In May, as part of their reorganization in bankruptcy, both
Chrysler and General Motors announced that they would terminate
their contracts with many of the local auto dealers who sell their
cars. Chrysler terminated nearly 800 dealers the next month, while
GM informed 1,100 dealers that their contracts would end next
year.
The decisions set off a firestorm of protests from dealers, who
argued that the terminations were unnecessary. Going further, some
commentators charged that the terminations were politically
motivated by the Obama Administration, which allegedly pressured
the automakers to target dealerships for termination more for their
partisan affiliation than for economic performance.
Several proposals are now pending in Congress to limit these
terminations, including the Automobile Dealer Economic Rights
Restoration Act of 2009 (H.R. 2743) by Representative Dan Maffei
(D-NY), which would restore to dealers contractual rights lost in
bankruptcy.
Sympathy for terminated dealers--many of whom have been in
business for a generation or more--is understandable. Nevertheless,
the terminations were essential steps toward returning GM and
Chrysler to viability. And while the reorganization process for
these two firms has been heavily politicized in many ways, research
by The Heritage Foundation shows no evidence that the dealership
termination process was influenced by partisanship. Absent such
evidence, Congress should not interfere with these painful but
necessary moves to bring GM and Chrysler back to profitability.
Too Many Dealers
Analysts have long recognized that the Detroit-based automakers
have an outsized dealer network. The excess dealerships are in part
a legacy of earlier times, when Detroit sold many more cars than
today, and in part the result of demographic and business changes
that have made fewer dealers necessary. For years, Detroit
automakers have slowly trimmed their networks, but progress has
been slow--in no small part due to state franchise laws that made
termination difficult.[1] As a result, GM has some 6,000 dealers
nationwide, and Chrysler (before terminations) had over 3,000
dealers. Toyota, by contrast, has only 1,240 dealerships.
Altogether, GM and Chrysler dealers sold 497 and 475 cars per
dealer, respectively, in 2008, while the average Toyota dealer saw
off 875 cars.[2]
This surplus of dealerships hurt the manufacturers in several
ways. First, although the dealerships are owned independently, they
receive financial support from GM and Chrysler through a variety of
mechanisms, ranging from low-cost financing for vehicles in
inventory to local advertising assistance. GM estimates that it
will save some $2 million in such costs for each dealer closed.[3]
Second, and perhaps even more significantly, a surplus of
franchises means dealers for the same manufacturer end up competing
among themselves, resulting in lower returns across the board. With
less revenue, not only do dealers need more assistance from the
manufacturer, but they find it harder to maintain service and
quality levels.
But even though the terminations were justified, some critics
argue that the process was unfair, using bankruptcy to deprive
dealers of contractual rights as well as overriding state laws
granting auto dealers special protections against closures. But
clearing away unsustainable obligations is exactly what the
bankruptcy process was designed to do.
Political Bias?
Of more concern are claims that the decision as to which dealers
were terminated was itself skewed so that Republican-leaning
dealers were treated more harshly than those that supported
Democrats. This is a serious charge. From the beginning, the GM and
Chrysler bankruptcies have been dominated by the federal
government--which is taking a stake in both firms--and many
decisions have been politically tinged.[4] But is there evidence that
the dealership termination lists were politically biased?
To examine the issue, The Heritage Foundation identified the 789
Chrysler dealerships that were closed and the 2,392 dealerships
that will remain open and affiliated with the manufacturer. This
information is contained in the bankruptcy papers of Chrysler's
Chapter 11 filing, filed with the United States Bankruptcy Court
for the Southern District of New York. These documents contained
dealership names and addresses, as well as the identity of the
majority owner of the dealership.
The Heritage Foundation then collected data on the political
contributions made by the majority owner of each dealership. The
name of each dealership's majority owner was compared to the donor
database maintained by the Center for Responsive Politics.[5] This
database includes all available Federal Election Commission data.
The Heritage Foundation collected data on how much money the
majority owner donated to the McCain and Obama campaigns in the
2008 election cycle as well as all donations made to federal GOP
and Democratic candidates in the 1990- 2008 election cycles.
Table 1 shows summary statistics on dealer closings and
political donations.[6] Dealerships whose owners donated to federal
political campaigns are classified as McCain donors, Obama donors,
Republican donors, Democratic donors, and donors to both parties.
The appendix explains the details of these classifications.
Roughly a third of all dealerships are owned by individuals who
gave money to political candidates, and these donations tilted
heavily toward Republican candidates. Chrysler dealership owners
gave a total of $1,347,637 to Democratic candidates and $6,989,079
to Republican candidates over the period studied. Since dealerships
gave more to Republicans overall, it is unsurprising that far more
dealerships that gave to GOP candidates closed than those whose
owners gave to Democratic candidates. About 130 GOP-donor-owned
dealerships closed, compared to 25 Democratic-donor-owned
dealerships and 77 dealerships whose owners gave to both
parties.
