General Motors Corp said it would drop about 1,600 U.S. dealers as it struggles to slash billions of dollars in operating costs and debt ahead of an anticipated bankruptcy filing by the end of the month.
Taken together with a similar announcement by bankrupt Chrysler LLC a day earlier, over 2,300 U.S. auto retailers have been put on notice that they are being eliminated by the two embattled automakers.
The unprecedented closures under the direction of the Obama administration put an estimated 100,000 jobs at risk and showed the economic pain from the collapse of the two Detroit-based automakers spreading across the United States.
This is going to be a mess, said Atlanta-based dealer consultant Jim Ziegler. These dealerships are crucial to the local communities. Dealers are big advertisers. There will be a lot of ripple effects.
GM said it planned to drop about 1,100 of its smaller and less profitable dealerships by letting their franchise agreements expire when they come due in October 2010.
The automaker also expects to drop another 470 dealerships from cutting its Saab, Hummer and Saturn brands.
After other dealerships fold or merge in coming months, the plan is for GM to end up with about 3,600 showrooms by the end of next year for its Chevy, Cadillac, Buick and GMC brands.
That would represent a 40-percent reduction in GM's far-flung dealership network that has been protected until now by a patchwork of state franchise laws that made automakers reluctant to move quickly to drop dealers.
GM spent more than $1 billion to close its Oldsmobile division and shut down some 2,800 dealerships earlier this decade, an experience that made it reluctant to take on its widely recognized problem of having too many dealers competing for a shrinking share of U.S. auto sales.
GM is not offering dealers any compensation this time but offered to help them wind down their operations. The risk of a drawn-out legal battle is another reason analysts believe it will follow Chrysler into a bankruptcy filing.
They may want to take legal action. We will have to see, GM sales chief Mark LaNeve said of the dealers.
GM dealers targeted for closure were notified on Friday morning by letters sent overnight via Federal Express. Other GM dealers learned they had been spared when no letter arrived.
The National Automobile Dealers Association had lobbied Congress and the autos task force under the U.S. Treasury Department to stop or slow the closures.
We view GM's action with a profound sense of sadness and disappointment, the business group said in a statement.
Sen. Sherrod Brown, an Ohio Democrat, demanded that GM and Chrysler provide a detailed explanation of how the dealer closures would save them money or boost revenue.
Given the fact that this will further contract my state's economy and leave thousands of employees without jobs, I would like to understand the logic behind this decision, Brown said in an open letter to the CEOs of both automakers.
Analysts have argued Detroit's massive dealer networks have become a liability, particularly in big cities and suburbs where dealers selling the same models have been forced to compete against each other with advertising and incentives.
Toyota Motor Corp, which has a bigger market share than Ford Motor Co also has far fewer U.S. dealers: less than 1,500 showrooms versus 3,800 for Ford.
U.S. auto sales are at the lowest levels since the early 1980s with no prospect of a short-term rebound. On the annualized basis tracked by analysts, sales are below 10 million vehicles, down from over 16 million two years ago.
GM shares closed down six cents to $1.09 on Friday. The shares traded as high as $21.37 last May.
FROM MOTOWN TO MAIN STREET
Chrysler, which filed for bankruptcy on April 30, plans to terminate 789 of its 3,181 dealerships by early June. Dealers in Pennsylvania, Texas, Ohio, Illinois and in Michigan would be hit hardest.
AutoNation, the largest U.S. dealership chain, said it had six GM dealerships targeted for closure but that those stores had not contributed to its 2008 earnings.
Asbury Automotive Group, another major dealership group, said it had two GM dealerships on the list. Combined with a Chrysler dealership also being dropped, those dealerships had revenue of $105 million.
GM remains out of bankruptcy but has said that a filing is likely because of its need to cut $27 billion in bond debt.
Chrysler on Friday sought to ease some of the industry-wide jitters when Chief Executive Robert Nardelli said the company would begin paying its suppliers for invoices that had been sent prior to its filing for Chapter 11 protection.
Nardelli also said the company was moving ahead to establish ties with suppliers after the new Chrysler emerges from bankruptcy under the control of Italy's Fiat.
Fiat Chief Executive Sergio Marchionne, who is expected to steer the combined auto operations of the two companies, is also pursuing a deal for GM's European operations.
The plan is ready. We'll present it on May 20, he said on the sidelines of a presentation on Friday.
NEXT UP: THE UAW
While GM continues to shrink its operations, the company continues to talk with its largest union, the United Auto Workers, about a deal to slash employee costs.
GM has said it expects to halve its remaining cash outlays for retiree health costs to about $10 billion and supplement that with a 39 percent stake in the reorganized company.
Talks between the UAW and GM have intensified in recent days but remain stuck on the issue of whether the automaker should be allowed to cut 21,000 more U.S. factory jobs even as it plans to sell more imported vehicles in the U.S. market.
The union sees that as an unjustified use of U.S. government assistance and on Friday renewed a call on the Obama administration and members of Congress to force GM to change its plans and spare jobs.
If GM is going to receive government assistance to facilitate its restructuring ... we believe it should be required to maintain the maximum number of jobs in the United States, the union's lobbyist Alan Reuther said in a letter.