Dec. 29 (Bloomberg) -- General Motors Corp. and Chrysler LLC still haven’t figured out how to close thousands of dealerships, a promise in the plan they presented to Congress to win loans, starting with $4 billion that each is due to receive today.
The companies have been hoping that dealers would close or sell stores on their own, as industrywide sales have fallen to the lowest level in 17 years. The attrition hasn’t been happening fast enough, and the automakers have few tools at their disposal.
Restructuring the network of independent retailers is more difficult than negotiating with bondholders or the United Auto Workers union, which can bargain as groups. Dealers, employing more than 1.1 million salespeople, accountants and mechanics, are protected by state franchise laws. GM spent more than $1 billion to dissolve its Oldsmobile unit, partly on lawsuits over forced closures.
“In a number of states there’s these very elaborate procedures that you have to go through to shut dealerships,” University of Chicago law professor Douglas Baird said in an interview. “In some states you just can’t do it at all.”
GM has set a goal of closing 1,750 showrooms, or 27 percent, over four years. Chrysler hasn’t set a target for its plan to cull 3,300 dealerships. Chrysler’s and GM’s sales have plunged a combined 24 percent this year.
The companies set the goal of thinning dealerships to compete with Toyota Motor Corp., whose namesake dealerships sell almost four times as many vehicles monthly as Chevrolet showrooms and almost six times that of Dodge-brand retailers.
Necessary Steps
Those goals weren’t a condition for receiving the funds from the U.S. Treasury and may not be required as part of the loan package, though Chrysler and GM have said they are essential to their long-term survival.
Negotiations with dealerships are under way, especially in urban areas, where stores opened decades ago have lost customers to the suburbs. Dealers are being urged to merge, according to the automakers. Cash payments are among the typical inducements, but it was a lack of cash that spurred GM and Chrysler to seek federal loans in the first place.
The ultimate tool for forcing dealerships to close is the one the automakers say they won’t use: filing for bankruptcy, which would let them skirt state protections for franchisees. Without that, Detroit-based GM and Chrysler have to bargain with dealers, said Baird, a bankruptcy-law specialist.
Forced Hand
“General Motors doesn’t have the option to walk away from a dealer any more than it does to walk away from a collective bargaining agreement,” Baird said.
The $4 billion in U.S. loans GM and Chrysler are each set to receive today will allow them to avert an imminent collapse from a lack of operating funds and buy more time to work on the dealership consolidation and other parts of their survival plans, such as shedding entire brands.
GM is in line for another $5.4 billion next month and may get $4 billion more by Feb. 17 should Congress expand the Troubled Asset Relief Program for U.S. banks.
GM fell 8 cents, or 2.2 percent, to $3.58 at 12:03 p.m. in New York Stock Exchange composite trading after rising as much as 6.6 percent earlier. A year ago today, the stock traded for $25.30, a drop that made GM worst among the 30 companies on the Dow Jones Industrial Average.
Larger, healthier dealerships will be able to “more effectively compete with the newer franchises such as Toyota and Honda,” GM’s sales chief, Mark LaNeve, said in an interview.
Brands Examined
Through the sale of its Hummer sport-utility vehicle and Saab franchises, GM may get 400 dealerships closer to its goal, LaNeve said. The Saturn brand also is under review, said Steve Janisse, a spokesman.
GM hasn’t briefed dealers on how it plans to pare their numbers, said Tom Durant, whose Classic Chevrolet in Grapevine, Texas, is the largest in the U.S.
“If the market stays at this level very long and with the way GM has slowed up money coming back to dealers, it could happen on its own,” Durant said.
He was referring to moves by GMAC LLC, the automaker’s former credit unit and still its primary financing source, to limit loans to buyers with credit scores of 700 or higher. That excludes about 42 percent of U.S. consumers.
Chrysler Financial stopped offering leases earlier this year, another move that sapped sales. Chrysler parent Cerberus Capital Management LP also owns Chrysler Financial and leads the group that holds 51 percent of GMAC. GM has the rest.
One Way or the Other
“Unfortunately, you’re going to hit a period of natural attrition because of the weak economic conditions in the country and the lack of available credit,” GM’s LaNeve said.
Operating profits for U.S. dealers fell 38 percent in the first 10 months of the year to about $311,000, according to the National Automobile Dealers Association.
Failures among U.S. new-car dealerships may total 900 in 2009, according to Paul Taylor, NADA’s chief economist in McLean, Virginia.
“Most of those closures are going to be from the U.S. automakers,” Taylor said.
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