100 were average performers; those below
70 were considered poor performers and would not be retained. SIGTARP noted, however, that
GM did not uniformly apply the phase one criteria to the entire network. For example, our
analysis found that two of the wind-down dealers did not meet either criterion. Furthermore, we
found that, of the dealerships that met only one of the two criteria:
•
•
16
GM retained 355 (or approximately 41 percent) of the 858 dealerships that had a DPS
score below 70. 16
GM retained 9 of the 394 dealerships that sold fewer than 50 new vehicles in 2008. 17
An additional 10 dealerships with a DPS score below 70 were in phase two wind-downs.
17
GM officials attributed these inconsistencies primarily to a desire to maintain coverage in certain
rural areas where they have a competitive advantage over import auto companies that are not
typically located in rural areas, although ultimately close to half of all of the GM dealerships
identified for termination were in rural areas. Other dealerships were retained because they were
recently appointed, were key wholesale parts dealers, or were minority- or woman-owned
dealerships.
On June 1, 2009, GM filed for bankruptcy. As indicated earlier in this report, bankruptcy would
permit GM to accelerate the process without the restriction of state franchise laws.
Bankruptcy laws supersede various state franchise laws, which could have required litigation or
arbitration. GM management had also determined that the company would need to wind down
more dealerships than those designated in phase one to
State Franchise Laws
get close enough to the “ideal network size” of 3,380
dealerships.
In early June 2009, GM initiated phase two of their
wind-down process and identified an additional 383
dealerships to wind down. By this point, GM
management had decided to eliminate the Pontiac and
GMC Medium Duty Truck brands as part of the
restructuring, and, as a result, 144 of the 383 dealerships
identified in phase two were ones that sold only those
brands. 18 GM officials stated that they also used a
“more aggressive” set of criteria in phase two than in
phase one to select the remaining 239 dealerships for
wind-down and bring the phase two total to 383. GM
used the following criteria to select the 239 dealerships
for wind-down:
•
•
•
•
•
Franchise laws, which vary from state to
state, are designed to protect the rights
and interests of a franchise purchaser
by requiring the franchisor (in this case
Chrysler or General Motors) to follow
specific guidelines in order to terminate
the franchise agreement. For example,
under Delaware law, a franchisor is
prevented from unjustly terminating,
failing to renew a franchise, or refusing
to deal with a franchisee with whom the
franchisor has been dealing with for at
least two years, without good cause or
in bad faith. Franchisors are required to
provide notice before terminating, or
electing not to renew, a franchise
agreement. Franchise laws also
provide franchise purchasers with a
legal remedy if a franchisor unjustly
terminates, or threatens to or attempts
to unjustly refuse to renew a franchise.
DPS of 80 or less; or
Unprofitable in 2006, 2007, and 2008; or
Retail Sales Index below 70; or
Non-GM brands in same facility and DPS below 100; or
Buick-GMC or Cadillac dealership network viability 19
SIGTARP found that GM did not wind down all the dealerships meeting the aforementioned
criteria. For example, although 992 dealerships with a DPS below 80 were selected for closure,
another 763 with a DPS below 80 were retained. 20 Similarly, for dealerships with a DPS of 100
17
The balance of the 1,071 dealerships that were terminated met both criteria.
A total of 165 wind-downs were related to discontinued brands (GMC Medium Duty Trucks and Pontiac). In
phase one, 21 Pontiac dealerships received wind-downs; in phase two, 15 Pontiac dealerships received winddowns. Also in phase two, 129 GMC Duty Trucks received wind-downs.
19
Buick-GMC dealership network viability refers to GM’s efforts to combine standalone Buick and GMC
dealerships under one dealership. Cadillac dealership network viability refers to the reduction of the overall size
of the Cadillac network to better compete with other luxury vehicle brands, such as Lexus and BMW.
20
Of the dealerships with a DPS below 80, 15 additional were standalone dealerships that sold only the phased out
Pontiac brand.
18
18
and a non-GM brand in the same facility, 226 were phase one wind-downs, 43 were phase two
wind-downs, and 299 were retained. 21 Additionally, SIGTARP noted that 39 wind-down dealers
in phase two did not meet any of the performance-based criteria (DPS, RSI, new vehicles sold,
non-GM dual). During the time these decisions were made, GM did not document why some
dealerships meeting the criteria were retained while others were wound-down. GM officials
responded to questions about these inconsistencies by stating that they made case-by-case
decisions to determine whether to issue a wind-down agreement to dealerships that met any one
of the criteria. Officials also stated that two of the criteria, Buick-GMC and Cadillac dealer
network activities, required review of individual market factors. Therefore, GM officials had to
contact various regional or field representatives over several weeks to obtain their reconstruction
of the impetus for decisions made several months prior.
SIGTARP also found that GM was missing data to evaluate some of the dealerships based on the
established criteria. GM was missing at least one of the following criteria for 308 22 dealerships:
DPS score, RSI, or 2008 retail sales. We determined that a total of 61 dealerships that lacked at
least one of these criteria were terminated, and 247 were retained. 23 GM officials stated that the
criteria were missing for 308 dealerships because the dealerships had not provided it or the
dealership was new. To make wind-down or retention decisions for dealerships that were
missing DPS scores, GM officials said they instead considered RSI and new vehicles sold.
During the first week of June 2009, GM sent wind-down agreements to 1,454 dealerships to end
their franchise agreements in October 2010. To receive compensation as part of bankruptcy,
dealerships were required to sign the wind-down agreements and submit them to GM by June 12,
2009. The wind-down dealerships were allowed up to 16 months to terminate the business and
sell existing inventory to retail customers; however, these dealerships could not order new
vehicles.
GM agreed to provide $587 million in compensation to wind down dealerships. Compensation
for each dealership was determined using a formula that considered dealership rent, sales, and
new vehicle inventory in late May 2009. The dealerships were provided with an initial payment
of 25 percent of the total compensation, and the dealerships will receive the remaining 75 percent
of the total compensation on the completion of various milestones. As of May 1, 2010, a total of
409 dealerships in wind-down sought to close their GM dealerships before October 2010.
