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Dealer Wounds Remain Unhealed

The way GM and Chrysler carried out dealership cuts was “painful,” AutoNation President Mike Maroone says.

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NADA Convention & Exposition

ORLANDO, FL – Some auto dealers are putting the industry’s massive dealership eliminations behind them, but others remain fighting mad.

“We’re moving on,” says Michael Maroone, president of AutoNation Inc., the country’s largest dealership chain.

General Motors Co. and Chrysler Group LLC., as part of last year’s post-bankruptcy reorganization plans, slashed their dealership ranks by 2,000 stores.

AutoNation lost seven Chrysler and four GM stores. Although the U.S. Congress subsequently passed a law allowing affected dealers to take their cases to a third-party arbitrator, AutoNation is not planning to seek such redress.

“There was no question domestic auto makers were over-dealered,” especially Chrysler with 3,500 dealerships, Maroone says at a J.D. Power and Associates’ conference here held in conjunction with the annual National Auto Dealers Assn. convention.

But the way GM and Chrysler carried out the dealership cuts was “painful,” he says. “Most of the cuts were rational decisions; many were not.”

Tammy Darvish, vice president of Darcars Automotive Group, with 26 stores in the Washington area, is seeking arbitration for the dealerships her family business lost.

She says it is un-American for an auto maker to close a store without compensation after a dealer has invested millions of dollars in that facility at the manufacturer’s request.

“That’s why we are fighting,” says Darvish, who testified during Congressional hearings on the dealership closings.

She angrily recalls an auto maker’s attorney telling a bankruptcy judge it would be appropriate to get Chrysler’s dealer count down to about 1,300, the same number of dealers for Toyota Motor Sales U.S.A. Inc.

“It was one of the most ignorant things I ever heard,” Darvish says. “I was baffled that a Harvard attorney would say something like that.”

Another egregious statement came from an auto maker representative who claimed dealers cost manufacturers $2 million a year per store, says Sid DeBoer, chairman of Lithia Motors Inc., a dealership chain. “That was putting forth a fallacious argument.”

At one point, Chrysler brands accounted for 40% of Lithia’s portfolio, he says. “We took a big bet when Daimler-Benz (AG) bought Chrysler (and formed DaimlerChrysler AG). We thought it would be the best auto company in the world.”

Now that Chrysler is linked with Italy’s Fiat Auto SpA, DeBoer hopes CEO Sergio Marchionne will do for Chrysler “what Allan Mulally has done for Ford (Motor Co.).”

Darvish says she wants Chrysler to succeed, but to achieve that requires, among other things, Marchionne connecting with dealers. “It doesn’t help when he says he has no intention of visiting dealers because that’s what his subordinates are for.”

Chrysler’s approach of immediate closures with no compensation “was a travesty,” says Chuck Basil, president of Basil Ford in Buffalo, NY.

He is not opposed to dealership consolidation. In fact, Basil spearheaded such a movement in his home market. He and other Ford dealers bought and then closed same-brand stores. That reduced the number of Buffalo’s Ford, Lincoln and Mercury stores from 14 to six.

“We begged Ford to allow us to do that, but they initially refused,” Basil tells Ward’s. “They weren’t opposed to us buying stores and keeping them open, but they didn’t want us closing stores.”

The auto maker changed that position in 2006. Since then, market share, sales and profits have increased for the remaining stores, Basil says. “We are a model of consolidation. It was a true way to win.”

The last two years have been tough for dealers, who saw sales drop from 16.3 million units in 2007 to 13.4 million in 2008 to 10.4 million last year. Deliveries are expected to be up this year, with estimates ranging from 11.4 million to 11.9 million units.

“We’re working to get to the other side of the abyss,” Maroone says. “This industry has gone through a lot. It will be a gradual, bumpy recovery.”

Still, AutoNation is in an acquisition mode, looking for more stores to buy. On its shopping list are Audi, Hyundai and Volkswagen dealerships.

Maroone predicts an eventual return to the days of the auto industry selling 16 million units annually.

But he foresees two big differences: Surviving dealers will run leaner, larger operations. And auto makers, because of long-overdue production capacity cutbacks, won’t force cars on the market and then offer hefty incentives in order to find buyers.

“It will be a very profitable 16 million, a sweet 16 million – if we maintain a business discipline,” Maroone says.

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