Published in the Wall Street Journal with rebuttal commentary in bold face. Interesting Conspiracy Theory.

EDITORIAL & OPINIONS Beat the Dealer Is the Obama administration turning Chrysler into a patronage machine? By JAMES TARANTO / WSJ

When people talk about the problems that have driven Chrysler to bankruptcy and General Motors to the brink thereof, they usually have in mind the companies’ excessive commitments to those who build their cars: the high wages, lavish benefits and irrational work rules written into union contracts. A less-discussed problem is the companies’ relationship with those who sell their cars. A 2006 Forbes article gave an outline:

General Motors still has 7,100 dealerships (some with multiple franchises, for example, Buick-Pontiac-GMC). That count is down from 8,434 ten years ago. Ford Motor has 4,400 dealers and Chrysler Group 3,900.

Contrast Toyota, with 1,215 franchises. These sell an average 1,613 new vehicles a year apiece. Chevrolet has 4,111 franchises selling an average 643 vehicles. Ford showrooms sell 696, and Dodge stores (Chrysler’s largest division) sell only 408. The situation is disastrous for the smaller brands: Buick franchises sell only 102 new cars a year, Jeep franchises 170.

The quote uses the word “disastrous” as if it is a settled issue that low “throughput” is a negative. In truth, it has little to do with Dealer or OEM profitability. It has everything to do with the ratio of Dealer overhead to overall sales, which includes pre-owned, service, parts, etc. In the early eighties I ran the 2nd most profitable Chrysler dealership in the Chicago zone. We never sold as many as 100 units in a month. We were making $50 K a month during the peak of the Chrysler bailout crisis of that era. The profit leader was Elmhurst Chrysler, a huge fleet dealer that had to sell thousands of units a year to beat our profit numbers. For manufacturers, each Dealer is a profit center, not an expense.

Toyota, with their high “throughput,” has one of the lowest J.D. Power “SSI” figures of any franchise’s Dealers. “SSI” is Sales Satisfaction Index. In other words, their high “throughput” must contribute to the fact that their customers are highly dissatisfied with their purchase experience even though they love their Toyota vehicles. Toyota’s sales numbers have tumbled along with the rest of the industry. Using Toyota as a model may be unwise as they have posted record losses recently.

It is widely understood within Toyota, and within the industry, that one big reason for the lack of success of Toyota’s superb new truck, the Tundra, is their lack of Dealer coverage. Further, court documents in Chrysler’s BK included comments by Jim Press, ex Toyota exec, which indicate he is aware that shedding Dealers is counterproductive to Chrysler’s profitability.

Manufacturers can only watch as their dealers carve one another up by advertising giveaway prices. Worse, at least for the manufacturer, is that a lot of these dealers own competing franchises. A Buick dealer, that is, may also have a Toyota dealership down the road. Naturally, they shift their best salespeople and capital to the most profitable brands, leaving their Buick or Ford store looking shabby and staffed by inept or green sales agents.

In fact, they watch with glee as their Dealers carve each other up, spending their own resources to move inventory after the OEM has loaded them up by using various inducements and intimidation. The factory’s mantra has always been, “Inventory pressure sells cars!” I’ve heard this from them hundreds of times! As it regards multi franchise Dealerships, there ARE competitive pressures.

Why don’t the weak dealers just fold on their own? Two reasons. They can still make money on service and on selling used cars. And the dealership provides jobs for the owner’s friends and relatives.

Now this last statement is an interesting piece of hyperbole, as if this is a major issue. I’d like to see some evidence , other than an occasional anecdote, to support this outrageous generalization.

Car makers, however, have little ability to rationalize their dealer networks, because dealers have substantial political clout, which translates into laws protecting them. “Under state franchise laws car companies must show good cause to terminate a dealer’s franchise agreement,” Forbes notes. Since the dealers are constituents of the officials who make these decisions while the car makers are not, the bias in favor of the former is systematic.