GM Allowed Dealers to Appeal Wind-Down Decisions
Subsequent to announcing the dealership closures and declaring bankruptcy, GM set up an
appeals process. Dealers were instructed to submit appeals to GM, but they still had to sign and
submit their wind-down agreements by June 12, 2009. For the appeals process, GM created an
appeals review team and an Executive Review Committee, but did not establish criteria for the
21
For dealerships with a DPS of 100 and a non-GM brand in the same facility, 12 additional dealerships were
standalone dealerships that sold the phased-out Pontiac brand and no other GM brands.
22
An additional three dealerships were missing data but were standalone dealerships that sold phased-out brands.
23
A total of 172 dealerships that lacked all three of these criteria were retained, and four received wind-downs; 61
dealerships missing DPS scores received wind-downs, and 247 were retained.
19
review or for the reversal of wind-down decisions. GM officials stated the appeals review was
based on a second look at the same data used in the original wind-down decisions. The appeals
process opened on June 4, 2009, and closed on August 7, 2009.
GM received 935 appeals related to complete wind-downs and granted 64 reversals. 24 GM did
not document the reasons for reinstating dealerships. When SIGTARP requested explanations of
the reversals, GM contacted various field representatives to obtain their undocumented
recollections of the reasons for reinstatements. The reasons provided to SIGTARP included the
desire to maintain market coverage in rural areas, recent facility upgrades, corrections of
erroneous score data, GM legal advice, and GM leadership review. Without proper
documentation from GM, SIGTARP could not validate the reasoning or consistency of appeal
decisions.
GM did not provide guidance on the specific data that dealerships were to submit as part of the
appeals process. Our review of 323 appeals packages found that dealers submitted a variety of
information that they deemed relevant. For example, some provided updated financial data, and
others submitted letters from members of the community, as shown in the following excerpts
from the appeals packages:
We have not heard back from anybody. We have just moved into a brand new dealership
04/14/2009. We do not understand this letter. We would like to appeal this. Please look
at our investment. We have moved to the corner of two major highways and invested
over 2 million dollars. We feel you might not be aware of our new dealership since it
was addressed to our old address and name.
GM reversed this dealership’s closure, but did not document why the appeal was granted.
However, GM officials stated that this appeal was granted after its DPS score data was corrected
and its facility upgrades were considered.
The following excerpt is from a dealership appeal that was rejected. GM did not document why
the appeal was rejected.
As a recipient of GM’s May 14th letter of anticipated contract non-renewal and the
Wind-Down Agreement dated June 1, 2009, we request that you review and reconsider
the decision to abandon the market of 80,000…in light of the enclosed information. Our
continued partnership is truly best for our mutual clientele, the current and future GM
customers in this vital area….In an overwhelming show of support from the community,
we have received nearly 300 letters and emails, most within a 24-hour period last week
due to a grass-roots effort by customers.…We would be happy to provide all these letters
if you wish to review them.…We respectfully request an opportunity to review the details
24
GM received a total of 1,316 appeals related to both complete and partial wind-downs, and granted 86 reversals.
22 of the reversals were for dealerships that received partial wind-downs, 935 of the appeals were received from
dealerships selected for complete wind-down, and 381 of the appeals were received from dealerships selected for
partial wind-down, which involved eliminating one or more brands from a dealership, but keeping the dealership
open.
20
of our situation in person with an appropriate GM representative at your earliest
convenience.
The following excerpt is from another appeal that was rejected. GM officials did not document
why the appeal was rejected.
We started out by getting very involved in the community and establishing our own brand
as you would. Sponsorships ranging anywhere from the local high school football teams
and cheerleaders, softball teams of all levels, Little League and Pee Wee Football…How
can General Motors encourage and approve a dealer to make an investment in a
franchised dealership and then in just 15 months after all of our investment tell us that
there is no longer a market for the amount of dealers in this market. I could understand if
that would have been 5 years later but not 15 months and two and a half million dollars
later. Furthermore the commitment to our facility which was a 15-year lease with an
option to purchase the facility at the end of 5 years is also a major factor that all parties
were aware of at the time of the transaction. Could General Motors please tell me why we
would be allowed to enter into this type of an arrangement when we are talking about just
15 months in business? My exposure on this facility is in excess of 4.5M over the next
three and half years. I made the commitments and the investments based on your
approval and your desire to have a dealer in this market.
Chrysler Evaluated Dealerships Market by Market
Before filing for bankruptcy, Chrysler had been implementing a plan known as Project Genesis
to consolidate dealerships and have each dealer sell all three of its brands—Chrysler, Dodge, and
Jeep. The plan was scheduled to be completed in 2014. Chrysler’s Network Operations-Dealer
Operations team developed and executed a market-by-market dealership review that incorporated
the goals of Project Genesis. During bankruptcy, Chrysler accelerated this plan and decided to
terminate 789 dealerships within 22 days without providing any financial assistance to these
dealerships. Chrysler officials noted that prior to bankruptcy, state franchise laws made it
difficult to close dealerships and stated that the goal was to close dealerships quickly and to have
the terminations coincide with the effective date of the bankruptcy sale. Unlike GM, Chrysler
did not have an appeals process.
Chrysler used the following primary criteria to select dealerships to retain or terminate: whether
the dealer’s location was a desirable one targeted by Chrysler; which brands were offered; the
number of new vehicle sales; and the Minimum Sales Responsibility (“MSR”). 25 Chrysler also
considered customer convenience, financial stability of the dealership’s company, condition of
the dealership’s buildings and lots, and capacity of the facility’s buildings and lots. Chrysler
identified target locations using a market analysis performed by Urban Science, a consulting
group. The analysis compared the number of dealerships and corresponding sales to competitors
in 1,712 markets across the United States. To demonstrate how it applied the analysis, Chrysler
provided SIGTARP with market maps detailing the target areas, number of dealerships and new
25
Minimum Sales Responsibility is a ratio of the actual sales to the average number of vehicle registrations in a
state. One hundred is considered average. The state average is broken down by market share and market segment
(small, midsize, etc.).
