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July 30, 2010

The Costs of Central Planning: How TARP Failed the Auto Industry

“What seemed to be an obvious move to reduce the size of the American auto industry got screwed up when the government over-pressed on the closure of dealerships.  If the government could not get the downsizing of the auto industry right, how are they going to get the upsizing of the healthcare industry right?”
The Office of the Special Inspector General for TARP has released a controversial report on the Obama Administration’s pressure to close many dealerships in order to back GM and Chrysler during their 2009 bankruptcies.  The entire 45 page report can be read here.  I found several things interesting in this report:
1)      I could not copy and paste quotes from the report to give an accurate account of what the investigation found.  The document was purposely set up to make copy/paste functions virtually impossible.
2)      The Treasury Department “strongly disagrees” with the results of the study.  Apparently, it knows the situation better than the “key officials inside Chrysler and GM, auto industry experts, and auto dealers” who were interviewed by the inspectors.  I find the fact that the Treasury finds itself smarter than all those folks a strong sign of a Central Planning authority.
3)      Instead of sticking to its original plan to close around 1,500 dealerships by 2014, GM announced the closure of all of these dealerships by 2010 as the federal government announced the original plan was “too slow.” (See page 11 of the file).
4)      At the bottom of page 11 (marked pg 7), the TREASURY identified the keys of viability for General Motors and Chrysler.  One such characteristic for both companies was “improving product mix and moving towards fuel efficient vehicles.”  Clearly, this is a central planning mentality as the government is telling these two companies what to produce if it wants its loans.  This is especially ironic considering SUV and pickup truck sales are beginning to rise.  I guess when it comes to consumer versus government, we should listen to what the government has to say.  (By the way, Ford was a huge winner according to the above article).
5)      The original dealership closing plan “assumed” that the number of cars sold per dealership would rise for GM and Chrysler in proportion to consolidation.  I guess that means that the hundreds of thousands of people put out of work were going to continue to buy the brand of vehicle that put them out?  And, they would continue to show the same positive enthusiasm for these brands with friends and family?  This section of the report should have been entitled “Why Ford Sales Were Boosted by the Auto TARP bailouts.”
6)      Chrysler opposed the dealership strategy outlined by the Auto Task Force because it was trying to hard to replicate the foreign car dealerships business models.  Toyota and Chrysler were two different companies with two different brands and two different target markets.  The Chrysler executive likened it to “turning our sons into daughters.”  The Obama Auto Task Force’s desire to take the Toyota model and cookie-cutter it across America is very simple-minded.  Standardization was also a very popular Central Planning technique.
7)      An internal Auto Task force memo acknowledged that terminating such a large number of dealerships was “the greatest challenge to the current plan.”  To me, this dramatic of an undertaking with this supply chain actually increased the risk for default between GM and Chrysler.
8)      Profitability was weighted as 10% of one of two components GM used to close dealerships in 2008.  Sales volume and customer satisfaction accounted for 80% of that same component.  This means that a dealership with mediocre customer service, high sales, and no profitability likely beat out a dealership with a slightly better customer service ranking, low sales, and high profitability  (See page 21 of the PDF form).
9)      The report (see page 22) and an interview with a car dealer on FOX News on July 19th (I wish I could find the video) hint that the companies violated franchise laws in several states then hid under the guise of bankruptcy in order to avoid being sued for violating such laws.  We should thank the President once again for his task force aiding in circumventing the law.
10)   General Motors created an appeals process for dealers set to close, but did not document the process (criteria, rationales, etc).  Why have accountability when you are receiving a government backstop?
I believe that the findings of this report speak to the true abilities of the government to manage anything in our economy.  It was absolutely clear that Chrysler and GM needed to reduce and make “lean” their dealership networks.  However, the Task Force made huge errors in the method and speed for which these are to be done.  If our government cannot get the simple economic issues of the day right, how are they going to handle the complicated ones?

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