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Chrysler spreads the pain with move to drop dealers

Rural and urban areas alike will feel the loss of jobs and revenue.

May 15, 2009|Ken Bensinger and Jim Puzzanghera

LOS ANGELES AND WASHINGTON — Detroit's woes are hitting Main Street with a vengeance.

Chrysler moved Thursday to eliminate 789 of its dealers, using its bankruptcy status to break their franchise contracts. And as many as 1,200 General Motors Corp. dealers are expected to receive termination notices as soon as today, with an additional 1,400 coming as GM works to meet a June 1 restructuring deadline.

By the time the dust settles, nearly 20% of the nation's roughly 19,000 auto dealerships will be forced out of business, casualties of attempts by GM and Chrysler to get past the worst industry slump in decades.

And although much of the fallout from the industry's decline to date has affected auto workers in Rust Belt states, the forced extinction of so many dealers brings the huge economic effect of the crisis home to small towns and urban neighborhoods alike -- areas where dealers have reputations as civic leaders.

"This is certainly a hit to the economy," said Gary Schlossberg, senior economist at Wells Capital Management in San Francisco. But "I think the bigger impact would be on the local economies."

The National Automobile Dealers Assn. estimates that nearly 38,000 jobs could be lost in the Chrysler closures, and as many as 150,000 by the time GM's targeted dealerships are closed.

Of the 142 Chrysler dealers in California, 32 are scheduled to close, and many of them are in small and mid-size towns. Hundreds of such towns around the country rely on sales taxes for as much as 30% of their revenue and now face more budget woes without their dealerships.

Meantime, customers in rural areas will be forced to drive past closed dealerships and travel great distances to get warranty service on their vehicles.

Early Thursday, Dave Merrill received an overnight letter from Chrysler informing him that the automaker would be canceling the franchise contract for his Jeep and Dodge store in remote El Centro, Calif.

Like all affected dealerships, his will close June 9, leaving the closest Chrysler location 60 miles away -- in Arizona. Since Merrill also has Hyundai and Honda franchises, he won't be forced out of business, but said he would have to lay off 20 employees, pushing them into an Imperial County job market that has a staggering 25% unemployment rate.

"I think it's criminal," said Merrill, who has owned the location for a decade and whose sales have fallen about 45% this year. "It gets to be 115 degrees here in the summer. You break down. Where are you going to go to get serviced?"

With nearly 10,000 dealers between them, GM and Chrysler have repeatedly said they have too many dealers, a legacy from decades of operations and former dominance in the U.S. market. Foreign brands now control more than half of U.S. auto sales by volume.

To show the drag of dealerships, Chrysler said in a bankruptcy filing that Toyota, with about 1,400 U.S. dealers, sold an average of 1,292 cars and trucks per showroom last year while Chrysler, with about 3,280 dealers, sold 303 vehicles per showroom.

This so-called over-dealered status hurts profit, automakers said, which in turn cuts into customer service and prevents upgrades to aging showrooms. That could hurt the brand image, making it less competitive. Ultimately, they argue, that leads to fewer sales and diminished profit.

Chrysler, which has borrowed $7.8 billion from the federal government, filed for bankruptcy protection two weeks ago and is being merged with Italian automaker Fiat. Its cuts will leave it with 2,392 dealers nationwide.

"We're going to have a much more powerful, profitable Chrysler distribution system going forward," Chrysler Vice Chairman Jim Press said in announcing the contract rejections. "Our dealer body should become more valuable and should flourish," he said.

GM, which is trying to avoid bankruptcy and has borrowed $15.4 billion from taxpayers, said in its latest restructuring plan that it would purge 42% of its U.S. dealers by late 2010, leaving it with 3,600.


Making their case

Franchised auto dealers, which are independent businesses, have vociferously opposed the cuts, contending that the industry's significant woes are not their fault. They say that cutting dealers could hurt GM and Chrysler because it could lower the visibility of their brands in many locations and reduce overall sales.

This week, hundreds of dealers were in Washington, meeting with members of Congress and the Obama administration's auto task force to protest the cuts.

"Dealerships don't cost the automakers one cent, and cutting them doesn't save them any money," said Peter Welch, president of the California New Car Dealers Assn., who was on Capitol Hill to support his members.

"This is going to have a cascading effect on dealership employees, communities and local governments," Welch said.

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