21
vehicle sales for each competitor brand. The analysis also detailed Chrysler’s percentage of
market share in each area.
SIGTARP’s analysis of terminations in 13 markets found that Chrysler’s rationale for
termination focused on implementing Project Genesis, retaining dealerships with higher sales
and premium facilities and retaining those located in target areas. In two of the markets
reviewed (see Table 10 in Appendix E), Chrysler terminated all of the dealerships because their
performances were below average. Chrysler plans to seek new owners to replace the dealerships
in these markets. Chrysler also identified at least 27 other terminated dealerships nationwide that
they intend to replace with dealerships under new ownership. For a summary of the 13 markets,
see Table 10 in Appendix E.
Table 4 below shows the rationale Chrysler used in its decision-making process for one market.
Table 4—Example of Chrysler’s Decision-Making in One Market
Dealership
Brands
Dealer A
Jeep
Dealer B
Dodge,
Chrysler
Dealer C
Chrysler,
Dodge, Jeep
In Target
Location 2008 MSR
Yes
Yes
Yes
442%
172%
103%
2008 New
Vehicles Sold
Terminated
486
Yes
Blocking the addition of Jeep
franchises in three other sales areas.
No
In target area, above-average sales
performance. Jeep brand to be added
in August 2009.
No
In target area, above-average sales
performance. New 2007 dealer and in
line with project Genesis.
477
390
Chrysler Rationale
Dealer D
Dodge
Yes
445%
378
No
In target area, above-average sales
performance. Jeep brand to be added
in August 2009.
Dealer E
Chrysler,
Dodge
Yes
162%
190
No
In target area, above-average sales
performance.
Dealer F
Chrysler,
Jeep
Yes
82%
145
Yes
Below-average sales performance, not
profitable, undercapitalized.
29%
45
Yes
Below-average sales performance,
under-capitalized on finance hold,
nearby dealership has above-average
sales.
Dodge
No
87%
Source: SIGTARP analysis of Chrysler data
41
Yes
Not in target area, below-average
sales performance, not profitable.
Dealer G
Dealer H
Chrysler,
Jeep
Yes
Three of the four terminated dealerships among these examples (F, G, and H) in Table 4 had the
lowest MSR and lowest number of new vehicles sold. However, Dealer A, which had the
highest sales and MSR, was terminated because the dealership was preventing Chrysler from
adding the Jeep brand to surrounding dealerships, thus preventing Chrysler from implementing
Project Genesis. The retained dealerships in this market accounted for 67 percent of the new
vehicles sold and had an average MSR of 233 percent. The terminated dealerships accounted for
33 percent of the new vehicles sold and had an average MSR of 160 percent.
22
Chrysler asserted that the elimination of 789 dealers increased the percentage of dealerships that
sold all three brands from 62 percent to 84 percent. In addition, retained dealers generated 86
percent of Chrysler’s new vehicle sales in 2008.
Arbitration and Reinstatement Offers
Following the GM and Chrysler dealership closure announcements, Members of Congress held
hearings in the House and Senate at which auto manufacturing executives and auto dealers
testified. According to an August 2009 Congressional Research Service (“CRS”) report,
“…some Members of Congress were sympathetic to the concerns of the dealers, citing instances
in their districts and states where long-standing dealers had been notified of termination.”
During the summer of 2009, several legislative proposals were introduced which sought to
reinstate dealerships terminated by GM and Chrysler. One amendment to the Government
Appropriations Act, 2010 (H.R. 3170) offered by Representative Steven C. LaTourette required
reinstatement of the terminated dealerships because “the closing of these dealerships was
punitive and secretive.” Ultimately, on December 8, 2009, House Majority Leader Steny Hoyer
and Assistant Senate Majority Leader Dick Durbin announced compromise legislative language
requiring binding arbitration to address the “ongoing dispute between GM, Chrysler, and
dealerships that were closed during the companies’ restructuring.” The compromise language
was included in the Consolidated Appropriations Act, 2010.
On December 16, 2009, President Obama signed the Consolidated Appropriations Act, 2010,
into law (Public Law No. 111-117). Under the act, affected dealerships had to file for
arbitration by January 25, 2010. According to data provided by the auto companies, 1,169 GM
dealerships and 418 Chrysler dealerships filed for arbitration. The law requires cases to be
submitted to the arbitrators by June 15, 2010, but allows arbitrators to extend this deadline by 30
days if necessary. The deadline has now been extended to July 15, 2010.
In March 2010, both GM and Chrysler decided to offer reinstatement to a limited number of
dealerships that filed for arbitration. Officials from both GM and Chrysler told SIGTARP that
the decision to offer reinstatement to some dealerships was in response to the legislation and the
realization that it would not be a prudent use of company resources to go through arbitration with
every dealership that filed. Furthermore, the companies’ officials expressed doubt that all the
arbitration cases could be completed by the deadline of June 15, 2010. On March 5, 2010, GM
announced that it would be sending Letters of Intent (“LOI”) offering reinstatement to 666
dealers that filed reinstatement claims, including to 216 complete wind-down dealerships and
450 partial wind-downs, 26 as shown in Table 5. GM officials said they did not believe that the
reinstatements will negatively affect the dealership network, stating that economic conditions are
better now than they had anticipated at this time last year and that they have a “sense they can
support the new network.” Ultimately officials stated that they did not believe the reinstatements
would be detrimental to the network.
26
GM offered LOIs to 148 dealerships that had been identified in phase one and to 68 dealerships that had been
identified in phase two.
23
Table 5—GM Letters of Intent Offered to Dealers
Type of Wind-Down
Metro
Hub
Rural
Total
Complete
41
54
121
216
Partial
34
220
196
450
Total
75
274
317
666
Source: SIGTARP analysis of GM data
GM officials stated that dealerships receiving LOIs were selected based on the dealership’s RSI,
CSI, and the geographical impact on existing dealerships. The Letter of Intent allows a
dealership to be reinstated after complying with its terms, which require the dealership to meet
capitalization requirements, secure wholesale floor plan financing within 60 days and, if a nonGM brand was added after receipt of the wind-down agreement, the dealership must remove that
brand.
