Congress complicates the car business

NEW YORK (Fortune) -- Never underestimate the ability of Congress to allow short-term thinking to undermine long-term results -- or to talk out of both sides of its mouth.

A year ago when the Detroit Three came asking for federal help, lawmakers were grabbing every available microphone to complain about how badly the automakers were running their businesses.

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Characteristic was the comment of Rep. John Boehner, the House minority leader, who complained that taxpayers were being asked "to further subsidize a business model that is failing to meet the needs of American workers and consumers."

But when General Motors and Chrysler tried to tighten up their businesses by streamlining their distribution, Congress decided that car dealers, much like farmers, needed to be protected by the federal government.

Last week, House and Senate leaders agreed to a proposal to give the right of arbitration to terminated GM and Chrysler dealers, which are said to number more than 2,000. In other words, Congress, after complaining that the two companies don't know how to make a profit, is imposing a new requirement that will make it more difficult for them to make a profit.

One big dealer with a reputation for plain speaking called the move "absolutely crazy." He explained: "Congress wanted the dealers to restructure and get competitive and then wants to change the rules so it can make them less competitive again."

It would seem that logic didn't play a big part in Congress' thinking. House Majority Leader Steny Hoyer mysteriously declared that the dealers and the automakers need a process "that gives the dealers a chance to make their case for remaining open, while respecting the companies' need to return to profitability."

That is the legislative equivalent of having your cake and eating it too.

Extra dealers mean extra cost and marginal dealers dilute customer satisfaction.

The only reason so many of them are still in business is franchise laws in each state that make it difficult to terminate dealers outside of bankruptcy.

As the automakers pointed out in Congressional hearings, their large dealer networks are artifacts of the 1950s and cost the companies billions of dollars in support costs, incentive payments, and other expenses.

Lawmakers are more concerned with protecting local constituents. "The dealers in these small towns are kind of the heart of the town," said Sen. Tom Udall, D-N.M., at hearings earlier this year. "They sponsor the Little League. I am worried about it."

To be sure, the auto companies, notably Chrysler, handled their dealer rationalization poorly. There were stories about dealers who placed big orders for new cars at Chrysler's request, only to find themselves terminated a week or two later, leaving them with lots filled with unsold cars.

But many dealers just weren't financially viable, especially with car sales running at a rate of 10 million a year, instead of 16 million. According to one report, some 80 Chrysler dealers who are still in business are unable to get financing from any bank, including GMAC -- and that's not a good sign. "Mother Nature is sending a message that in this environment, fewer, bigger, stronger dealers are required," says one of the stronger ones.

In a nod to the requirements of capitalism, the arbitration process that has been agreed upon requires that automakers' overall business plan be considered, as well as how the dealership measured up against performance goals, and the corporate criteria used to terminate them.

Weighing those criteria will require a Solomon-like ability that will make traditional dispute arbitration seem simple by comparison.

But then when government gets involved in business, the process is usually messy -- and the outcome less than satisfactory.