Analyzing dealership closure rates reveals whether dealerships
owned by McCain or Obama supporters were more or less likely to
close than those owned by non-donors. In fact, dealership closure
rates differ little by political donation status. Twenty-five
percent of all Chrysler dealerships were closed in the bankruptcy
proceedings. Dealerships owned by McCain donors were not
statistically significantly more or less likely to close than
dealerships whose owners did not give to McCain. The same is true
of dealerships owned by Obama donors and dealerships whose owners
gave to both parties.
Dealerships whose owners gave primarily to Republican candidates
closed at statistically significantly lower rates than dealerships
whose owners did not, and the same was true of dealerships owned by
Democratic donors.[7] Only 22 percent of GOP-donor-owned
dealerships and 19 percent of Democratic-donor-owned dealerships
closed.
It is important to keep in mind that this correlation does not
imply causation: It does not follow that the Obama Administration
used its influence to keep dealerships owned by Republican and
Democratic donors open. More likely, owners of more financially
stable dealerships have higher incomes and are more likely to give
to political candidates. At the same time, these financially stable
dealerships were less likely to be closed by bankruptcy
proceedings.
Table 2 shows the average amount given by those dealership
owners who donated to political candidates. The differences in
donation levels between dealerships that closed and those that
remained open are insignificant with one exception: Dealerships
owned by Democratic donors that closed gave significantly more
money to Democratic candidates than those that remained open.[8]
GOP-supporting dealerships that closed did not give more money to
Republican candidates than those that remained open. Evidence does
not suggest that the bankruptcy process was used to terminate
dealerships owned by generous Republican supporters.
No Correlation
The correlations between donor status and dealership closing can
be analyzed more thoroughly with regression analysis. The Heritage
Foundation used two probit regression models for this purpose. The
first regresses dummy variables indicating whether an individual
dealership's owner gave to the McCain and Obama campaigns and
whether it gave to both GOP and Democratic candidates on a dummy
variable indicating if the dealership closed or not. The second
adds the total amount given to GOP and Democratic candidates to
this base model.
Table 3 shows the results of both models, both of which have
little explanatory power. Model 1 shows that whether a dealership's
owner contributed to McCain, Obama, or candidates of both parties
has no statistically significant correlation with whether it
closed, although dealerships owned by GOP and Democratic donors
were slightly more likely to remain open.
The second model in the second column incorporates the total
donations given to both GOP and Democratic candidates. The total
amount that dealerships gave to either party's candidates has no
explanatory power, and the first model's results remain largely
unchanged. GOP- and Democratic-donor-owned dealerships remained
slightly less likely to close than non-donors, confirming the
earlier analysis of closing probabilities.[9]
The Real Danger
The bankruptcy process is intended to provide failing firms with
both the incentive and ability to make their enterprises viable. In
regard to dealer terminations, the process seems to have worked the
way it was supposed to--with General Motors and Chrysler shrinking
dealer networks, thereby confronting a problem that had long been
known and which they had previously been unable to address
adequately.
Political interference in this process, or any process so
dominated by the government, is of coursealways a concern. In this
case, however, claims that the method by which dealers were
selected was biased appear to be unfounded, with no correlation
between political contributions and terminations. Instead, the real
danger of interference comes from efforts in Congress and elsewhere
to overturn these painful but economically necessary choices made
in the hopes of returning automakers to profitability.
James
Sherk is Bradley Fellow in Labor Policy in the Center
for Data Analysis and James L. Gattuso is Senior Research Fellow in
Regulatory Policy in the Thomas A. Roe Institute for Economic
Policy Studies at The Heritage Foundation. Heritage interns Jesse
Blumenthal and Dodsen Strawbridge contributed substantially to the
research findings in this report.
Appendix
Donor Classification
For the purposes of this study, a McCain donor is a dealership
whose majority owner donated to the John McCain for President
Campaign in 2008, gave less than $500 to Democratic candidates in
all election cycles, and gave more to the McCain campaign than to
all Democratic campaigns. An Obama donor gave at least $500 to the
Barack Obama campaign, gave less than $500 to Republican candidates
in all election cycles, and gave more to Obama than to past
Republican candidates. Democratic donors gave at least $500 to
Democratic candidates and less than $500 to GOP candidates, while
GOP donors gave at least $500 to Republican candidates and less
than $500 to Democratic candidates. Dealerships classified as
donating to both parties gave at least $500 to Republican and
Democratic candidates over all election cycles.
Note that McCain and GOP-donor-owned dealerships are not
mutually exclusive categories. Any dealership whose owner gave less
than $500 to Democratic candidates and more than $500 to the McCain
campaign would be classified as both a McCain donor and a
Republican donor. Similarly, Obama donors and Democratic donors are
not mutually exclusive.