GM to shed 1,100 dealers today

GM to shed 1,100 dealers today
The move is just the first step in a restructuring plan to eliminate 2,600 of its nearly 6,000 dealers by late 2010, as the company seeks to avoid bankruptcy.
By Ken Bensinger

9:05 AM PDT, May 15, 2009

General Motors Corp. has begun notifying 1,100 of its dealers that it will not renew their franchise contracts today, effectively pushing out nearly 20% of its distribution network.

The news, delivered in express mail letters and phone calls to Chevrolet, Buick, Pontiac, GMC and Cadillac dealers, comes a day after Chrysler used bankruptcy court to break the contracts with 789 of its nearly 3,200 dealers.

"It is imperative that a healthy, viable GM have a healthy, viable dealer body that cannot only survive but prosper during cyclical downturns," said Mark LaNeve, GM's head of sales, service and marketing. "It is obvious that almost all parts of GM, including the dealer body, must get smaller and more efficient."

This was likely the first of several rounds of cuts. In its latest restructuring plan, GM said it would cull 2,600 of its 5,969 dealers by late 2010 as it attempts to return to viability and avoid bankruptcy.

GM has borrowed $15.4 billion from the federal government and has until June 1 to show the Obama administration that it has improved its balance sheet and business model.

Today's cuts do not include dealers of Saturn, Saab and Hummer brands, all of which are up for sale. In an interview last week, GM Chief Executive Fritz Henderson has said that roughly 500 dealers are included in that group, and that he believes many more dealers may fold on their own because of the challenging sales environment.

Through the first four months of the year, GM's U.S. sales are down 45% compared with last year, and the industry as a whole is on a pace to sell fewer than 10.5 million vehicles all year.

In 2007, Americans purchased 16.1 million cars and light trucks, and GM and Chrysler have both argued that they have far too many dealers for a reshaped domestic marketplace.

Toyota Motor Corp. has only about 1,200 dealerships in the U.S., less than a third of the number of dealers as its chief rival, GM, for example. Yet with a far smaller network, Toyota has managed to sell three-quarters as many vehicles as GM has so far this year.

GM and Chrysler argue that too many dealers puts pressure on pricing and dealership profits, which leads to ailing dealers offering weak customer service and hurting the brand image. That can cost the automakers sales.

"We're going to have a much more powerful, profitable Chrysler distribution system going forward," said Jim Press, Chrysler vice chairman, on Thursday.

Dealers groups, including the National Automobile Dealers Assn., dispute the automakers' reasoning, pointing out that because dealers are the source of revenue for automakers, eliminating them could cost the automaker dearly.

Details of GM's plans for dealers are not yet known, but the automaker is expected to offer to repurchase their inventories, parts and signage, although it will not offer them cash settlements. When it closed the Oldsmobile brand earlier this decade, GM made over $1 billion in cash payouts to dealers for their franchises, an experience the troubled automaker hopes to avoid.

Attorneys for dealers have said that their clients would consider legal action against GM if they do not offer settlements, arguing that the decision not to renew their contracts is tantamount to wrongful termination of a contract.

Terminated Chrysler dealers have no such recourse, most lawyers say, because bankruptcy law allows such contracts to be broken.

Because of the legal risk, many suggest that GM will have little choice but file for bankruptcy to avoid lawsuits.