General Motors’ (GM) and Chrysler’s mass closure of auto dealerships last year may not have helped the Detroit companies and likely was an unnecessary burden on the fragile U.S. economy, according to a government report that examined how the U.S. Treasury Department handled the automaker restructurings.
The report, published on July 19, examined the closure of dealerships by the two auto makers and how the Detroit companies actually chose which dealers would be shuttered. Also, the report noted that not one of the professionals on the auto task force had actual experience in the auto industry. The task force relied on restructuring advice from a consulting firm and Wall Street banks which suggested emulating foreign auto manufacturers.
To date, Treasury has committed $80.7 billion to the two auto makers under the Trouble Asset Relief Program’s (TARP) Automotive Financing Program. GM and Chrysler filed for bankruptcy in 2009. Both companies used the bankruptcy process to close auto dealerships.
Chrylser closed 789 dealerships in June 2009 and GM planned to shutter 1,454 dealerships by October 2010. GM initially proposed closing 1,650 dealers.
The audit was made by the office of the special inspector general for the TARP. It was spurred by Congressional requests to conduct an audit on the dealership terminations from Senator Jay Rockefeller, and David Obey, chairman of the house appropriations committee.
It found that the process of deciding which dealerships would be closed was not consistently followed and it was not monitored closely enough. More to the point, the closures may not help improve the fortunes of both auto firms.
“That the automakers have offered reinstatement to hundreds of terminated dealerships in response to Congressional action without any apparent sacrifice to their ongoing visibility 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,” the audit recommended.
Indeed, the closings also came at a time when the broader U.S. economy was hobbled by dramatic job losses.
“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 [Treasury's] 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,” according the report published by the Office of the Special Inspector General for the TARP (SIGTARP).
According to the audit, “the acceleration of dealership closings was not done with any explicit cost savings to the manufacturers in mind.”
The report said that GM estimated its cost savings of $1.1 million per terminated dealership and Chrysler said it was going to save $45,500 per dealership. As the authors of the audit see it, “the difference in these estimates alone casts doubt on their credibility.”
The audit also noted that a GM employee interviewed by the inspector general’s office said the auto maker could not specifically identify how much it actually saved by closing a particular 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,” the audit stated.
The audit found that there inconsistencies to how GM went about closing dealerships; 364 dealers were kept open that qualified for termination. “There was little or no documentation of the decision-making process to terminate or retain dealerships with similar profiles,” according to the audit.
On Feb. 15, 2009 President Obama announced the creation of an interagency presidential task force on the auto industry. Its job was to review GM’s and Chrysler’s restructuring plans as a requirement to their loan agreements.
The task force was co-chaired by Treasury Secretary Timothy Geithner, and National Economic Council Director Lawrence Summers. This task force created a so-called Treasury auto team that evaluated the restructuring plans. This auto team was led by Ron Bloom, a former investment banker, and Steven Rattner, co-founder of Quadrangle Group.
The auto team run by Bloom and Rattner included Treasury employees. “Although this group was responsible for managing AIFP [the automotive industry financing program] none of the auto team leaders or personnel had any experience or expertise in the auto industry,” according to the audit report.
The Treasury auto team relied on outside experts when it comes to restructuring GM and Chrysler.
The two firms hired to provide feedback on the financial viability of the auto makers were: Boston Consulting Group and Rothschild.
Boston Consulting professionals recommended that GM and Chrysler reduce the number of dealerships; this, they reasoned, then would improve sales at the remaining dealerships and make them more profitable.
Other outside firms that were called on to consult the Treasury’s auto team were UBS, JPMorgan Chase, Deutsche Bank and Barclays Capital.
Consultants brought on by Treasury’s auto group suggested that GM and Chrysler emulate foreign auto makers such as Toyota Motor Corp., Nissan Motor Co. and Honda Motors.
A former Chrysler deputy chief executive officer interviewed by the inspector general said that the Toyota model studied by Treasury’s auto team – one that argued for fewer dealerships in mostly metro areas, would lead to higher sales and profit for remaining dealerships – would not work for Chrysler. Why? According to this former Chrysler executive “this is because Chrysler sells trucks in rural markets as well as cars in Midwestern states where imported cars are less popular.”
The former Chrysler deputy CEO likened applying the Toyota model to Chrysler to “trying to turn our sons into daughters.”