Dealers ARE more direct constituents on the state level, but OEMs dedicate huge resources to their lobbying efforts. State franchise laws are based more on “fairness” than any other issue. Protecting Dealers from their supplier is in the best interest of consumers and fair play.

Closing down dealers thus requires a big outlay of cash that produces dividends only in the long run:

It cost GM $583 million to compensate its 699 Oldsmobile dealers after it decided in 2000 to phase out the brand. That’s $840,000 per. . . .

GM ruined Oldsmobile, which at one point was their most profitable car division. For years the Olds Cutlass was GM’s volume leader. But resources for Oldsmobile were diverted to GM’s experiment with Saturn. How’s that working out? They starved Oldsmobile for product and initiated the “It’s not your father’s Oldsmobile” marketing campaign. That didn’t recruit younger buyers and alienated their customer base. One could say that Roger Smith started GM down the path the bankruptcy.

When a company loses a dealer, its overhead costs stay the same and–at least in the short term–it loses a few hundred car sales. “There’s no immediate payback,” says Joe W. Eberhardt, Chrysler Group’s senior vice president for sales and marketing.

No kidding Joe!

Things are different now, at least for Chrysler, which is now in bankruptcy court. As a May 4 Wall Street Journal editorial noted, the Obama administration “is hoping the judge will do little more than rubber stamp the restructuring deal it has worked out among the Treasury, the United Auto Workers and the Italian car maker, Fiat.” As part of the restructuring, the Detroit Free Press reports, has sent termination notices to 789 of its dealers:

Dealers no longer have protection from state franchise laws because Chrysler is in Chapter 11 bankruptcy, but they can contest the process by which Chrysler chose the survivors, said Scott Silverman, a Boston attorney representing four terminated Chrysler dealers in Massachusetts.

I don’t hold out much hope that this will be successful. Judge Gonzalez is rubber stamping everything the task force wants.

“What dealers need to do is look at the criteria Chrysler said it used and look at how you performed on those metrics,” said Silverman. Those criteria included sales volume, customer service scores, local market share and average household income in the immediate area.

But what if one of the criteria is partisan politics? Blogger Doug Ross raises that possibility:

A tipster alerted me to an interesting assertion. A cursory review by that person showed that many of the Chrysler dealers on the closing list were heavy Republican donors.

To quickly review the situation, I took all dealer owners whose names appeared more than once in the list. And, of those who contributed to political campaigns, every single one had donated almost exclusively to GOP candidates. While this isn’t an exhaustive review, it does have some ominous implications if it can be verified.

However, I also found additional research online at Scribd (author unknown), which also appears to point to a highly partisan decision-making process. . . .

I have thus far found only a single Obama donor (and a minor one at that: $200 from Jeffrey Hunter of Waco, Texas) on the closing list.

WOW! Isn’t it well known that Auto Dealers are 90 percent Republican? Chrysler Dealers have been largely Republican except for a point in time during the previous Chrysler bailout when they temporarily became Democrats.

It must be emphasized that Ross’s evidence is suggestive, not conclusive.. It does not appear that anyone has yet conducted a complete analysis of Chrysler dealers’ political contributions. Ross’s post, published Monday, contains nine updates with supporting material from news sources and blog posts, but the whole thing ends up being rather disjoined and hard to digest.

This situation certainly bears watching. If Ross’s suspicion is unwarranted, we’re sure Obama’s many online defenders will be along soon with data to debunk it. If he’s right, though, it could complicate the bankruptcy proceedings by giving the jilted dealers a basis on which to challenge their termination. It would also demonstrate that political intervention in private business is an invitation for the most brazen sort of corruption.

It is also an invitation for totally inane complaints and conspiracy theories. Having said all of this, I am AGAINST shutting down all these Dealerships. It doesn’t help anything. If a conspiracy theory can prevent it, I’m all for it even if there isn’t to it. I would like to see a “truth commission” to see who pushed the rejection of 789 Chrysler Dealers. No one wants to “cop” to it!