Jim Press, Chrysler LLC Vice Chairman and President, was called to testify before the United States Senate Committee on Commerce, Science and Transportation yesterday, regarding Chrysler's dealer network as a New York bankruptcy court prepares to decide whether the closing down of 789 dealers can go ahead. Originally scheduled to be heard yesterday, Judge Arthur Gonzales will instead begin hearing testimony today with the session expected to continue into Friday.

The following statement is the written testimony provided by Jim Press to the U.S. Senate yesterday as he sought to lay out Chrysler's case for swingeing dealer reductions:

Chairman Rockefeller, Senator Hutchison and Members of the Committee, I appreciate this opportunity to discuss how and why the new Chrysler Group is realigning its dealer network. Chrysler LLC’s decision about which of the company’s 3,181 dealers would be brought forward to the new company was gut wrenching, but it was an absolutely necessary part of our effort to assure the long-term viability of the new Chrysler Group. The goal of the sale of our assets to a new company is to position Chrysler to move forward as a strong, financially sound automotive company serving our customers with a broader and more competitive lineup of environmentally friendly, fuel-efficient, high-quality vehicles, and an equally high level of customer service through an efficient dealer network.

The last thing Chrysler wanted to do was enter into Chapter 11. I can empathise with the dealers who were not brought forward into the new company, and can understand their disappointment. This has been the most difficult business action I have personally ever had to take. But the optimisation of Chrysler’s dealer restructuring plan is necessary to save the company. In an opinion filed May 31, 2009, granting approval for Chrysler’s motion to sell substantially all its assets to a new company in an alliance with Fiat S. p. A., U.S. Bankrupt cy Court Judge Gonzalez stated:

There are two main elements that we can control as an automaker: our products and our dealer network. It’s a well-documented opinion of the Administration and many members of Congress that over the years Chrysler has not moved fast enough to make the tough changes necessary to become a formidable competitor. The changes currently underway at Chrysler are needed for the company to produce competitive products and field a healthy dealer body. If we invest in better products while maintaining a disadvantaged dealer body, neither Chrysler nor our customers will benefit.

At Chrysler, we are realigning our dealer network to ensure that the new dealer body will be strong and competitive in the future. We entered Chapter 11 proceedings because the automobile industry is in a depression, brought about by the economic slowdown and the freezing up of credit markets. Chrysler was unable to survive in that environment because our products and our dealer network were not competitive. The new Chrysler that will be formed as a result of the Chapter 11 process needs to be able to survive and compete in the face of increasing global competition better than the Chrysler that went into it. As a whole, the Chrysler dealer network is not profitable and therefore not viable. In 2008, the average U.S. automotive dealer sold 525 vehicles and made a profit of $279,000 according to the National Automobile Dealers Association, but Chrysler dealers sold only an average of 405 vehicles …and on average lost $3,431.

Today’s automotive industry cannot support the number of dealers currently in the market place. From 1990 through 2007, the industry averaged 16 million new vehicles sold each year. As a result of the industry depression, U.S. light vehicle sales fell to 13.2 million vehicles in 2008, and are projected to be only 10 million to 10. 5 million vehicles in 2009. As part of the viability plan submitted to the administration on Feb. 17, Chrysler revised its Seasonally Adjusted Annual Rate (SAAR) forecast covering the next four years to reflect the reality of a declining automotive industry. The plan projected, commencing in 2009, a SAAR level of 10.1 million units and for years 2009 through 2012, an average SAAR level of only 10.8 million units.

There’s not enough business for the number of dealers Chrysler has today, given that we have less than two-thirds of our former sales volume. The Chrysler dealer network faces the additional disadvantage of a legacy of dealers that sell only one or two of the company’s three brands – Chrysler, Jeep® and Dodge – which have led to redundancies and inefficiencies in product development and marketing costs. Poor performing dealers within the dealer network also cost the company in terms of lost sales and low customer satisfaction. The “overdealering” problem has been well chronicled over the past several years, even before the drastic downturn in sales. In the May 28, 2009, Detroit Free Press, journalist Sarah Webster recalled writing about the problem two years ago:

David Cole, chairman of the Center for Automotive Research, was quoted in the May 17 Crain’s Detroit Business as saying the current dealership network is too large:

AutoNation, Inc., one of Chrysler’s largest dealer groups by volume, will be closing seven Chrysler dealerships as a result of our consolidation plan. Nevertheless, Mike Jackson, Chairman and Chief Executive Officer of AutoNation, released this statement:

Even before the current economic crisis, Chrysler realised it needed a smaller dealer network. Chrysler’s efforts to consolidate its dealer network date back to 1992, when we had 4,923 dealers, and have continued since. Chrysler has consistently communicated the need for a consolidation of dealers to our network. Our most recent restructuring effort, Project Genesis, is aimed at bringing all three brands under one roof to go along with our plan to produce fewer products that overlap. Genesis was launched in 2008 with an extensive communication plan including a series of meetings across the United States with our dealers and presentations at the National Auto Dealers Association annual conference. In each market, we identified the optimal number of dealers and locations and we began working collaboratively to build a healthy and profitable network. Some have suggested that because an auto manufacturer like Chrysler sells cars to the dealerships, and these dealerships are independent businesses, they are not a cost to Chrysler. This is simply not true. For Chrysler, excess dealerships are costly in several ways. First is the problem of maintaining several dealership channels . Maintaining multiple distribution networks is inefficient and costly. Product complexity is increased because of the need to provide products in the same segment to different networks. For example, Chrysler currently supplies dealers with two similar minivans, Chrysler Town & Country and Dodge Grand Caravan; two similar full-size sport-utilities, Chrysler Aspen and Dodge Durango; two similar mi d-size SUVs, Dodge Nitro and Jeep Liberty; and two similar sedans, the Chrysler Sebring and Dodge Avenger. Based on six major vehicle launches between 2005 and 2008, Chrysler incurred approximately $1. 4 billion in incremental costs to develop these multiple pairs of “sister vehicles.” Second, as a result of over dealering, the marketing and advertising messages are split between multiple products, diminishing the reach and frequency of each campaign. For example, in 2008 we spent about $100 million on each of two marketing and advertising campaigns to launch our two redesigned mini vans instead of spending half as much to support a single launch to attain virtually the same sales volume.

Going forward, the new Chrysler Group LLC will reduce the number of overlapping products. We ar e moving from 27 nameplates covering 13 product segments in 2007 calendar year to a target of 20 nameplates covering 17 segments by 2013 calendar year. Fewer nameplates with better product and customer market coverage will help improve the overall return on our product capital investment. This means that dealers need to have all three of our brands under one roof in order to offer a full range of products and to optimise their profit potential.

- Product engineering and development for “sister vehicles”: $1. 4 billion over 4 years
- Lost sales due to dealer underperformance: $1.5 billion revenue annually
- Administrative cost to maintain the 789 discontinued dealers: $33 million annually
- Marketing and advertising $150 million annually

Finally, poor performing dealers cost us customers. It’s true that dealers are our customers, but it works both ways. If they don’t sell cars, we don’t either. Poor performing dealerships cannot afford t o keep facilities up-t o-date or hire and train the best people, resulting in poor customer experience and lower sales. In fact, in 2008 the 789 discontinued dealers achieved sales of only 73 percent of the minimum sales responsibility, representing 55,000 lost unit sales and $1.5 billion in lost revenue in 2008. A financially strong, competitive dealership should generate profits over $1 million a year. Profitable dealers can afford to invest in facilities, in people, in training, and in amenities that produce a high level of customer satisfaction.

As I said earlier, we tried our best to avoid Chapter 11. Now as Chrysler moves through the process, we need to do our best to form a new company that will evolve from the process as viable as possible. We recognise that the U.S. government and the American taxpayers have a stake in our success, and we are committed to building a new American automotive company that is financially sound and competitive both from a product and dealer perspective. This was our goal when we presented our viability plan in February and it is our goal in the Chapter 11 process.

To achieve the necessary realignment, we are using a thoughtful, rigorous and objective process designed to have the least negative impact while still creating a new dealer footprint scaled to be viable and profitable for the long term. The methodology was consistently applied to every dealer in the company’s U.S. operations. The decisions made to either continue or discontinue dealer contracts were based on a robust process that looked at all market types, Metro, Secondary and Rural. This analysis reviewed many factors that are unique for each market and dealer. The primary focus of this initiative, as it has been under Project Genesis, was to create a more viable network footprint that enhanced sales per dealer while bringing all three brands together within each retail outlet.

A team of people within our local business centres around the country as well as headquarters staff reviewed every market and dealer situation as a group many times. From this analysis the 2,392 dealers who would best carry the new company forward were identified. Although Chrysler submitted a plan to reduce total dealer count by 25 percent, those dealers represent only 14 percent of our sales volume. Half of these dealerships sell fewer than 100 vehicles a year, or less than nine vehicles per month on average (that compares with 125 vehicles sold per month on average at Toyota dealerships). About 44 percent of the discontinued dealers who reported revenues were profitable, earning $84 million last year, while the remaining 56 percent were unprofitable, losing a total of $136 million.

