Car dealers fight call to hit the road
In the next seven days, General Motors Corp. and Chrysler will tell as many as 2,000 dealers they are no longer wanted. They won’t go without a fight.
GM, which posted a $6-billion quarterly loss Thursday, plans to notify 1,000 to 1,500 dealers early next week that it will not renew their franchises, according to company officials. That group -- which does not include dealers of brands slated for elimination or sale -- represents the largest share of the 2,600 dealers GM told the Obama administration it would eliminate by the end of 2010.
Separately, Chrysler, which filed for bankruptcy protection in New York last week, is expected to notify roughly 800 of its 3,200 dealers as soon as today that it will tear up their contracts, potentially reducing its nationwide dealership count by a quarter.
The two imperiled automakers, which have borrowed $20 billion from taxpayers, say cuts are needed to reduce costs and return to viability.
But it amounts to a blood bath for dealers, who employ hundreds of thousands of people nationwide and pump billions of dollars into their area economies. With dealers unsure whether their names will be called, a pervasive sense of dread has crept into showrooms.
“This is going to be the biggest week in the history of the U.S. auto industry as far as dealers are concerned,” said Scott Silverman, an attorney at law firm McCarter & English who specializes in dealer contract law.
In anticipation of the cuts, the National Automobile Dealers Assn. is taking out advertisements in major publications urging President Obama “to choose Main Street over Wall Street.” It will meet with the administration’s auto task force Thursday.
Meanwhile, the group has retained law firm Arnold & Porter to represent Chrysler dealers and Orrick, Herrington & Sutcliffe for its GM-affiliated members. Chrysler dealers have contributed $4,000 each to the legal fund, while GM dealers are putting in $2,000. Total collections now top $1 million for each fund, an individual familiar with the program said.
“You’d be an idiot not to,” said Tom Bell, owner of a Chevrolet dealership in Redlands, who ponied up to join the GM defense fund.
Dealers across the country are also attending seminars on how to prepare for termination and the implications of bankruptcy, while hundreds, if not thousands, are hiring lawyers to protect them individually.
GM has roughly 6,200 dealers nationwide. In the first-quarter results posted Thursday, GM lost $6 billion thanks to a 47% revenue decline. The automaker said it would reduce North American production by 190,000 in coming months as it gears down for a smaller distribution network.
Last week, the automaker submitted a revised restructuring plan calling for slashing its dealership network to 3,600 in 2010, a 42% reduction.
It will shed roughly 500 of those dealers, Chief Executive Fritz Henderson said, by selling or eliminating its Saturn, Saab, Hummer and Pontiac brands. Many more dealers will fold on their own accord, he said, victims of the worst sales and credit environments in at least three decades.
But, said Henderson, an additional 1,000 need to go because their “performance is well below the standards outlined in our franchise agreements,” while 500 are being targeted because their “annual sales are less than 50 vehicles per year.”
Next week, GM plans to notify up to 1,200 of those dealers that they will not be retained, spokeswoman Susan Garontakos said, and to provide details of the settlements it will offer them, including buying back unsold vehicles and parts.
Those dealers will be allowed to operate until their current contract expires in October 2010, she said, although they can elect to close sooner.
They will not, however, be offered a cash settlement for their franchises. Buying out franchises cost GM more than $1 billion when it wound down the Oldsmobile brand earlier this decade, and GM -- which burned through $10.2 billion in cash in the first quarter alone -- doesn’t have enough money to absorb such an expense.
Aaron Jacoby, a Los Angeles attorney who gave a presentation to New York area dealers on their legal options Thursday, said a no-cash offer didn’t cut it. “Dealers are going to fight it until the bitter end,” he said.
For Chrysler’s dealers, the picture is even bleaker. Under bankruptcy law, Chrysler has the discretion to cancel any contracts it sees fit, without having to pay dealers a cent or even repurchase vehicles.
A filing specifying which dealers the automaker will cut is expected by late next week, and letters notifying dealers of their fate are reportedly being mailed out as early as today.
Rick Deneau, a Chrysler spokesman, would not confirm the exact timing of the cuts. “We wish we were continuing to do business with these folks,” he said.
Martin Brill, a Los Angeles attorney who represented dealers in the bankruptcy of South Korean automaker Daewoo, said targeted Chrysler dealers could suffer disastrous financial repercussions. Each would probably be out tens or hundreds of thousands of dollars in receivables for warranty service and incentives, while finding themselves stuck with millions of dollars in inventory the company won’t buy back.
“Their only recourse would be to get in line with the countless other creditors,” said Brill, who said he would not be surprised to see GM file for bankruptcy as well to avoid huge legal costs associated with closing down its dealers.
Brill said dealers would “be lucky to get pennies on the dollar.”
For Ziad Alhassen, owner of Chevrolet and Chrysler, Jeep and Dodge stores in West Covina, the prospect of being dumped by his longtime dance partners seems hard to believe.
He acknowledges that neither dealership is profitable -- making him vulnerable -- but “you don’t just walk away from a relationship like this.”