On March 26, 2010, Chrysler announced that it would offer LOIs to 50 of the 789 dealerships
that had been terminated. According to Chrysler, 46 of these dealerships were in rural markets;
the other four were in metro and secondary markets. Chrysler officials stated that dealerships
that were provided LOIs were in areas where no other dealership could protest the addition of
other Chrysler brands, and were not likely to harm sales in the remaining network.
24
Dealership Termination Decisions Were Not
Based on GM’s and Chrysler’s Cost Savings
Estimates
This section discusses the cost savings that the auto companies estimated would result from
terminating auto dealerships.
GM reported that dealership terminations could yield cost savings of $2.6 billion (about $1.1
million per closed dealership); Chrysler expected to save $35.8 million ($45,501 per closed
dealership). GM’s estimate was significantly higher than Chrysler’s because it included
anticipated savings from reduced incentive payments to dealerships, which Chrysler did not
include in its estimate. However, GM and Chrysler officials, along with Auto Team officials,
emphasized that these estimates were not considered in their decisions to terminate dealerships,
but were developed in response to congressional inquiries and in preparation for congressional
testimony in June 2009, i.e., after the terminations.
Indeed, key members of the Auto Team — including Messrs. Rattner and Bloom — stated that
they did not consider cost savings to be a factor in determining the need for dealership closures.
Nevertheless, GM officials stated that they developed the cost-savings estimate shown in Table 6
after being “pressed” during meetings with congressional representatives to explain the cost
savings that would result from the dealership terminations. A Chrysler official said that the cost
savings estimates had been originally developed in 2006 and 2007, before the issue of dealership
terminations arose, and were updated based on SIGTARP’s request. GM officials reiterated that
the plan to reduce dealerships was based on making the remaining dealership network more
profitable by increasing their sales volume. In fact, when asked by SIGTARP what GM will
save by closing any particular dealership, one GM official stated the answer is usually “not one
damn cent.”
Furthermore, a GM official stated that removing a dealership from the network does not save
money for GM—it might even cost GM money—and that savings cannot be attributed or
assigned to any one dealership. According to one GM official, it was a “math exercise” to assign
a savings amount to one dealership; it was difficult to estimate savings for a particular dealership
because the savings are expected to be achieved when the entire dealership network plan is
accomplished. GM’s Dealer Network and Investments team said the cost savings estimate was
their effort to quantify savings in response to the negative reaction to GM’s plan to terminate
dealerships and to the congressional “drumbeat” of statements that “this is a bad plan.”
Estimated Cost Savings
GM’s and Chrysler’s estimated savings can be grouped into two categories: incentive savings
and structural or administrative savings, as shown in Table 6.
25
Table 6—GM and Chrysler Estimated Cost Savings from Dealership Closures
GMa
Category of Savings Estimate
Incentive Savings
Structural/Administrative Savings
Chryslerb
Per dealership
Total
Per dealership
Total
928,000
180,000
2,150,000,000
415,000,000
0
45,501
0
35,900,289
Total Savings
Savings Per Dealership
$2,565,000,000
$35,900,289
$1,108,000
$45,500
a
GM’s total is based on a reduction of 2,300 dealerships
Chrysler’s total is based on a reduction of 789 dealerships
Source: SIGTARP analysis of data provided by GM and Chrysler
b
GM’s savings estimate is significantly higher because it includes $2.1 billion in anticipated
incentive payment reductions that it currently pays to dealerships. GM’s incentive savings are
based on the assumption that once excess dealerships have been eliminated, sales and
profitability for remaining dealerships will increase. GM believed that as dealership profitability
improved, it would be able to reduce the incentives to dealerships to sell new vehicles. GM’s
savings estimates are also based on two other assumptions — that GM’s new vehicle sales will
increase from the current level of 1.5 million per year to 3.1 million by 2014, and that GM will
eliminate about 800 additional dealerships through normal attrition and consolidations during the
same time period.
Approximately 80 percent of GM’s estimated total savings are classified as reductions in the
anticipated incentive payments that it currently makes to dealerships. The total estimated
savings include:
•
$810 million by reducing the dealership discount on vehicles GM sells to its dealerships
•
$380 million by lowering other incentives paid directly to dealerships (for example, GM
anticipates that significantly lower dealership inventory levels in 2010 will reduce the
need to use incentives to encourage dealerships to reduce their vehicle inventory)
•
$350 million by reducing payments for Standards for Excellence, a program that provides
payments to dealerships if they meet certain criteria, such as selling more new vehicles in
the current year than in the comparable period of the prior year
•
$350 million by reducing the incentive that GM currently pays dealerships to inspect
vehicles when they are delivered from the manufacturer (GM plans to reduce the current
payment to 15-20 percent)
•
$140 million by reducing current levels of wholesale floor plan support, which provides a
payment to dealerships to help them manage the cost of financing daily operations and
purchasing new vehicle inventory
26
•
$120 million by reducing reimbursement to dealerships by 15 to 20 percent for a full tank
of gas for each new vehicle sold
Chrysler did not include incentive savings in its estimate. One Chrysler official noted that
Chrysler did not project any incentive savings, and further stated it would be difficult to isolate
savings derived from reduced incentives in a market where various dynamics can influence
vehicle sales and the incentives that an auto manufacturer must offer.
GM and Chrysler also projected administrative savings from reducing the number of dealerships,
as shown in Table 7.
