The news was devastating to some. As part of its bankruptcy, Chrysler plans to eliminate nearly 800 dealerships. GM has also announced plans to eliminate 2,600 dealerships (with 300,000 employees) this year and another 1,000 dealerships by the end of next year.
With Chrysler’s bankruptcy protection (and the expectation of a bankruptcy filing at GM), the affected dealerships can expect to be, “left out in the cold,” according to one industry insider. “There won’t be a buyback of cars or parts. The dealers will lose their affiliation but will be stuck with all of their inventory.”
Toyota is said to be actively approaching many former Chrysler and GM dealerships. Of particular interest to Toyota are those dealerships that already have a Toyota franchise in place.
What deals will be made and what impact this will ultimately have is unclear. Toyota’s strength is the relative scarcity of dealerships. Toyota dealerships are more spread out than domestic counterparts, so there is less internal competition.
As Toyota looks to convert some of the old Chrysler and GM dealers, it will have to take care not to over-saturate any existing markets. Since most of Chrysler and GM’s cuts are in urban and suburban markets, Scion may prove to be the biggest beneficiary of the franchise change.
The wild card in all this is that old inventory. Dealers are supposed to try to sell it to surviving franchises. This works fine for companies like AutoNation, Inc which owns other franchises, but smaller dealerships will be left trying to sell entire inventories in a market that is already weak. These dealers can expect to get only a fraction of what they paid for their inventories.
Their alternative is to take a smaller loss by selling their products off at rock-bottom prices. This could cause a sudden, severe deflation of car prices across the board that would affect not just Chrysler and GM, but Toyota as well.
It’s a bleak prospect for sales and economic recovery that would likely knock the auto industry back for years- something that everybody will be looking to avoid.
However it turns out, the ripple effect from these bankruptcies will echo throughout the industry for years to come.