When auto industry experts told The Network Journal in last year’s report on the industry that businesses that had the foresight to prepare for the impending economic storm stood a better chance of weathering it, their comment was as applicable to the Big Three automakers as it was to small enterprises. As the recession wreaked havoc on car sales, two of the Big Three — Chrysler L.L.C. and General Motors Corp. — buckled, triggering a wrenching shakeout among auto dealers.
African-American and other minority dealers have been disproportionately hard hit. “Currently, the state of the Black dealer is extremely bleak. Black dealers across the United States are on the verge of being extinct by year’s end,” says Marjorie A. Staten, executive director of General Motors Minority Dealers Association in Southfield, Mich.
In 2006, Ford Motor Co.’s then-new CEO, Alan R. Mulally, had the foresight to leverage all of the company’s assets for $23.6 billion in loans from the nation’s biggest banks. At the time banks were still willing to lend money. Mulally used the loans to overhaul his company and focus on small, fuel-efficient cars instead of gas-guzzling trucks and sport utility vehicles.
There was no such vision at Chrysler and GM. Chrysler was forced into bankruptcy and ordered to restructure in return for federal bailout money. It emerged from bankruptcy protection 42 days later under a new name, Chrysler Group. Managed now by Italian automaker Fiat, it has begun to roll out a line of more fuel-efficient cars.
GM, too, was driven to the brink of bankruptcy. As part of its restructuring, it was required to shed its CEO, unloaded its Saab brand to a Swedish company and its Hummer brand to a Chinese company. Discussions with Penske Automotive Group Inc. to acquire the Saturn line fell through, and the line was terminated in September. Like Chrysler, GM was required to shed dealerships, seriously impacting minority-owned dealerships.
“Currently, GM only has seventy-two Black-owned GM dealerships. It is predicted that this number will be greatly reduced to fifty or below before the end of the year when the Saturn, Saab and Hummer sales are completed, and the dealerships that GM have designated to closed are shut down,” Staten says.
Car dealerships traditionally are family run businesses whose accumulated wealth and capital are passed on from generation to generation, but discriminatory loan policies and practices in the 1930s and 1940s denied minorities the opportunity to generate similar wealth. Lack of access to capital still is a major challenge for minority entrepreneurs in the cyclical automotive industry.
The advent of the Big Three’s dealer diversity programs in the early 1970s eased the situation somewhat by giving African-Americans the opportunity to establish entrepreneurial ventures and accumulate generational wealth. With the current industry shakeout, however, “all of that progress we’ll have made over the past thirty years will all be wiped out,” laments Damon Lester, president of the National Association of Minority Automobile Dealers (NAMAD) in Lanham, Md.
Lester has been lobbying Washington to pass economic assistance legislation for the benefit of minority auto dealers. The few dealers who sell imports are faring only slightly better than those who sell exclusively domestic brands, as recession-wary consumers tighten spending across the board. According to NAMAD’s 2008 Data Census, import brands created dealer-development programs so long after their U.S. counterparts — some, like Toyota and Honda were even reluctant to do so — that their dealer numbers are miniscule in comparison.
Last December, when Chrysler and GM asked the federal government for a $25 billion bailout, NAMAD requested that $500 million of those funds be allocated to minority auto dealers. That request became a moot point, when the Obama administration ordered the automakers to come up with solid restructuring plans, plans that ultimately meant paring down their bloated dealer networks.
In true survival-of-the-fittest fashion, carmakers took inventory away from failing dealerships and gave them to larger ones that were holding their own. But, Lester points out, owners of the failing stores are still required to pay the note on their dealerships, only now they have no assets to sell in order to get the money to make the payments.
As a conciliatory measure, the administration implemented the Small Business Administration Motor Vehicle Dealer Loan Guaranty Program, which guarantees loans made by local lenders to small businesses that cannot obtain credit on a conventional basis. However, in processing the loan applications, the local banks used the dealers’ balance sheets for 2007 and 2008 — dismal years for the auto industry that reflected negatively on financial statements.
“I call it a left-handed approval,” says Bill Perkins, owner of three dealerships that make up the Bill Perkins Automotive Group in Ann Arbor, Mich.
Lester agrees. “Since the requirements to get from point A to point Z are so strict, it’s hard to get there,” he says, adding that he knows of only five dealers out of the hundreds desperate for help who qualified for the SBA loan program.
A better alternative, Lester and Perkins say, would be a direct loan program similar to the $12 million in direct loans and $200 million to $300 million in guaranteed loans that assisted minority dealers in the Chrysler bailout of 1979 during the Carter administration. “The direct loan program is the most effective and expedient way to help minority dealers who are in trouble,” says Perkins.
The Obama administration has made no move in this direction even with the demise of countless dealerships. “I would suspect that the administration is playing hardball with the auto industry,” says Barron Harvey, Ph.D., dean of the Howard University School of Business in Washington, D.C.
Harvey suggests that the administration assumed that a certain number of dealers would have to close down, while others would be retained. The impact this paring down of the industry on minority dealers was an important “major omission” on the administration’s part, he notes. “Minority dealers should not bear the complete brunt of the right-sizing of the retail stores,” he says.
The federal Car Allowance Rebate System, commonly referred to as the Cash for Clunkers program, was a much-needed infusion of capital for dealers. The hugely successful program, which ended Aug. 25, gave buyers up to $4,500 toward a new, more environmentally friendly vehicle when they traded in their old gas-guzzling cars or trucks. Perkins did 160 Cash for Clunkers deals across his three stores.
Still, access to capital remains the overriding concern for Black dealers struggling to survive. While the banks play hardball, finding alternative financing — whether through private equity firms or foreign investors — is vital. NAMAD is encouraging some of its larger dealerships to form a financial consortium to help smaller dealerships ride out the storm.
Perkins and Lester are hoping that dealers who are still standing will be stronger and leaner when the dust settles. Perkins, who lost his Pontiac/GMC franchise at his Ann Arbor store when GM dropped the product line in April as part of its restructuring, is bracing for the hit in his 2009 financial statements.
“The Pontiac franchise made up to sixty percent of my business at that location,” he says. But he’s prepared to come back swinging. “It’s a matter of survival of the fittest,” he declares.