Chrysler Sale May Accelerate Dealership Closings

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Detroit's Big Three automakers have too many dealers for the number of cars they sell. Many of those dealers are hurting financially, and struggling dealers aren't in Detroit's best interest.

Automakers are now trying to thin their dealer ranks. Chrysler, for example, has cut the number of dealers by about 10 percent in the last four years, to about 3,700, and says it will eliminate hundreds more.

The news that the private equity firm Cerberus Capital Management is slated to acquire Chrysler has prompted some industry watchers to predict that many more dealers will be put on the chopping block.

On a recent afternoon, Bill Tapscott, the impeccably dressed general manager of Lithia Chrysler in Renton, Wash., showed off his new vehicles, including the Aspen, a seven- passenger luxury SUV. He has been selling Chrysler cars and trucks for nearly three decades.

His dealership is what Chrysler calls an alpha dealer. It sells the full line of the company's products: Chrysler, Dodge and Jeep all under one roof . This spacious, modern dealership is the wave of the future for Chrysler dealers. The automaker wants its dealers to have larger geographic territories, a broader customer base, and less competition with others selling the same brand. The aim: More sales and higher profits.

"Chrysler wants its dealers to be profitable," says David Cole of the independent Center for Automotive Research. Profitable dealers spend more on advertising, they invest in new facilities, and they provide the kind of atmosphere people are looking for as they shop for new cars, he says.

In short, says Cole, "dealers are the public face of an automaker." Those that make hefty profits project the image of a vibrant car company, selling autos you want to buy. Since dealers actually purchase their inventory from Chrysler, the faster dealers reorder, the better it is for Chrysler's bottom line. But right now there are too many cars sitting unsold on dealer lots.

Earlier this year the company announced plans to eliminate about 10 to 15 percent of its dealers over the next year or two. Chrysler spokesman Jason Vines says that plan has been endorsed by Cerberus and by the Chrysler dealers. But he acknowledges that dealer support is tempered.

"Everyone is favor of this. But like the old saying, 'Everyone wants to go to heaven but no one wants to die.' "

In other words, the dealers are interested in having fewer dealers so long as they aren't the one getting axed.

Vines adds that, for now, there are no plans to go beyond the previously announced cuts. But he concedes that could change.

"If other opportunities come about and it makes sense, sure we will do that," Vines says.

Indeed, some industry watchers, including Cole, suggest that Chrysler needs to eliminate 1,000 more dealers as part of its long-term strategy. Cole says the buyouts will be expensive. "It's probably going to cost hundreds of millions, maybe even a billion dollars to get the kind of dealer body they have to have."

Dealers have franchise agreements with Chrysler – and if Chrysler wants to terminate those arrangements, it will have to buy the dealers out. That's what General Motors did when it eliminated the Oldsmobile nameplate. GM won't say what that buyout cost, but some estimates put that figure at more than $800,000 per dealer.

Q&A: Under the Hood of the Chrysler Deal

A Chrysler Jeep sits at a Chrysler dealership May 14, 2007, in Troy, Michigan i

A Chrysler Jeep sits at a Chrysler dealership May 14, 2007, in Troy, Mich. Bill Pugliano/Getty Images hide caption

toggle caption Bill Pugliano/Getty Images
A Chrysler Jeep sits at a Chrysler dealership May 14, 2007, in Troy, Michigan

A Chrysler Jeep sits at a Chrysler dealership May 14, 2007, in Troy, Mich.

Bill Pugliano/Getty Images

Germany-based DaimlerChrysler will soon lose the second half of its name. The company announced Monday that it is selling 80 percent of the Chrysler Group to a private equity fund for $7.4 billion. The new owner, Cerberus Capital Management, inherits an automobile company that is losing money and laying off workers. The deal essentially reverses a much-touted 1998 merger of the two automakers. Here, a look under the hood at the sale:

What is Cerberus? I've never heard of it.

It is a private-equity firm — named after the three-headed dog that guarded the gates of hell in Greek mythology. The firm, founded in 1992, currently owns about 50 companies, ranging from Air Canada to Formica Corp. Of late, it has taken an interest in the auto industry. It owns the car-rental firms National and Alamo and has a controlling interest in General Motors' financing arm. Former Treasury Secretary John Snow is Cerberus' chairman.

Is this the biggest takeover by a private-equity firm?

No, but it is certainly one of the most high profile. For the first time, a U.S. automaker — and American icon — is in the hands of a private-equity firm, not accountable to shareholders.

What happened to the much-heralded merger between Daimler-Benz and Chrysler a decade ago?

It never stuck. At the time, it was called a "merger of equals" and a "marriage made in heaven." As it turns out, it was a less-than-ideal union —- with Chrysler's profit line after the merger resembling the path of a roller-coaster. Dieter Zetsche, the chief executive of DaimlerChrysler, admitted as much at a news conference Monday in Germany. "We obviously overestimated the potential of synergies," he said.

Critics of the merger say it failed, in part, because Daimler was reluctant to share its high-end technology with the more down-market Chrysler products. "Daimler didn't want their Mercedes owners looking under the hood of their car and seeing the same thing under the hood of a Dodge," says David Healy, an analyst with Burnham Securities.

Under pressure from angry shareholders, Daimler was eager to unload Chrysler — even at a fire-sale price — and rid itself of what had become a financial albatross. The way the deal is structured, Daimler is actually paying to unload Chrysler.

Will Daimler play any role in Chrysler's future?

Yes. Daimler will retain a nearly 20 percent share in the new Chrysler, and some joint research projects will continue.

How poorly is Chrysler doing as a company?

Very poorly. It posted an operating loss of $1.5 billion last year, closed one plant and recently announced 13,000 layoffs. It is saddled with high labor costs, dwindling sales and an excessive number of dealerships. And Chrysler, like other U.S. automakers, has been slow to introduce fuel-efficient hybrid cars, like the popular Toyota Prius.

What does the deal mean for Chrysler's 80,000 employees?

That's not clear. Traditionally, private-equity firms that buy a company like Chrysler reduce costs drastically — often through layoffs — then sell the company at a profit. That's why Chrysler President Tom LaSorda was quick to reassure employees by saying that Cerberus has "a long-term commitment to Chrysler's growth and success." Cerberus Chairman John Snow argues that a private firm, free of shareholders hunger for quarterly profits, can actually take a more long-term view. "We don't think about the next quarter. We don't think about what analysts have to say about us," he said. Many analysts, though, say future layoffs at Chrysler are inevitable, given the amount of cash the company is hemorrhaging.

How do the labor unions feel about the sale?

They support it, which is surprising because just a few weeks ago, the head of the biggest union, the United Auto Workers, publicly opposed the sale of Chrysler to a private-equity firm. UAW chief Ron Gettelfinger said he feared such a firm would "strip and flip" the company to turn a quick profit. It's not clear why he had a change of heart. The deal, though, may represent the best of several bad options for the company — and the union. On Monday, Gettlefinger said the union had received some "commitments" from Cerberus, but he didn't specify what they were. In any event, the tough decisions won't be made until this summer, when management and the union begin negotiating a new four-year contract.

Who absorbs Chrysler's health care and pension liabilities?

Cerberus does. And they are costly: around $18 billion or more, according to some estimates.

What does the deal mean for Chrysler consumers?

Not much, at least in the short term. Warranties, for instance, are protected under law, even if the company is sold. In the medium term, the new owners may launch some innovative new models in hopes of winning back market share.



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