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In Other Chrysler news

posted by Stephen Lubben

The bankruptcy court entered an order today that allows the debtor to reject more than 700 dealership agreements, effective today. The order includes the following slightly odd finding:

To the extent that any Dealer Laws conflict with the terms of this Order or the impact of the rejection of the Rejected Agreements under the Bankruptcy Code and applicable case law, such laws are preempted by the Bankruptcy Code, pursuant to the Supremacy Clause of the United States Constitution.

Essentially this is a restatement of the law of preemption.  A broad restatement. Not really a finding. More relevant to the dealers, the bankruptcy court retains jurisdiction over "all matters relating to the implementation, enforcement and interpretation of this Order." That is, don't even try to go to state court on this.

The order indicates that the court will issue an opinion on this in the near future. Just in case some other debtor wants to cite it.


What is in those contracts that Chrysler doesn't like? A manufacturer ordinarily benefits from having more retailers for his product-- more orders at spot prices can't hurt. So what makes these dealer contracts burdensome? I've been on the lookout for answers and haven't seen any.

Some possibilities (completely speculative):

1. Chrysler agreed to sell the cars to the dealer at too low a price (unlikely).

2. Chrysler bears the inventory cost for dealers who keep cars unsold on their lots that Chrysler would like either not to manufacture at all or to sell via other dealers.

3. Chrysler guarantee profit to every dealer.

4. Chrysler promises to provide loans to any dealer.

If the contracts simply say that Chrysler allows a dealer to use the Chrysler name, provide warranty service, and buy Chrsyler cars for resale, I can't see why they wouldn't want to sell as many as possible. (For any economists reading: a Telser-style RPM quality argument is one possibility, but seems implausible to me.)

I think the basic argument goes like this: the US automakers have more dealers than other automakers, reflecting a time when the US makers had a larger market share. In an era of reduced market share, the existing dealers engage in intra-manufacturer competition that reduces their margins.

With reduced margins, the US maker dealerships have less money to invest in the dealerships, leading Chrysler and GM dealerships to look shabby and offer less services as compared with Toyota et al. This reduces the total number of sales, which effects the US automakers.

That's the Telser argument, pretty much. The counter to it is that an alternative policy for Chrysler is to raise the invoice price (to prevent dealers from competing down the price) and then rebate the amount of the raise back to dealerships for use in spiffery. They don't have to give the dealership profits by selling them cars at cheap invoice prices, which also risks the dealers simply enjoying high incomes instead of using the higher profits to spiff up the dealership.

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