Table 7—Estimated Structural/Administrative Cost Savings
GMa
Chryslerb
Category of Savings Estimate
Local Advertising
Dealer Channel Network Alignment
Per dealership
Total
Per dealership
Total
86,957
54,347
200,000,000
125,000,000
0
0
0
0
Sales and Service Consultants/Field
Staff
Dealer Website/IT Expenses
Training
Corporate Administration
Transportation
Other
17,391
40,000,000
3,802
3,000,000
17,391
4,348
0
0
0
40,000,000
10,000,000
0
0
0
4,183
6,337
18,504
10,139
2,535
3,300,000
5,000,000
14,600,000
8,000,000
2,000,000
Total Savings
Savings Per Dealership
$415,000,000
$35,900,000
$180,434
$45,500
a
GM’s total is based on a reduction of 2,300 dealerships
Chrysler’s total is based on a reduction of 789 dealerships
Source: SIGTARP analysis of data provided by GM and Chrysler
b
GM’s administrative savings estimate was higher primarily because it included savings from
local advertising assistance and expenses associated with wind-down compensation provided to
dealerships, which were not included in Chrysler’s estimate. For example, GM estimated it
would save $200 million in local advertising assistance, a dealer assistance program that GM
intends to reduce over time when all of its planned wind-downs are completed. GM also
estimated $125 million in savings for Dealer Channel Network Alignment, which refers to GM’s
historical expenses incurred to date to close dealerships, which will not be required at the same
level once the wind-down process is complete.
Chrysler’s largest cost savings estimate was $14.6 million in a reduction in administrative
expenses from a smaller dealership network. Chrysler also anticipated that a smaller network
would allow them to decrease training expenses, and that fewer delivery points for its parts
distribution centers would reduce transportation expenses.
27
Conclusions and Lessons Learned
In response to the Treasury Auto Team’s rejection of GM’s and Chrysler’s restructuring plans
and its explicit comment that GM’s “pace” of dealership closings was too slow and an obstacle
to its viability, GM and Chrysler substantially accelerated their dealership termination
timetables. In GM’s case, instead of gradually reducing its network by approximately 300
dealerships per year through 2014, as GM had proposed in the plan initially submitted to
Treasury, GM responded to the Auto Team’s decision by terminating 1,454 dealerships’ ability
to acquire new GM vehicles and giving them until October 2010 to wind down operations
completely; for Chrysler (which also had originally planned to terminate dealers over five years),
its acceleration was even more abrupt, with Chrysler terminating 789 dealerships (25 percent of
its network) within 22 days.
The Auto Team’s view about the need for GM and Chrysler to reduce their dealership networks
and do so rapidly was based on a theory that, with fewer dealerships (and thus less internecine
competition), like their foreign competitors, the remaining dealerships would be more profitable
(through more sales volume and less floor plan financing costs) and thus would permit the
dealerships to invest more in their facilities and staff. For GM and Chrysler, the theory goes, this
would mean better brand equity (i.e., better consumer perception through more attractive
facilities and better customer service) and would allow the manufacturers over time to decrease
their substantial dealership incentives. In addition, the Auto Team felt the companies’ best
chance of success required “utilizing the bankruptcy code in a quick and surgical way” and noted
further that it would have been a “waste of taxpayer resources” for the auto manufacturers to exit
bankruptcy when they knew the networks would still have to be reduced. The Auto Team was so
convinced of the need for the acceleration of dealership closings that it highlighted GM’s
proposed pace of dealership closings (approximately 300 a year over five years) as one of the
primary obstacles to its continued viability, and required GM to revise its proposal to address the
Auto Team’s concerns as a condition for receiving the additional TARP support that GM
believed it needed to survive. Not surprisingly, GM’s and Chrysler’s plans for accelerated
terminations soon followed.
Perhaps only time will tell whether and to what extent the Auto Team’s theory proves valid;
however, there are several aspects of the theory and how the Auto Team came to have this view
about dealership reductions that are worth noting.
•
One, although there was broad consensus that GM and Chrysler generally needed to
decrease the number of their dealerships, there was disagreement over where, and how
quickly, the cuts should have been made. Some experts that SIGTARP spoke to in
connection with this audit questioned whether it was appropriate to apply the foreign
model to the U.S. automakers, particularly in small markets in which the U.S. companies
currently have a competitive advantage, a concern apparently not substantially
considered by the Auto Team when they adopted this theory. The conclusion that the
manufacturers should close dealerships more rapidly than originally planned was also
criticized as being potentially counterproductive; one expert opined, for example, that
closing dealerships in an environment already disrupted by the recession could result in
28
an even greater crisis in sales. Chrysler officials similarly told SIGTARP that closing
dealerships too quickly would have an adverse effect on sales from which it would take
several years to recover, and, even then, only if new markets were penetrated by opening
new dealerships. The fact that, after the mandatory arbitration legislation was passed,
GM offered to reinstate 666 dealerships 27 and Chrysler offered to reinstate 50 dealerships
with a senior GM official stating that the final number of dealerships won’t damage
GM’s ability to recover or grow the company, suggests, at the very least, that the number
and speed of the terminations was not necessarily critical to the manufacturers’ viability.
It is worth noting that GM’s top rival among U.S. automakers, Ford Motor Company,
which is also carrying out plans to “aggressively restructure to operate profitably,” is
closing dealerships at a rate similar to that in GM’s original restructuring plan which was
rejected by Treasury. 28
27
28
•
Two, job losses at terminated dealerships were apparently not a substantial factor in the
Auto Team’s consideration of the dealership termination issue. Although there is some
controversy over how many jobs will be lost per terminated dealership (the National
Automobile Dealer Association’s estimate of approximately 50 per dealership is
challenged by the manufacturers as too high), it is clear that tens of thousands of
dealership jobs were immediately put in jeopardy as a result of the terminations by GM
and Chrysler. In the face of the worst unemployment crisis in a generation and during
the same period in which the Government was spending hundreds of billions of dollars
on a stimulus package to spur job growth, the Auto Team rejected GM’s original plan
(which included gradual dealership terminations), expressly indicated that GM’s pace of
terminations was too slow, and then encouraged the companies’ use of bankruptcy to
accelerate dealership terminations. These decisions — all based on the Auto Team’s
theory that GM and Chrysler would be better off by accelerating dealer terminations —
contributed to the accelerated loss of potentially tens of thousands of jobs. Although the
restructuring of GM and Chrysler inevitably required an overall reduction in their own
workforces (and the termination of a certain number of poorly performing dealerships), it
is not at all clear that the greatly accelerated pace of the dealership closings during one of
the most severe economic downturns in our Nation’s history was either necessary for the
sake of the companies’ economic survival or prudent for the sake of the Nation’s
economic recovery.