Chrysler 789 Discontinued Dealers at a Glance

- 25 % of total dealer network
- 14 % of sales volume
- 50 % sell 100 or fewer new vehicles per year
- 84 % sell more used than new vehicles
- 44 % are dealers dualled with a competing franchise

In many instances, we’re moving a franchise as part of our overall Project Genesis consolidation that brings all three of our brands under one roof. So, when a Dodge dealer’s contract is not assumed, that franchise in some cases will wind up in a nearby Chrysler/Jeep store. In that case the business should grow, become more profitable and have a beneficial impact on the community. Of our remaining 2,392 dealers, 84 percent will carry all three of our brands compared to 62 percent prior to implementation of this plan. The new Chrysler Group LLC dealer network will be in better retail locations with more modern facilities that are convenient and better positioned to serve customers. With the opportunity for increased sales per outlet, dealers should experience an enhanced franchise value resulting in more willingness to invest in facilities, people and their local communities.

The time frame for discontinuing dealers was driven by the Chapter 11 process and the need for speed in order to preserve maximum value for Chrysler. Prior to May 1, Chrysler had planned to avoid bankruptcy. Only after filing did we begin the necessary process of actually identifying which dealers could go forward with the new company. Timing was mandated by the Chapter 11 proceeding, including the requirement to complete our strategic alliance with Fiat by June 15. It was important to Chrysler and Fiat that a new and stronger dealer network would be in place by the closing date. On May 14, we notified the dealers of our decisions, and later filed the list of discontinued dealers with the court.

In hi s approval of t he sale motion, Judge Gonzalez confirmed, “while in Chapter 11, Chrysler is a wasting asset, ” – meaning that while we’re not building cars, our assets are deteriorating and customers are losing confidence. It is in the best interest of Chrysler and discontinued dealers to move quickly through this process. The number of days’ notice provided to discontinued dealers was similar to the 30 days provided under the Chrysler voluntary termination process, and it provided for a quick process in everyone’s best interest. Financial commitments from both the U.S. and Canadian governments require our alliance with Fiat be completed by June 15. This deadline determined a number of other deadlines, including the June 9 termination date for rejected dealers. That termination date is needed to ensure that our new dealership structure will be firmly in place at or about the time the new company is formed with Fiat – something understandably important to Fiat. The success of our new enterprise depends in large part on this new dealer body, and we must focus our limited resources on this. Similarly, we do not want customers to have any confusion about who is and who is not a dealer for the new company. The termination date for discontinued dealers was chosen, therefore, to meet the demands of our credit ors and partners, to bring our new dealer net work online as quickly as possible, and to strongly signal customers that the new dealer body will meet their needs.

There’s no question that Chapter 11 has been a painful process. While a number of elected officials, commentators, and other observers of the industry have advocated bankruptcy for the company, it was not Chrysler’s first choice. However, at this point, we are committed to do our best to create a new company that will succeed in the long term. We recognise that you and your constituents have a stake in our success, and that’s why we are committed to take the tough but necessary actions to build a new Chrysler that is fully able to compete and win. To do that we must provide the American public fuel-efficient vehicles with strong consumer appeal and a strong, high-quality and viable dealer network: One without the other will fail.

Does my heart go out to the dealers who will not be part of the new company? Absolutely. But we’ve had to make many hard choices to create a viable business and preserve jobs for tens of thousands of people. Many of our stakeholders have made unprecedented sacrifices. In that perspective, the sacrifices of the dealer network are in-line and appropriate considering that 27,000 Chrysler jobs were eliminated, the UAW accepted wage and benefit cuts that place them on a par with workers at transplant operations; many suppliers have experienced pricing reductions in addition to significant job losses resulting from reduced volumes, and many are retirees losing a significant portion of their pensions. Given the auto industry depression, Chrysler had no choice but to seek Chapter 11 protection. Facing that reality, we used a thoughtful, fair process, and we are doing everything possible to soften the impact to everyone affected.

Realignment of our dealer network will help create a vibrant new company, with a stronger and leaner organisation and a key partner in Fiat. Moving forward with 75 percent of our dealer network is far better than the alternative of liquidation, which Chrysler will face if the sale of assets is not finalised and the alliance with Fiat completed. Under liquidation, tens of thousands would be out of work, and all 3,181 of our U. S. dealerships would lose their agreements to sell and service Chrysler vehicles, which would have a far more devastating effect on scores of communities and on our national economy.