The Ethical Issues Surrounding Dealer Closures and Bailouts

In the midst of all the restructuring, taxpayer-funded bailouts, and bankruptcy, General Motors and Chrysler decided to alter their dealer networks, closing down hundreds of dealerships in the process. In 2009, GM vowed to close four-hundred dealerships per year until 2012 in an attempt to increase company profitability. In the U.S., GM has over 6,000 dealers, compared to Toyota with about 2,000.

According to GM's viability plan presented to Congress, the company would like to reduce the number of dealerships to 4,000. However, GM made a surprising decision recently. From edmunds.com:

GM recently reinstated many dealerships that were previously notified of franchise agreement terminations. On March 8, 2010, GM contacted 661 dealerships to negotiate terms of retaining the franchises. Other dealers contested the franchise agreement terminations through an arbitration process that ended on August 5, 2010.

Chrysler, also needing to thin its dealer network, cut the franchise agreement with 789 of its dealers.

For many families who depend on these dealership for their livelihood, the news has been devastating. However, families do not have to completely close their dealerships, rather, they can continue to sell used cars and perform automotive maintenance, which is how dealers already make the bulk of their cash. New car sales just create more potential service customers in the future.

Why is this an ethical issue within the industry?

Many dealer owners and customers have questioned the methods used to close dealerships. Some conservative commentators suggested the closings were politically based, since the government owns a majority of the company and the majority of the closures were in districts held by Republicans. Additionally, some questioned how GM could measure if a dealer was under-performing, since some dealerships, particularly in rural areas, were bound to have relatively low sales numbers.

Luckily, in June of 2009, some 50 smaller dealerships originally marked to be closed were spared, followed by more announcements that the dealership closures would be further minimized, like the information reported from edmunds.com above.

I believe that it was unethical for GM to close down so many dealerships so quickly. They were doing this not because it was a good business decision, but because of arm twisting from Washington. Should GM close some dealers? Sure, but widespread closures would not engender much good will among the American people, already furious over the bailouts for GM and Chrysler.

As for Chrysler, they had to close down some dealerships as well, but they have less than GM so the closures would not be as widespread. Still, many dealerships from both companies have gone under, especially former Saturn dealers who suffered when the brand was shut down.

Jalopnik has chronicled the abandoned dealerships with a picture slideshow. As you can see from the pictures, the empty showrooms are a strong reminder of how failed policies and bloated brands can bring down an automotive empire.

This is an ethical issue that has arisen just recently, as GM and Chrysler battled though bankruptcy and emerged trim and debt-free, thanks to an expedited Chapter 11 process. Many consumers have responded to the auto bailout by buying Ford products. Ford is an American brand that, unlike GM and Chrysler, had the foresight to bring in a gifted Chief Executive, Alan Mulally, formerly of Boeing, to help make the brand competitive and financially stable. Ford had succeeded and remained free of government ownership.

In my view, it is unethical for a business to put itself in the position that GM and Chrysler found themselves, in need of a government bailout. Why couldn't the companies just file for bankruptcy like everyone else and get it over with. We were told by executives at both companies that the bailout would keep them out of bankruptcy, yet that didn't happen. I don't blame Americans for driving Fords instead of GM and Chrysler products.

Ford has shown corporate responsibility by not taking government money when that was the easy thing to do. In return, customers have rewarded the publicly-traded corporation by purchasing its products, and Wall Street has rewarded it by driving stock prices to nearly $12 a share most recently, up from a 52-week low of $6.61.