•
Finally, the acceleration of dealership closings was not done with any explicit cost
savings to the manufacturers in mind. Again, the anticipated benefits to GM and
Chrysler from a smaller dealership network were far more amorphous — a better “brand
Of these 666 dealerships, 216 were complete wind-downs, and 415 were partial wind-downs.
According to Ford’s 2009 annual report, concentrating efforts in its largest 130 metropolitan market areas, Ford
closed an average of 200 Ford, Lincoln, and Mercury dealerships per year in calendar 2006, 2007, and 2008, and
another 250 in calendar 2009, leaving a total of 3,550 dealerships at the beginning of 2010. Ford has a goal of an
average of 1,500 vehicle sales per year for Ford dealerships and 600 per year for Lincoln Mercury dealerships. By
focusing on closing dealerships located in metropolitan areas, Ford reflected its philosophy that “our dealers are a
source of strength…especially in rural areas and small towns where they represent the face of Ford.” This echoed
comments industry experts made to SIGTARP advising that GM and Chrysler had less need to reduce the number
of rural dealerships and instead should focus on closing dealerships in metropolitan areas.
29
equity” and the potential ability to decrease dealership incentives over time. GM
prepared its cost savings estimate only at the request of Congress and only after the
decisions to accelerate terminations had already been made. Chrysler provided Congress
with estimated cost savings that had been developed three years prior. The disparity in
the companies’ cost-savings estimates are telling. Chrysler estimated a savings of only
$45,500 per terminated dealership. GM, however, estimated cost savings of $1.1 million
per terminated dealership. The difference in these estimates alone casts doubt on their
credibility. Moreover, despite the fact that Treasury rejected GM’s even less optimistic
assumptions about their market share and profitability in its Viability Determination,
GM’s estimate was based on a projection that GM’s sales would double by 2014. GM
acknowledged that its cost savings (assuming the decreases in incentives could be
realized) could only be calculated across its entire network and could not be calculated
for a single particular closed dealership. Indeed, one GM official emphasized this point
by telling SIGTARP that GM would usually save “not one damn cent” by closing any
particular dealership.
Once the decisions to accelerate the dealership terminations were made, Chrysler decided which
dealerships to terminate based on case-by-case, market-by-market determinations that examined
whether the dealership’s location was a desirable one, whether it offered all three of Chrysler’s
brands, the dealership’s volume of new vehicle sales, and the dealership’s score for Minimum
Sales Responsibility, a ratio based on actual sales versus vehicle registrations broken down by
market share and market segment. Chrysler did not offer an appeals process. Perhaps not
surprisingly in light of the case-by-case nature of the process, SIGTARP did not identify any
instances in which Chrysler’s termination decision varied from its stated, albeit subjective
selection criteria.
GM’s approach, which was conducted in two phases, was purportedly more objective. In the
first phase, GM claimed that the dealerships subject to termination were those meeting at least
one of these criteria: a Dealer Performance Summary (“DPS”) Score (a score based on a
dealership’s sales, customer satisfaction, capitalization and profitability) of less than 70; or
annual sales of fewer than 50 new vehicles in 2008. In the second phase, GM stated that
dealerships subject to termination were those meeting at least one of these criteria: those with a
DPS of 80 or less; those that were unprofitable in 2006, 2007 and 2008; those with a retail sales
index (a ratio of actual sales to expected sales based on a market average) below 70; those with
non-GM brands in the same facility and a DPS of less than 100; or those interfering with GM’s
Buick-GMC Truck or Cadillac dealership network restructuring plans.
However, SIGTARP’s review demonstrates that GM did not consistently follow its stated
criteria. In the first phase, for example, two of the terminated dealerships did not fit into either
termination category, and GM retained 364 dealerships that potentially qualified for termination.
In phase two, GM terminated 39 dealerships that did not meet any of the objective criteria and
retained more than 1,062 dealerships that met one or more criteria for termination. Just as
troubling, there was little or no documentation of the decision-making process to terminate or
retain dealerships with similar profiles, making it impossible in many cases for SIGTARP to
determine the causes of deviations from the supposedly objective criteria. Similarly, although
GM did have an appeals process and granted 64 reversals in cases of dealerships that would have
30
been completely wound down, it failed to set the criteria or process for appeals or to document
its reasoning for granting or denying appeals.
Lessons Learned
Although the auto dealership termination process is beginning to come to a close, several of the
lessons from the process should be considered in the event Treasury once again is compelled to
make decisions that directly affect the businesses in which it has invested. Although perhaps it is
inevitable that public ownership of private companies will have the effect of blurring the
Government’s appropriate role, the fact that Treasury is acting in part as an investor in GM and
Chrysler does not insulate Treasury from its responsibility to the broader economy. In particular,
Treasury should have taken special care given that its determinations had the potential to lead to
job losses, particularly given that one goal of the loan agreements was to “preserve and promote
jobs of American workers employed directly by the automakers and subsidiaries and in related
industries.”
Here, before the Auto Team rejected GM’s original, more gradual termination plan as an
obstacle to its continued viability and then encouraged the companies to accelerate their planned
dealership closures in order to take advantage of bankruptcy proceedings, Treasury (a) should
have taken every reasonable step to ensure that accelerating the dealership terminations was truly
necessary for the long-term viability of the companies and (b) should have at least considered
whether the benefits to the companies from the accelerated terminations outweighed the costs to
the economy that would result from potentially tens of thousands of accelerated job losses. The
record is not at all clear that Treasury did either. The anticipated benefits to the companies of
accelerated terminations were based almost entirely on the not-universally-accepted theory that
an immediate decrease in dealerships would make them similar to their foreign competitors and
therefore improve the companies’ profitability, and the theory arguably did not take into account
some of the unique circumstances of the domestic companies’ dealership networks. Although
Treasury consulted with several experts on the subject, it undertook no market studies to test the
counterintuitive theory until after making its Viability Determination. More importantly, there
was no effort even to quantify the number of job losses that the Auto Team’s decision would
contribute to until after the decision was made, and the effect on the broader economy caused by
accelerated dealership terminations similarly was not sufficiently considered.
