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.
Although Chrysler’s Press denied that the Obama administration had any hand in trimming dealers, GM officials, including Chief Executive Fritz Henderson, have acknowledged pressure to make “faster and deeper” cuts to the company’s distribution network.
For its part, the Treasury Department said the administration’s auto task force did not directly decide how many dealers the company should have or which ones would be closed.
“We understand that this rationalization will be difficult on the dealers that will no longer be selling Chrysler cars and on the communities in which they operate,” a department statement said. “However, the sacrifices by the dealer community -- alongside those of auto workers, suppliers, creditors and other Chrysler stakeholders -- are necessary for this company and the industry to succeed.”
Richard Carpenter, vice president and general manager of a Dodge, Chrysler and Jeep dealership in Oroville, Calif., said the decision to cut his store could only hamper Chrysler’s survival.
When he and his mother -- who as the franchise’s owner is one of the few female Chrysler dealers in the nation -- convert the dealership to a used-car lot next month, the town of 13,000 will be left with just one new-car dealer: Hobbie Toyota.
“They’re just giving away their business to Toyota,” Carpenter said.
He noted that even with selling about three new cars and trucks a month, the dealership is profitable and has supported the local community for the 16 years it has been open.
Eyeing sales volume
According to Chrysler, the dealers being cut represent a quarter of its total distribution network but just 14% of its sales volume. Half of those stores moved fewer than 100 vehicles a year, and 83% of them sold more used than new vehicles.
Under the rules of bankruptcy, “there is no appeals process,” said Steve Landry, Chrysler’s head of North American sales and marketing. Moreover, he said, Chrysler is under no obligation to repurchase inventory, parts and signage from dealers being cut.
However, he said the automaker would ask surviving dealers to buy the roughly 44,000 vehicles on the lots of dealers whose contracts are being terminated, and hoped that the company’s two-month production freeze would help that process.
But with sales at a standstill, some owners of surviving dealerships worry that they will be forced to take the inventory, said Halbert Rasmussen, a Los Angeles lawyer who represents auto dealers. He said the wording of the filing used to reject contracts left the door open for Chrysler, or Fiat, to add new names to the list.
And if they don’t take the added inventory voluntarily, Rasmussen wondered, would they “end up rejected as well?”
As Chrysler dealers adjusted to the new reality Thursday, thousands of Chevrolet, Buick, Pontiac, GMC and Cadillac dealers sat in agonized suspense, watching the mailbox for their own termination letters from GM.
Some may never rest easy.
Jerry Dillard, a Dodge, Chrysler and Jeep dealer in Lexington, Md., dodged the ax Thursday but said he was still worried. Dillard, the first vice president of the Chrysler Minority Dealers Assn., has been a dealer for nine years and moved far from home to obtain the dealerships, but still feels as if he has to hold his breath.
“I’m sure it’s not the final situation,” Dillard said.
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Dealers closing in California
Chrysler on Thursday sent letters to 789 of its 3,200 dealers, revoking their franchises. In California, 32 dealerships are affected:
Bay Bridge Chrysler Jeep Dodge
Boardwalk Chrysler Plymouth Jeep
Butts Jeep Eagle
Courtesy Motors Auto Center
North County Jeep
Liberty Motors Dodge Chrysler
Liberty Chrysler Dodge Jeep
Harper Jeep Country
San Luis Obispo
John Hine Dodge
Jeep of Ventura
Richardson Dodge Chrysler Jeep
Livermore Chrysler Jeep
Star Chrysler Jeep
Mother Lode Motors
Murphy and Shelby Dodge
Folsom Lake Chrysler Jeep
Dodge City Chrysler Jeep
Burlingame Chrysler Jeep Dodge
Ted Miles Jeep
Union Chrysler Jeep Dodge
Urban Chrysler Jeep Dodge
Big Valley Chrysler Jeep
Direct Auto Plaza
Weaver Auto and Truck Center
Source: U.S. Bankruptcy Court for the Southern District of New York