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General Motors moves to shed 1,100 dealers

GM takes action in a restructuring plan that would shrink its distribution network from 6,000 to 3,600 by the end of 2010. The company is trying to avoid bankruptcy.

May 16, 2009|Ken Bensinger, Andrea Chang and Tiffany Hsu

The painful reshaping of the American auto industry hit home this week, delivered overnight by FedEx and UPS.

Over the last two days, General Motors Corp. and Chrysler moved to cull nearly 2,000 of their dealers, with at least 1,000 more to come. And Chrysler indicated that it was likely to break its contracts with hundreds of parts suppliers, setting the stage for yet another blow to American manufacturing.

The sweeping cuts were a reminder that the decades-long decline of the U.S. automakers truly does affect the nation as a whole. Dealer groups estimate that the moves could cost 100,000 jobs and billions in state and local tax revenue. That's not even counting the $23 billion in federal loans to GM and Chrysler that taxpayers may never see repaid.

"This is the price of restructuring. It hits home everywhere," said Thomas Klier, senior economist at the Federal Reserve Bank of Chicago. "Every town has a car dealership. That's what was left out of this when the debate about the auto industry started."

On Friday, GM informed 1,100 of its 6,000 dealers by overnight letters that it would not renew their franchises come October of next year, giving them 18 months to wind down their businesses. The company has said that as many as 500 more dealers would get the ax next month.

A day earlier, Chrysler asked a bankruptcy judge to cancel the franchises of 789 of its 3,200 dealers, a process that leaves them without legal recourse and could stick them with millions of dollars in unsold inventory when they close in just four weeks. Chrysler, too, indicated that more cuts could come soon.

Unlike Chrysler, GM didn't publish a list of the dealers it was getting rid of, so a complete regional tally isn't known. Although dozens of California dealers were expected to be named, only a few spoke out Friday.

Bill Hatfield, owner of Hatfield Buick GMC in Redlands, said he felt a sense of dread as he watched a FedEx truck pull up to his showroom.

"It's a little bit like a death -- you know one's coming, or you're worried one's coming, but when it comes it's still a hell of a shock," he said.

Inside was the dreaded letter, telling him the automaker saw no future for his 96-year-old dealership. It survived the Great Depression and two World Wars, but not the restructuring of the U.S. auto industry.

"Many people bought their cars here because they knew I would take care of them -- now it's like I'm abandoning them," said Hatfield, who is considering opening a used-car lot if he can't save his store.

Although the cuts came to small towns and big cities alike, Paul Taylor, chief economist of the National Automobile Dealers Assn. said the hardest-hit areas appear to be suburban communities and mid-size markets. Those are the kinds of places, he said, that rely heavily on the spending, employment and tax revenue a dealer provides.

He estimates that the average dealer employs close to 50 people and pumps $16.5 million a year into the local economy, including payroll, taxes, payments to vendors, advertising and charitable giving. All told, tens of billions of dollars of regional spending could be lost.

"It's a horrendous story," Taylor said, "one we argue is unnecessary."

His group and targeted dealers say that getting rid of dealers won't solve the serious problems confronting GM and Chrysler, which have teetered on the brink of failure since last summer, with Chrysler filing for bankruptcy two weeks ago. They contend instead that cutting franchises may simply cost them even more sales.

The automakers say they have far too many dealerships to continue in a market where sales are down more than 40% from levels just two years ago. They also claim that having too many dealers makes their showrooms unprofitable and uncompetitive.

GM said that although the targeted franchises represented 18% of its dealer body, they accounted for only 7% of its sales. Chrysler said the dealers it was cutting produced only 14% of its sales despite representing a quarter of its sales network.

As a result, GM plans to shed 42% of its distribution network by the end of 2010, leaving it with 3,600 dealers. Chrysler's cuts give it about 2,400.

"There's not enough industry," said Steven Landry, Chrysler's head of North American sales and marketing. "It's a situation that allows us to fix a lot of things."

Allan Rose, co-owner of Rose Buick Pontiac GMC in Gloversville, N.Y., didn't suspect that he was part of the problem. Although his northern New York dealership is small, it's the only one of its kind for more than 30 miles in every direction, clear to the Canadian border. But he too got a FedEx letter.

"Even though I felt we have done a very good job for General Motors, there's never a knowledge why they do things," Rose said. "It just didn't seem logical . . . that they would elect to not re-contract with us."

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