GM Dealers Feel the Pain

The beleaguered auto company targets 1,124 dealerships for closing, following on the heels of a similar move by Chrysler

By David Kiley

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.

Reversing the Decision?

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."

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