Industry leaves auto dealers stranded

Recent actions by General Motors and Chrysler to jettison more than 1,700 of their franchised dealerships - including the oldest in Colorado Springs - has left dealers distressed, even depressed, but not surprised, said Tim Jackson, head of the state's dealer association this week.

And the automakers' cuts are just the "first shoe to drop," said Ann Winslow, executive director of the Colorado Springs Automobile Dealers Association and a member of the family that owns Winslow BMW. She predicts more dealers will be forced out of business.

Local auto dealer Dave Solon, who owns a Kia dealership in town, said the automakers' desire to break with its dealers must be galling.

"The dealer network has been built by entrepreneurial small businesses that built a wonderful business," said Solon, who also owns Kia dealerships in Grand Junction and Longmont, a Mazda dealership in Lakewood and a Nissan-Subaru dealership in Pueblo.

"A bunch will now be forced out, not because of something they did. They have been put in an unworkable situation."

The upheaval in the auto industry could have troubling implications for Colorado Springs, experts said. Auto dealerships provide thousands of jobs, generate 13 percent of the city's tax revenue even in a depressed economy and support many charitable and nonprofit organizations.

It remains to be seen, one local economist said, whether fewer domestic dealerships will have an effect on the price consumers pay for vehicles.

Not our fault, dealers say

GM's decision last week to cut 1,100 dealers, including Daniels Chevyland in the Springs, is the culmination of an argument GM, Chrysler and Ford have long made: They have too many dealers, said Jackson, executive director of the Colorado Automobile Dealers Association.

The automakers say they need a smaller dealer network, much like Honda and Toyota, that allows each dealer to make more sales and more profit, generating money to reinvest in their dealerships.

That was the rationale of Chrysler when it asked a bankruptcy judge for permission to end franchise agreements with 789 of its 3,300 dealers, including Lithia Chrysler-Jeep in Colorado Springs and a Jeep store in Denver owned by Phil Long Dealerships, which is owned by a group of investors in Colorado Springs. Chrysler wants those dealers to stop selling its vehicles by June 9.

Jackson said dealers believe the market should winnow out underperforming dealers, as has been happening for years.

Fifty years ago, with Asian automakers entering the market, 50,000 dealers were in America, he said. By the start of this year - with a U.S. population that had grown almost 50 percent, with domestic automakers holding only about 50 percent of the market share, and with a decade of declining new-car sales - there were about 19,000 dealers.
Besides, said Jackson and Winslow, dealers don't believe they are the cause of automakers' woes. They maintain they cost manufacturers very little, if anything - and in fact generate the revenue automakers so desperately need.

Jerry Colten, owner and general manager of Colorado Springs' only Hummer franchise - a brand GM wants to sell or stop making - said he understands the carmaker's desire to reduce the number of dealerships in the nation. But he doesn't understand why that strategy has become a priority over decreasing expenses involved with pension, medical and retirement plans for auto workers.

"All have to be reduced because American cars need to be priced no more or less expensive than Asian cars, while at the same time making a profit," he said.

GM may be taken to court

It's unclear whether GM's plan will even work, said Jackson and local economist Fred Crowley, senior economist with the Southern Colorado Economic Forum.

Jackson said Colorado, like many other states, has laws protecting businesses, like auto dealers, that hold a franchise agreement. He said the letters from GM may not be worth the paper they're written on if challenged in court, as dealers have threatened to do.

Targeted GM dealers can appeal the automaker's decision.

Jackson and Colten think that legal uncertainty alone may force GM to seek bankruptcy protection, maybe as early as the first week of June.

"If and when they file bankruptcy," Jackson said, "you could say all bets are off. We're all aware that franchise laws are somewhat diminished (in bankruptcies), we just don't know to what extent."

Crowley said it also remains to be seen if fewer domestic dealers will result in stronger automakers.

"Conceivably, the loss of several dealerships could mean less competition and higher prices, but it could also mean higher sales volume per dealer and greater efficiencies for dealers, who could pass along those savings to customers," he said. "Although the strategy by the manufacturers is to reduce discounting resulting from competition among dealers, that strategy may not work."

Crowley said the Pikes Peak region has benefited from a surplus of dealers. According to the U.S. Census Bureau's County Business Patterns publication for 2006, El Paso County had 49 new vehicle dealers with 2,652 employees.

He said there are two or three more dealers than would be expected with this area's population. That must mean, he said, people from outside the Springs area are traveling here to buy cars.

With the loss of Lithia Chrysler-Jeep, Daniels Chevyland, both Saturn dealers - a brand GM also wants to close or sell - and Phil Long Mitsubishi, which closed this year, Crowley estimates the direct economic impact could total 130 jobs paying about $50,000 each.

Pinch felt all around

General Motors' decision to end its franchise agreements with 1,100 of its 6,300 or so dealers was the most obvious - but certainly not the only - indication that tumultuous times have descended upon the auto industry.

The recession has had its impact not only on domestic brands but even on foreign automakers admired for their efficiency and profit.

Toyota Motor Co. saw April sales slide 42 percent from the same month a year ago. Honda Motor Co. saw its U.S. sales in April drop 25 percent, and Nissan Motor Co. was down 38 percent, according to industry reports.

All told, U.S. auto sales fell 34 percent in April over the same month a year earlier.

Those dramatic reductions have played out locally: There were 2,654 fewer new cars titled in El Paso County from January to April compared with the same period last year, a 37 percent drop. Last year, new car sales were 22.4 percent below levels in 2004 and 32 percent below 2001 levels, according to a quarterly market update by economist Crowley.

The market contraction has resulted in closures and consolidations among all dealerships.

Colten plans to close the city's only Hummer franchise this year and convert the building at the Chapel Hills Auto Mall into a Volkswagen dealership.

Phil Long Dealerships recently closed two of its five Saturn stores - one in Denver, the other in Pueblo. It sold a Kia franchise and is selling a Mitsubishi franchise. Phil Long, also consolidated its Suzuki stores in Denver.

The company has 15 dealerships, all but one in Colorado.

Phil Long's staff has shrunk from 1,100 to 800 employees, said Jay Cimino, chief executive of Phil Long Dealerships.

"From an industry standpoint, there's never been anything like this," Cimino said.

"The landscape will change dramatically."

"What happens in lean times is that franchises shed a lot of people who don't have the talent for it, the guts for it, the passion for the business," he said. "You end up with dedicated employees with a great deal of passion. Our company will be stronger for it."

Dealers said they're also adapting to the economic realities of their customers, with used cars now becoming the staple for dealerships.

Phil Long's stores used to sell one used car to one new car, Cimino said. That ratio has changed to two used cars to one new, he said.

Solon, the Kia dealer, reckons dealers' ability to adapt will help them prevail.

"The industry will survive," he said. "There will be different brands and vehicles available and places to buy them and get financing.

"I've been doing my market research to see if anyone is out there riding a horse and since I don't see that, I think our business will survive."