The Sour Taste of Victory

The Chrysler dealer arbitrations have been completed. Out of 108 arbitration hearings Chrysler won 73 of the decisions to 32 in favor of dealers.

Those dealers were among the original 789 to lose their franchises. The ones who prevailed in the congressionally ordered arbitration hearings get a “Letter of Intent,” which still makes them subject to the nefarious whims of Chrysler when it comes to re-establishing their business.

On the heels of the final Chrysler arbitration numbers comes the Special Investigator General's Troubled Asset Relief Program report. This is the government's own audit of the use of TARP funds to bail out Chrysler and General Motors.

The report castigates the federal government automotive task force, led by Ron Bloom, Steve Rattner, and Steve Girsky for forcing the terminations. It seems the task force wanted to impose the “Toyota throughput model” on GM and Chrysler.

The report says the dealer terminations were not vital to the well-being of the auto makers, nor did they take into account the thousands of job losses that occurred from dealership closings. The report questions the wisdom of forcing job cuts in the depths of a recession.

It may be that the two auto makers had no choice but to slash their dealership counts, what with the determined task force breathing down their necks.

After all Rick Wagoner was fired as GM's CEO for not submitting an aggressive enough restructuring plan after taking TARP money from the Bush administration in December 2008.

It's too bad the special investigator's report didn't come out sooner. It would have been quite helpful to dealers locked in arbitration.

How Chrysler, in particular, went about terminating dealers is telling. Chrysler aggressively pursued arbitration. CEO Sergio Marchionne, who apparently thinks the dealers work for him.

GM, on the other hand, wasn't as aggressive, as new CEO Ed Whitacre quickly figured out who his customers are and quickly worked to restore many dealers regardless of the arbitration ordered by Congress.

I talked to certified public accountant Carl Woodward of Woodward and Associates. He has 38 years experience specializing in business accounting for hundreds of auto dealers. He also has actual dealer experience as a partner/owner.

Woodard participated in about 20 dealer arbitration cases on behalf of dealers.

I've also spoken with dealers, some who won and some who lost their Chrysler arbitration hearings.

A common theme arose from these conversations. Many of the Chrysler terminations made no sense at all. They were made based on incorrect data, incorrect interpretation of data, and quite possibly out of retribution toward dealers who had stood up for themselves in the past.

Chrysler typically fought against motions to transcribe arbitration proceedings. It seems they routinely took advantage of the lack of auto business and financial experience of some of the arbitration judges.

Chrysler must not have wanted a record to be available when it took different sides of an issue depending on who the arbitration judge happened to be.

Take for example the accounting practice of last in, first out. Chrysler might take a position that LIFO reserve counts as working capital if that argument works in its favor, supporting a dealer it retained over one who was terminated.

In another situation the auto maker might argue that LIFO reserve does NOT count as working capital if that argument supported the termination of a dealer.

If the arbitration judge didn't know the difference, and the dealer wasn't knowledgeable and well prepared, this helped Chrysler.

As a practical matter, LIFO reserve does count as working capital.

In at least one instance, Chrysler retained a dealer with negative working capital over one with many times Chrysler's own guidelines. Chrysler got caught when the second dealer was well prepared and had a knowledgeable attorney and CPA experienced in these matters.

I have been in and around the auto business for 40 years, including as a general manager of a dealership. Until recently I have never heard from any manufacturer any assertion that fewer dealers sell more vehicles.

A spot check of Chrysler's Alpha-Genesis project revealed interesting results. The project involves consolidating under one roof all of the Chrysler brands: Chrysler, Jeep, Dodge and Dodge Trucks.

Imagine a market that has three dealerships, one for Chrysler, Dodge/Dodge Truck, and Jeep. Now you put them all in one location. Yes, it's probably good for the dealer who ends up with that bundle, unless he or she had to boost overhead substantially to accomplish it.

But I have yet to find an instance where overall Chrysler market share increases under this circumstance. My research is admittedly anecdotal. But others I have spoken to, including Woodward and various dealers, are telling me the same thing.

Even a couple of “factory guys” have made the same observation off the record.

When challenged in arbitration hearings to prove that Alpha-Genesis has been proven to achieve the stronger market penetration Chrysler says it desperately needs, it has not been able to provide any supporting data.

Might its premise to terminate dealers be based on a false assertion?

Tammy Darvish, co-leader of the Committee to Restore Dealer Rights and vice president of Darcars Automotive Group in Silver Spring, MD weighs in:

“It is curious that there is no accountability for the gross error in judgment on behalf of the auto task force in addition to those that we believe committed perjury in federal bankruptcy court and in congressional hearings,” she says.

The perjury reference has to do with auto executives who claimed terminations were needed because dealerships cost auto makers billions of dollars. In auto retailing circles, that allegation has become known as “the big lie.”

“Raising your right hand and swearing to tell the truth, the whole truth and then doing everything else but is unconscionable,” Darvish says.

There is no doubt that it has been better for the economy to have a relatively orderly post-bankruptcy restructuring of GM and Chrysler instead of a disorderly liquidation.

But the government's task force has been exposed for insisting on dealer cuts that weren't necessary. And the motives and tactics of Chrysler seem repugnant at best.