GM To Axe 1700 Dealers, STAT. Can They Do That?

by Robert Farago

Published: April 16th, 2009

gm to axe 1700 dealers stat can they do that

As part of GM CEO Fritz Henderson’s “ Deeper, Faster, Oh, Baby” plan to implement GM’s previous plan—only more quickly and, uh, dramatically—the General wants to slice 1700 franchised dealers from their roster. Automotive News [AN, sub] reports that a combination of a bad economy and the American automaker’s piss poor management [reading between the lines, paraphrasing, stating the obvious] has shuttered 200 GM dealers so far this year. Only 1500 more to go; you know, in Fritz’s ideal world. Which raises the question: how are they going to do that? “GM officials have told dealers that they would identify underperforming locations and could move to terminate franchise agreements by June 1, a dealer who had received such a notice said on Wednesday.” As AN correctly points out, you can’t just pull the plug on a franchised car dealer without providing them with financial compensation, or stand ready to fight hundreds of lawsuits in all 50 states.

GM is counting on the spin-off or closure of its Saturn and Hummer brands — combined with dealership closures because of declining business conditions and tight credit — to deliver about half of its targeted cuts, according to the dealer.

For the remainder, GM is preparing to terminate franchise agreements without the kind of payouts that it made when it shut down its Oldsmobile division and closed some 2,800 dealerships. That process cost GM more than $1 billion.

I reckon either 1) GM’s rushing through these dealer terminations so the aggrieved store owners’ claims will go to the back of the queue when the automaker files for bankruptcy on June 1. (In other words, disappear.) Or 2) The Presidential Task Force on autos is preparing to create some legal wrinkle that allows GM to walk away from all its dealer obligations. Just. Like. That.

At the same time, federally-funded financier (lender cum bank) GMAC is still cutting a swath through dealers, calling in loans, hoovering-up unsold inventory and… what? This is going to get a lot more complicated before it gets even more complicated. Did I mention the unions? The money GM drew down from Canada? Time for another bailout roundup.

Robert Farago

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Yankinwaoz on Apr 17, 2009

Thank you Pch101. From your answers, it seems to me like the GM is effectively having to pay people to be their dealers. Sort of like being so unpopular that you have to pay someone to be your friend. To me, the answer is pretty clear. Knock that s**t off. GMAC should not be allowed to subsidize credit by not being answerable to GM. This means that the relationship between GM and GMAC needs to be severed. This is similar to the problems at the Wallstreet firms that results in things like Enron. In Wallstreet, one part of the firm pushed stock, and the other part floated the same stock, a clear conflict of interest. GMAC should compete with other sources of capital for a dealerships floorplan credit needs. A dealer should be able to have a choice. And the dealers that hate new GM products that they have to be paid to warehouse inventory, then they can close their new car divisions as they naturally should.

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Pch101 on Apr 17, 2009
From your answers, it seems to me like the GM is effectively having to pay people to be their dealers. Sort of. In GM's case, that happens to be true. To me, the answer is pretty clear. Knock that s**t off That isn't it. This is how every major automaker manages its business. The business model is not unique to GM, and it works fine for most of them. GM has been particularly good at abusing what is otherwise a perfectly legitimate way of managing the dealership channel. The problem isn't with the model, it's with the company misusing it. This is similar to the problems at the Wallstreet firms that results in things like Enron. Not really. The whole thing is quite above board. Contrary to what someone else said above, this is not a Ponzi scheme by any stretch of the imagination. (We need a moratorium on "Ponzi", too; the term has been abused quite a bit as of late.) This system exists because auto inventory is expensive. If a dealership had to lay out the invoice price for every car on the lot, the resulting return on equity for the dealership's owners would be horrible, and there would be no reason for virtually anyone to operate a dealership. It also exists because of the use of credit at the wholesale level. In most industries, the producer would sell the inventory to the retailer on credit, and the retailer would endeavor to sell as much of the inventory as possible before the payments are due, in order to reduce their need to borrow money. But in the car business, the sale is recognized when the dealer takes delivery, so the dealer needs to borrow money just to get the inventory. That difference creates the need for floorplan. Borrowing the full invoice cost allows this business to be profitable. As a customer, you wouldn't be able to buy cars at such low spreads above invoice if this system did not exist. Also, the average dealership does not have millions of dollars lying around to buy inventory. They need to borrow a lot of money, otherwise the lots would be quite empty. GMAC should compete with other sources of capital for a dealerships floorplan credit needs. Competition provides no benefit here. A private party lender would charge higher rates, which means lower profits to the dealer. So that isn't the answer, either. The solution is fairly straightforward: Produce vehicles that the dealers can sell without needing too many incentives to move them. If a dealer can sell inventory quickly, the holdback becomes a profit source and the dealership becomes more efficient because the faster it can turn inventory, the more deals it can churn to cover its other overhead. Faster sales cycles reduce the need for incentives, which increases cash flow and net revenues to the manufacturer. As usual, it goes back to product and service, along with a bit of branding to help things along.

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