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More distress was handed down to car dealers across the country May 15 as General Motors (GM), facing a White House-imposed deadline to restructure or file for bankruptcy by June 1, notified 1,124 of its 6,200 dealers that the automaker intends to end their franchise agreements by late next year. The word—delivered in FedEx letters to affected dealers—went out a day after Chrysler, operating in Chapter 11 bankruptcy, tagged nearly 800 of its dealerships for termination.
Dealers handling the Big Three are feeling the brunt of Detroit's woes—first with the cratering of new car sales in the last 12 months, and now by losing their businesses altogether. Hundreds of dealers predominantly handling U.S. brands have gone out of business on their own in the last six months as sales have slowed to beyond the point where they could pay their bills.
The letters bearing the bad news began arriving Friday morning at GM franchises around the country. The letter states that dealers were judged on sales, customer service scores, location, condition of facilities, and other criteria. "Based on our review and current foreseeable market conditions and your dealership's historical performance, we do not see that GM have a productive business relationship with (your dealership) over the long term," according to the letter, a copy of which was obtained by the Associated Press.
The letter left open the possibility, however, that the decision could be reversed. "Please understand that our planning in this regard is not finalized, and we are prepared to give you until the end of the month to submit any information you would like us to see," the letter said.
While an extensive dealer network was once thought to be a competitive advantage, in a shrinking market it is becoming a liability, GM officials and analysts said, as dealers compete with each other to snag sales. By cutting dealers, the companies can also reduce the costs incurred in supplying so many more dealers than they need. In addition, it should make the remaining dealers more profitable and willing to invest in their stores and customer handling. "Too many dealers, in actuality, are a problem," Mark LaNeve, GM's vice-president for North American sales and marketing, said in a conference call with reporters as the letters went out.
Dealers are angry, peppering their legislators with pleas to intervene, as well as hiring lawyers to appeal the decisions by Chrysler and GM. The National Automobile Dealers Assn. said Friday that GM's plans to cut the dealers will affect more than 63,000 employees and thousands of their customers. "We view GM's action with a profound sense of sadness and disappointment," NADA said in a statement posted on its Web site. "GM's decision comes through no fault of the dealers, who are, in many cases, family-run businesses that have been loyal partners with GM—through good times and bad—for multiple generations."
As long as GM stays out of bankruptcy, GM dealers have a good bit of legal recourse. States have varying franchise laws that date back to the 1930s. Back then, dealers who were investing in the growing auto industry sought protection to keep the dozens of early car companies in the U.S. from manhandling them. If a dealer, for example, was having an argument with a manufacturer, the independent dealer wanted protection from the company selling a distributorship to another, more friendly dealer across the street from his or her store.
Generally, to cut a dealer, a company has to demonstrate cause. For instance, it may have to prove the dealer is not meeting standards and practices in the agreement, such as failure to maintain an up-to-date store or inadequate service facilities. Indeed, the state laws very much favor dealers rather than the automakers. And the panels that review the disputes at the state level usually include other dealers, consumers, and state bureaucrats.
The result: When GM set out to close its Oldsmobile channel in 2000, the final cost of buying out its dealers was in excess of $2 billion. GM executives have often said they would not follow that same costly process again.
On the other hand, with Chrysler operating under Chapter 11, there is a legal framework to challenge the dealership cuts. "About the only avenue in the Chrysler case is to show that the company's analysis is wrong about how much cutting dealers will save and the benefits to the operation," said Scott Silverman, partner in Boston at law firm McCarter & English, which is representing dozens of GM and Chrysler dealers.
GM has until June 1 to demonstrate to the White House auto industry task force that it has lined up enough concessions from bondholders and the United Auto Workers union to prove "viability," and justify continued government loans to keep it afloat. If not, GM is prepared to enter Chapter 11, and the federal government intends to provide it with debtor-in-possession financing that will allow GM to operate in bankruptcy and reemerge a smaller, more streamlined company.
A Chapter 11 filing, though, could enable GM to more quickly trim its dealer network from the 6,200 it has today to the 3,600 it believes it needs to compete against Toyota (TM) and Honda (HMC). Toyota has just 1,200 dealers. Honda has 1,029 dealers.
GM reckons it can use a network larger than Toyota's and Honda's to its advantage, as well as hold its position in rural markets where imports are still scarce. GM, which has announced its plans to shut the Pontiac division, cut or sell Saab and Saturn, and sell Hummer, will keep the Chevrolet, Cadillac, GMC, and Buick brands.
The third U.S. automaker, Ford (F), agrees. "Rural coverage is an advantage we and our domestic rivals have in the U.S., and we aren't going to give that up," said James Farley, Ford sales and marketing chief. Farley, who came to Ford in 2007 after a long career at Toyota, says imports will move into those markets if GM, Chrysler, and Ford abandon them. Ford, which is in better shape financially than GM and Chrysler, has a plan to reduce its dealer network too, though it hasn't made the sweeping announcements as GM and Chrysler have.
The dealer networks across the country are legacies of a different time. Many of the stores Chrysler and GM are cutting haven't invested in their facilities in decades. Others are in markets where too many dealers are fighting for too few sales.
In the 1980s, GM, Chrysler, and Ford controlled more than 75% of U.S. sales, but that dropped to 48% last year. GM alone held nearly 51% of the market in 1962, but only 22% last year.
The Associated Press contributed to this report.