Stated another way, at a time when the country was experiencing the worst economic downturn
in generations and the Government was asking its taxpayers to support a $787 billion stimulus
package designed primarily to preserve jobs, Treasury made a series of decisions that may have
substantially contributed to the accelerated shuttering of thousands of small businesses and
thereby potentially adding tens of thousands of workers to the already lengthy unemployment
rolls — all based on a theory and without sufficient consideration of the decisions’ broader
economic impact. That the automakers have offered reinstatement to hundreds of terminated
dealerships in response to Congressional action without any apparent sacrifice to their ongoing
viability further demonstrates the possibility that such dramatic and accelerated dealership
closings may not have been necessary and underscores the need for Treasury to tread very
carefully when considering such decisions in the future.
31
Furthermore, although it was certainly understandable for Treasury to defer to the automakers’
management in selecting the criteria for closing dealerships, its decision not to monitor the
process that they employed is far more questionable. In the absence of effective oversight, GM
purportedly employed objective criteria but then deviated from such criteria, making termination
decisions with little or no transparency and making a review of many of these decisions
impossible; Chrysler’s process did not even include an opportunity for dealerships to appeal the
termination decision. In the future, to the extent that Treasury takes action with respect to a
TARP recipient that has the potential to affect so many jobs in so many different communities,
Treasury should monitor the recipients’ actions to ensure that they are carried out in a fair and
transparent manner.
32
Management Comments and Audit Response
Treasury responded preliminarily to a draft of this audit by letter dated July 16, 2010, which is
reproduced in Appendix D. In its response, Treasury states that it “strongly disagree[s] with
many of your statements, your conclusions and the lessons learned.” Treasury notes in
particular, among other things, that “[i]n the absence of government assistance, both GM and
Chrysler faced almost certain failure and liquidation, which would have resulted in the loss of
hundreds of thousands of jobs across multiple industries,” and that “the outcome under the
restructuring plans is far better than the likely alternatives had the Administration not stood
behind the companies.” Treasury goes on to say that it will continue to review the report and
may respond more fully at a later date.
SIGTARP looks forward to Treasury’s more complete response to the audit. It is important to
note that Treasury was provided an opportunity to review a discussion draft of the report and
provide comments. Treasury did so, changes were made to the report as appropriate, and, at the
end of that process, Treasury offered no material factual objections with that draft audit report.
Treasury might not agree with how the audit’s conclusions portray the Auto Team’s decision
making or with the lessons that SIGTARP has drawn from those facts, but it should be made
clear that Treasury has not challenged the essential underlying facts upon which those
conclusions are based.
More importantly, SIGTARP does not dispute that Government assistance was necessary to
prevent the failure of GM and Chrysler, and nothing in the audit suggests otherwise. Treasury’s
letter seems to imply that Treasury was faced with the decision either to encourage the
acceleration of dealership terminations substantially, as it did, or let the companies fail
altogether. This is a false dilemma with no factual support: no one from Treasury, the
manufacturers or from anywhere else indicated that implementing a smaller or more gradual
dealership termination plan would have resulted in the cataclysmic scenario spelled out in
Treasury’s response; indeed, when asked explicitly whether the Auto Team could have left the
dealerships out of the restructurings, Mr. Bloom, the current head of the Auto Team, confirmed
that the Auto Team “could have left any one component [of the restructuring plan] alone,” but
that doing so would have been inconsistent with the President’s mandate for “shared sacrifice.”
That the scale of terminations was not vital to the companies’ survival has since been further
demonstrated by the fact that the companies have offered reinstatement to hundreds of
dealerships without concerns that such reinstatements will threaten their viability.
In any event, Treasury’s criticism does not address SIGTARP’s lessons learned — that Treasury
(a) should have taken every reasonable step to ensure that accelerating the dealership
terminations was truly necessary for the long-term viability of the companies and (b) should have
sufficiently considered whether the benefits to the companies from the accelerated terminations
outweighed the costs to the economy that would result from potentially tens of thousands of
accelerated job losses in the midst of the greatest recession in generations.
33
Appendix A—Scope and Methodology
We performed the audit under the authority of Public Law 110-343, as amended, which also
incorporates the duties and responsibilities of inspectors general under the Inspector General Act
of 1978, as amended. It was completed from July 2009 to July 2010 (Project No. 012). These
were the audit’s specific objectives:
1) Determine the role of the Treasury Auto Team in the decision to reduce dealership
networks.
2) Determine the extent to which GM and Chrysler developed and documented processes
for deciding which dealerships to terminate and which to retain.
3) Determine to what extent the dealership reductions are expected to lead to cost savings
for GM and Chrysler.
We performed work at the Department of the Treasury in Washington, D.C. We also performed
field interviews in New York, Michigan, and Virginia. The scope of this audit covered GM’s
and Chrysler’s entire dealer networks—both terminated and retained populations.
To determine the role of the Auto Team in the decision to reduce dealerships, we interviewed
members of the Auto Team, reviewed available documentation, and interviewed officials from
GM and Chrysler. We also interviewed industry experts who were consulted by the Auto Team.
To determine the extent to which GM and Chrysler developed and appropriately documented
consistent processes for deciding which dealerships to retain or terminate, we interviewed auto
dealers and officials involved in the decision-making processes at GM and Chrysler. We
analyzed the criteria and data used by both companies to make their decisions, and we
determined whether or not dealerships met the criteria for termination or retention. We also
analyzed a judgmental sample of GM retained and terminated dealerships and reviewed their
Dealer Performance Summary scores, including the retail sales, customer satisfaction, and
supporting financial data, including profitability and net working capital. For Chrysler, we
analyzed a judgmental sample of retained and terminated dealerships and reviewed their sales
performance, brand offering, and financial information (profitability and working capital). For
Chrysler, we also selected markets across the United States and reviewed the decision-making
process for each dealership in each market, with a specific focus on understanding the
geographic/Project Genesis factor. Regarding GM’s appeals process, we reviewed emails and
appeals for the 86 reversals, along with general appeals emails.
