The average car dealership probably employs 20 or 30 people. That does not include the truckers who deliver the cars, the people who provide basic services, or the employees in the town where the dealer pays taxes. Close a dealership and put another 10 or 15 people out of work, the usual ripple effect from the closing of a small business.
The Office for the Special Inspector General for the Troubled Asset Relief Program said in a recent report that the bailout of the car industry put a lot of people out of work. That does not just include the people the auto firms laid off from their own payrolls. GM and Chrysler, both of which got government funding to come out of Chapter 11, were criticized early in the process for not closing enough dealerships to help the stanch the flow of red ink. GM decided to close 1,454 dealers and Chrysler 789 in response to the criticism from government officials. The Inspector General pointed out the car companies did not consider whether there was any substantial savings to be had from closing dealers and did not take into account how many people the move would put out of work.
The downsizing of the car industry in 2008 and 2009 cost 400,000 jobs at the car companies according to the report. The dealer closings increased that figure by tens of thousands as 24/7 Wall St. wrote last June.
It is easy to say that the restructuring of GM and Chrysler happened so fast the dealer closings were collateral damage. But since the federal government may never get back the entire amount it put into the two car companies, the closures made the process costlier to the federal government and local economies. Nearly all the people who lost jobs at dealerships will receive unemployment and tax revenue for the cities and town were the dealers were located will shrink.
One of the problems of the car industry restructuring is that it was not run by car people. Washington assumed that the industry had caused its problems and that no one within the industry could solve them. That does not mean that people from outside the industry, selected by the government, could do any better.
The prevailing opinion about why the auto sector ran out of money and therefore time to get itself turned around is that GM and Chrysler were poorly run. That may be true, but only to some extent. The greatest recession in the industry, which dropped US vehicles sales from over 16 million units in 2004 to 10 million units in 2009, played a more substantial role that any other factor. People dispatched by the federal government to “fix” the industry may not have taken that into account enough.
What car industry executives might have told the government, if they were not afraid for their own jobs, is that the size of their dealer networks have very little to do with their overall costs. Most of a dealer’s expenses are borne by the dealer and not the manufacturer that supplies it cars. Dealership closings had only a marginal effect on the costs at GM and Ford.
Collateral damage is collateral damage until it undermines something core to the process of saving an industry. Unnecessarily putting tens of thousand of people out of work falls into a category of core damage but no one seemed to understand or care about that.
Douglas A. McIntyre