Chrysler LLC notified all U.S. dealers on Thursday about its plans to eliminate 25 percent of its retail showrooms and is seeking permission from a U.S. bankruptcy court to terminate franchise agreements.
The automaker sought approval in a bankruptcy court filing to terminate franchise agreements with 789 of 3,181 dealerships as of June 9.
Chrysler, which filed for bankruptcy on April 30, and larger rival General Motors Corp have faced pressure to cut struggling dealerships to bring their large sales networks in line with those run by more successful automakers led by Toyota Motor Corp that has only 1,200 dealers.
Chrysler said 5O percent of its U.S. dealers account for 90 percent of overall sales, according to court documents.
The U.S. automaker said it would not repurchase any new vehicles, tools or parts inventory from terminated dealers but will assist in finding buyers for stock, according to a memo to dealers that was obtained by Reuters.
Dealers are independent businesses and are protected by state franchise laws that have prevented Chrysler and other U.S. automakers from aggressively cutting dealers before now.
The bankruptcy process that we are in allows us a once-in-a-lifetime chance to achieve a right-sized dealer body, Chrysler Vice Chairman Jim Press said on a conference call. We do not have enough production or sales to keep all the dealers alive or prosperous.
The U.S. Treasury Department said on Thursday that Chrysler's decision to shut down dealers was a necessary step to help the troubled carmaker rebound.
The Obama administration's auto task force played no role in deciding which or how many dealers would close in the consolidation plan, the Treasury said in a statement.
CONSUMER BARGAINS IN THE OFFING
Rival GM, facing a U.S. government-imposed deadline of June 1 to restructure or file for bankruptcy, has said it wants to cut its dealer network to 3,605 from more than 6,246 at the end of 2008 but has not elaborated.
The automaker is expected to send termination notices to up to 2,000 dealers as soon as this week, sources have told Reuters.
The Chrysler cuts come as dealer representatives stepped up lobbying in Washington to try to slow down closures they estimate would cost 200,000 dealership jobs.
The National Automobile Dealers Association, a group representing the country's 20,000 new car dealers, estimated that each Chrysler dealership employs about 48 people on average. That would mean that the cuts by Chrysler could lead to a potential loss of almost 38,000 jobs.
The closure of the dealerships is also likely to flood the market with new and used vehicles from closed dealerships.
Mike Jackson, chief executive of AutoNation Inc, the largest public dealership group, said he supported Chrysler's dealer consolidation plan as this was long overdue, but said it could put pressure on vehicle prices in the short term.
This is an unprecedented event in the midst of an unprecedented economic situation, Jackson said. I think it's a relatively short-term painful event.
It's going to be an exceptional time for consumers, he added, referring to expected stepped-up incentives to clear inventory.
Chrysler said the terminated dealers had 44,000 vehicles in the inventory and those dealers represent about 14 percent of Chrysler's annual sales.
(Additional reporting by Soyoung Kim and Kevin Krolicki, editing by Gerald E. McCormick and Matthew Lewis)