To determine the extent to which the reductions would lead to cost savings for the auto
manufacturers, we interviewed GM and Chrysler officials, auto industry analysts, and
automobile dealers, and we reviewed any analyzed cost savings estimates provided by GM and
Chrysler.
This performance audit was performed in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions
34
based on our audit objectives. We believe that the evidence obtained provides a reasonable basis
for our findings and conclusions based on our audit objectives.
Limitations on Data
GM did not document the meetings during which decisions were made about dealerships in their
networks. GM did not document the rationale for granting or denying appeal requests from
dealerships. Chrysler did not document meetings held to determine dealership closures. The
Auto Team did not document some of the meetings it held with auto industry analysts.
Use of Computer-Processed Data
This audit did not use computer-processed data.
Internal Controls
This audit did not address internal controls.
Prior Coverage
No audits have been performed on dealership terminations with the same or similar objectives as
this audit.
35
Appendix B—Acronyms and Definitions
Acronym
AIFP
Definition
Automotive Industry Financing Program
Auto Team
Treasury Auto Team
BCG
Boston Consulting Group
BMW
Bavarian Motor Works
CEO
CSI
Chief Executive Officer
Customer Satisfaction Index
DPS
Dealer Performance Summary
GM/GMC
General Motors/General Motors Company
LOI
MSR
Letter of Intent
Minimum Sales Responsibility
NADA
RSI
National Automobile Dealers Association
Retail Sales Index
SAAR
Seasonally Adjusted Annual Rate
SIGTARP
Special Inspector General for the Troubled Asset Relief Program
Task Force
Presidential Task Force on the Auto Industry
36
Appendix C—Audit Team Members
This report was prepared and the review was conducted under the direction of Kurt Hyde,
Director of Audits, Office of the Special Inspector General for the Troubled Asset Relief
Program. The staff members who conducted the audit and contributed to the report include:
Michael Kennedy, Shannon Williams, Leah DeWolf, and Sarah Reed.
37
Appendix D—Management Comments
38
Appendix E—Additional Tables
Table 8—GM and Chrysler Distribution of Dealership Networks Before and After
Terminations
Dealer Count Before
Terminations
Market Description
GM
Metro
Number of
Terminated Dealers
Chrysler
GM
Dealer Count After
Terminations
Chrysler
GM
Chrysler
1,671
869
465
275
1,206
594
“Hubtown” /Secondary
1,330
619
275
190
1,055
429
Rural
2,590
1,446
714
263
1,876
1,183
N/A
247
N/A
61
N/A
186
5,591
3,181
1,454
789
4,137
2,392
a
b
Non-Designated (Chrysler Only)
Totals
a
Term used by GM to describe a mid-size market that is growing and attracts consumers from surrounding areas
A non-designated market has been determined to be unable to support a full-line dealer in the future. A dealer in a nondesignated market is allowed to stay until it voluntarily terminates, or its performance warrants taking action
Source: SIGTARP analysis of data provided by GM and Chrysler
b
Table 9—Status of GM Wind-Down Dealership Funds as of 12/01/2009a
Total Amount
25% Payment
75% Payment
Total Amountb
$587,060,628.00
$146,765,157.00
$440,295,471.00
Amount Paid
$159,306,755.50
$143,225,733.25
$16,081,022.25
$427,753,872.50
c
$424,214,448.75
Amount Owed
$3,539,423.75
a
This data pertains to 2,520 partial wind down dealerships and 1,840 complete wind down dealerships, and does not include
dealerships that were rejected in bankruptcy
b
2,470,640 of the total amount is under dealership eligibility review
c
25 percent payment amount owed figure includes approximate 25 percent for Hummer
Source: SIGTARP analysis of data provided by GM
39
Table 10—Summary of Dealership Sales Statistics for 13 Chrysler Markets
Reviewed by SIGTARP
Market
Status
1
Retained
Average Minimum Sales
Responsibility (MSR)
3
4
5
3840
82%
58%
855
18%
Retained
110%
5,235
69%
Terminated
104%
2,302
31%
Retained
139%
2,420
79%
Terminated
89%
663
21%
Retained
71%
3,043
59%
Terminated
79%
2,151
41%
108%
1,011
92%
21%
93
8%
Retained
Terminated
6
7
8
Percent of Total
Sales (Retained
and Terminated)
129%
Terminated
2
New Vehicle
Sales (units)
All dealerships were below average and terminated; new appointment
selected
Retained
223%
1,435
67%
Terminated
160%
717
33%
Retained
122%
4,435
68%
80%
2,113
32%
Terminated
9
All dealerships were below average and terminated; new appointment
selected
10
Retained
Terminated
70%
2,764
35%
11
Retained
85%
3,020
79%
Terminated
47%
827
21%
Retained
78%
6,451
79%
Terminated
68%
1,673
21%
Retained
135%
46,562
74%
Terminated
103%
16,044
26%
12
13
150%
40
5,042
65%
SIGTARP Hotline
If you are aware of fraud, waste, abuse, mismanagement, or misrepresentations associated with the
Troubled Asset Relief Program, please contact the SIGTARP Hotline.
By Online Form: www.SIGTARP.gov
By Phone: Call toll free: (877) SIG-2009
By Fax: (202) 622-4559
By Mail:
Hotline: Office of the Special Inspector General
for the Troubled Asset Relief Program
1801 L Street., NW, 4th Floor
Washington, D.C. 20220
Press Inquiries
If you have any inquiries, please contact our Press Office:
Kristine Belisle
Director of Communications
Kris.Belisle@do.treas.gov
202-927-8940
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For congressional inquiries, please contact our Legislative Affairs Office:
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Legislative Affairs
Lori.Hayman@do.treas.gov
202-927-8941
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