In my upcoming book, Business Decisions, I discuss how businesses sometimes need to make tough decisions. I define a tough decision as a decision where none of the alternatives are attractive, but the decision still needs to be made. The recent and upcoming decisions to reduce the number of auto dealers are an example of tough decisions that needed to be made. Chrysler announced that it will close 789 dealerships, and GM today announced that it will close 1,100 dealerships with more than 1,000 more expected to be affected when GM phases out or sells Pontiac, Hummer, Saturn, and Saab. Many people are obviously unhappy with these decisions. It will put many people out of jobs and have a devastating effect on many communities, yet it was unfortunately a necessary tough decision.
The US auto manufacturers had too many dealerships for the current and expected volume of sales. This overcapacity caused most of the dealers to struggle and be unprofitable. Their dealerships were forced to aggressively compete with each other on price, reducing everyone’s profits to unsustainable levels. At the same time, Toyota and other foreign auto manufacturers have far fewer dealers, giving their dealers the advantage of selling more cars, sustaining profits, and investing more. In court filings, Chrysler disclosed that it sold 303 vehicles per dealer while Toyota sold 1,292 and sold 1,030.
This problem has been brewing for a long time, as the US auto manufacturers’ market share steadily declined while the number of dealers stayed too high. Why did the US auto manufacturers wait so long to make this tough decision? In part, because it is always difficult to face up to tough decisions. In part, because decisions on slowly eroding problems seem to always be put off. But now with Chrysler and GM facing bankruptcy, they can legally void their dealer contracts without added financial burdens. When GM closed its Oldsmobile line, it paid an estimated $2 billion to dealers.
Tough decisions are sometimes necessary even though unpopular. These decisions were tough decisions.