Chrysler Alleged to Have Acted in Bad Faith in Dealer Closings

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Having seen what Cerberus has done to one of its acquirees (New Page, a group of mills that produce coated paper), nothing should surprise me. But the way that Chrysler treated its dealers as stuffees, pressuring them take extra inventory and make extra investments in plant and facilities shortly before the dealerships were cancelled, is simply heinous. In addition, Chrysler is cutting all ties as of June 9. By contrast, GM is far more humane, allowing dealers to continue operating until 2010, but giving them the option of wrapping up sooner if they choose.

Some disaffected Chrysler dealers are suing the automaker to block the termination. From the New York Times:

Mr. [Robert] Archer is among 330 dealers, calling themselves the Committee of Chrysler Affected Dealers, who are contesting the company’s action. Next week and on June 3, the bankruptcy judge handling Chrysler’s case will consider their objections.

Many of those fighting the hardest are dealers who recently spent huge amounts of money to stay in the company’s good graces, who sacrificed their own profits to help keep the company intact or who otherwise thought they had bent over backward to ensure that Chrysler could survive, only to learn that they were the ones who would not.

“I’m mad at myself for being duped all these years by them and going along with all of the things they wanted me to do,” said Homer Cutrubus, a Chrysler dealer in Utah since 1969. “If I treated my customers like Chrysler treated me, I wouldn’t have any business.”

For years, Chrysler had been urging Mr. Cutrubus and other dealers to combine dealerships with just one or two of the company’s brands into “alpha” stores selling all three: Chrysler, Dodge and Jeep. It stepped up that pressure in February, he said, and in April he finally agreed to move his Dodge store in Layton, Utah, into a Chrysler-Jeep showroom half a mile away, even though he thought the change made little sense financially and had to be done at his own expense.

Included in the exhibits filed in bankruptcy court is an e-mail message from a Chrysler official in Denver to Mr. Cutrubus that said the company wanted to keep only one of the four area dealerships, preferably him. It concluded, “Are you our guy?”

“I called them the next day and said, ‘Yeah, we’ve got a deal,’ ” Mr. Cutrubus said. Six weeks later, after he already had spent $100,000 making the move, he got the letter cutting all his franchises….

Chrysler is not buying back any inventory, including the vehicles and parts that dealers say they never wanted and bought only under pressure. And the entire process, which gives them only until June 9 to liquidate everything, is far from fair, they contend.

The article has more anecdotes of shoddy dealer treatment.

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8 comments

  1. Steve R. Barbour

    It was once said of communism: “Great idea, wrong species”.

    I fear that applies just as well to capitalism. I often despair that individuals engaging in any level of business allow themselves to be lured into ‘feeling’ or ‘acting noble’, such as these dealerships making sacrifices as though hoping that something would be returned.

    It happens everywhere, and every sphere of society. From consumers to employees, stores, CEOs, and even hedgefunds all fall victim to this trait. It is human to feel compassion, sympathy, and to try to work together. Even when we know better our fundamental instincts lead us astray.

    Unfortunately, it is also just as human to manipulate a system in our favor. We do it to nature and the laws of physics and through this became top of the food chain. We do it to each other and call it business.

    I’d probably feel a bit more sympathetic for the dealerships here if I didn’t realize that their kindness only served to further empower worst of humanity while weakening the best. That is always the result of kindness within the realm of business, because capitalism relies on us humans to function as selfish bastards.

    And yet, civilization requires a completely different trait.

    So I feel for them.

    At the same time I don’t.

    More importantly, I realize what these dealers seem not to. You can’t extract money or get vengeance on a corpse no matter how hard you try. That and bankruptcy is unforgiving even for those on the top of the food chain (secured creditors anyone!) much less the fellows that let themselves get screwed without collateral.

  2. Independent Accountant

    YS:
    Utah, Colorado, a e-mail which crossed a state line? What looks like a false representation to induce action. I conclude we have enough here for a wire fraud indictment under 18 USC 1343. Will either the US attorney for Utah or Colorado go for it? I doubt it.

  3. Warm, Dry and Well Fed

    I usually edit my posts carefully, but I’m beginning my summer trip this weekend, so this may be a bit sloppy… and is definitely being done in haste.

    Last weekend I had a conversation with one source who follows dealership issues. Here is what he said. Chrysler claims it is using a “decision matrix” to determine which dealers will be axed. This claim suggests an objective matrix with weights and values. If so, the axed dealers should be able to require Chrysler to produce the matrix, the weights and the results. My source’s guess is that there is no matrix, or at least a matrix with criteria which Chrysler would prefer not to discuss.

    Based on the dealerships he sees being closed, dealer satisfaction does not seem to be a major factor. Neither does customer retention rates. But there are some oddities. Rural and small-town dealers who don’t have all three brands are getting the axe more often than similar urban dealers. New franchises were rarely issued after 1955, but there are a number of relatively new affirmative action ( usually Black) dealerships created since 1968. As far as he can tell none of them have been closed.

    Now these patterns could reflect rural/urban issues, discrimination, or possibly something else. Rural Chrysler-products dealers sell cars mainly to older whites, who often bargain carefully and either pay cash or arrange for the loans themselves. These small-town dealers sell trucks mainly to tradespeople, who are also careful shoppers. The urban dealers often sell to poorer, less educated, and more often minority buyers, who are less adept at bargaining, leave more money on the table and are, thus, more profitable. These buyers usually finance and are more likely to have poor credit histories, a second source of profit, which is partly compensated for with a higher loan default rate. So Chrysler Corp. (but not necessarily its dealers) probably has a higher profit margin on urban vehicles while Chrysler Credit (now GMAC) has a higher default rate.

    If “dealer competition keeps the prices down” was the issue, then Chrysler could simply have changed the dealer volume rebate structure to disadvantage smaller dealerships in each area. They decided not to go that route, possibly because it would have harmed the struggling minority urban dealerships. My guess is that the company is encouraging urban consolidation via buyout of the weaker dealers.

    If, for whatever reason, there turns out to be a significant statistical bias in the ethnicity of the dealers being closed, then Chrysler has two problems. First, the pattern might constitute a prima facie case of discrimination, and the losing dealers could force Chrysler to produce the so-called matrix on which the decisions were based. Second, any suggestion that race played a factor could significantly reduce the value of the Chrysler franchise because the publicity would be an incentive for white buyers to go elsewhere.

    And of course if politically well-connected dealerships with low satisfaction and customer retention rates are being kept open…

    So my guess is that Chrysler will fight hard to keep its decision process secret.

  4. mdf

    Steve R. Barbour: That is always the result of kindness within the realm of business, because capitalism relies on us humans to function as selfish bastards.Mr. Barbour … please. If Chrysler deceived its dealers, then Chrysler needs to pay for the crime.

    This is true regardless of who is or is not a “selfish bastard”, or even if selfish bastardism is in fact the source from which capitalism arises.

  5. frances snoot

    @Barbour:

    Interesting, well-thought post. I am confused how men are saved from the “function as selfish bastard” mode through Socialism. I am sure other women would love to know as well.

  6. Jmd

    Feinberg at Cerberus…the lowest of the low…tried to stiff the workers on his mega-renovation. Represented his firm while I was an associate at a big firm…no moral compass.

  7. Steve

    I don’t think they used a Chrysler decision process. I think they used a Fiat decision process and any attempt to paint Fiat in a bad light will likely cause Fiat to walk away from the deal.

    There is no way that Fiat is clean in this and they will probably walk away before having their leaders brought before the American congress / media in a bad light.

    We either take the deal on the table and EVERYONE keeps their mouths shut, or Chrysler liquidates.

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