How Do Car Dealerships Cost Auto Makers Money?

This is a question that has confounded me since first hearing the announcements that more than 700 Chrysler dealerships would be forced to close, loosing their franchises, and that about 1000 GM dealerships would loose their franchises and be forced to close.

Anyone looking at this would think that closing dealerships is simply insanity. Dealerships sell cars. They make money for the auto makers. In fact, when you look at the dealerships that are loosing their franchises from Chrysler, many are among the best dealerships that Chrysler has, selling the most cars and have the best service records and customer satisfaction.

And that may be the root of the problem.

Dealerships that provide the best service to customers and have the highest rates of customer satisfaction along with repeat sales are the dealerships that also provide the best service to their customers … including WARRANTY WORK.

Warranty work or service on automobiles DO cost the automakers money … because they, the automakers, are billed by the dealerships for the work, not the customer.

So, the more warranty work that a dealership does, and does well, creating more satisfied customers, the more it costs the automakers.

Okay, I was born in 1951. I’m old enough to remember the days when nearly every small town of any size had at least one car dealership. All right. I know that “small town” and “of any size” is a little contradictory; but if you’ve grown up in a small town, you understand my meaning. Let’s say a small town of some size is around 3,000 people. I lived near a small town of some size that had about 3,000 people and four car dealerships: Chevrolet, Chrysler, Pontiac/GM and Ford. Of course, those were also the days when you could actually custom order an automobile and it would arrive as specified in about two to four weeks. Everyone knew all of the dealers, their kids, their mechanics and their kids.

Then “progress” came and the small town dealers were forced out of business. The “super” dealerships came into being. They were all located in small to medium sized “cities” and everyone in the small towns had to drive anywhere from 20 to 50 miles to get service. Also the day of custom ordering a car became history also … all in the name of “progress”.

What this progress meant was that it was harder or less convenient to get your automobile serviced, warranty or otherwise.

My suspicion is that the primary reason for forcing dealerships to close is to hopefully decrease the amount of warranty work that the auto manufacturers will have to pay for.

I know that a lot has been written about the high number of dealerships whose owners have been primarily Republican donors which are being forced to close. Personally, I don’t doubt that this might have been a contributing motive for the Obama Administrations “Auto Czar”, Steven Rattner,  in making the selections. This man is simply too sleazy for that not to be a possibility. But, there must have been some unexpressed rationale for the closures other than that, something equally despicable that no one would want to express openly … therefore, my conclusion that it had to be an attempt to reduce warranty work which does cost the auto makers money.

This would also be a logical explanation why some of the best dealerships are being forced to close. The service that they provide to their customers is simply too good.

After reading about the closings and the uproar which resulted from the appearance that nearly all of the dealerships being forced to close were those owned by Republican donors, I decided to look at the local situation in the Charleston area. It turns out that the dealership in my area being primarily affected is Hoover Chrysler/Dodge/Plymouth. The owner of this dealership is also listed as a Republican donor. Hoover is being forced to close three dealerships in the Charleston area … but, it is being allowed to keep one open, in the Summerville area, I believe.

If competition among dealerships was a bad thing, I doubt that Mr. Hoover would have had four dealerships competing with one another. I suspect that he owned all four to make more money and, therefore made more money for Chrysler. But, by being able to provide that much more service, including warranty work, those four dealerships were also costing Chrysler more money.

So, my hypothesis … fewer dealerships =  less service = less warranty work = less expense = more profit.

That is my conclusion.

As perverse as it seems, it’s a kind of “Amtrak” mentality of reducing expenses … even if it kills the golden goose. And, basically, it follows the same premise, that, if your only goal is to preserve union jobs, then you really don’t care about quality or service but are only interested in placating a voting block at any cost to anyone else.

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5 Responses

  1. Thank you so much for the link. I am honored!
    Your friend, Earl.

  2. Dear Earl: I can tell you are very smart. My name is Earl, too. I read that your name means wisdom, in your
    “About” tab. I never knew there were so many of us.
    I really like your opinions, I hope you like mine.
    Your friend, Earl

    • Well, Earl …

      I’ll have to say your site is interesting … to say the least. I think a person might consider it complimentary to mine. And contrary to popular myth, your name is one to be proud of.

      By the way, my apologies. I’m the culprit who nabbed “Earl’s World”. I have been planning to make it a pictorial site.

    • As a courtesy, I’m going to add a link to you’re site. Good luck with your new blog. The “Earls” of the world need to stick together.

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