NEW YORK – A decision by troubled automaker General Motors to drop 20 percent of its dealers is due in part to an oversized network that created stiff internal competition and gave shoppers too much leverage to talk down sticker prices, hurting chances for future sales.
GM's announcement Friday is more bad economic news for dealers, communities and businesses still reeling from Chrysler's similar nationwide dealer cuts a day earlier. Both automakers are scrambling to reorganize and stay alive in a severe recession that has devastated sales of cars and trucks.
Several hundred of the roughly 1,100 GM dealers already knew they were headed for closure, but most of them learned for the first time Friday. The dealerships will be eliminated when their contracts end late next year.
"We're 98 years old. We're two years from a hundred, and I don't want to go out at 99 years," said Alan Bigelow, whose family runs a Cleveland-area Chevrolet dealer that learned it was on GM's hit list.
Including Chrysler's decision Thursday to eliminate a quarter of its own, about 1,900 dealerships learned in a matter of 48 hours that they would be forced either to sell fewer brands or close altogether.
The National Automobile Dealers Association, an industry group, says the GM and Chrysler cuts combined could wipe out 100,000 jobs.
Chrysler LLC is already in bankruptcy protection, and industry analysts say General Motors Corp. is making its cuts now in preparation for a bankruptcy filing June 1. The company says it would prefer to restructure out of court.
GM declined to reveal which dealers will be eliminated. Many dealers vowed to fight, first through a 30-day company appeal process, then possibly in court.
GM's dealers are protected by state franchise laws, and the company concedes it would be easier to cut them if it were operating under federal bankruptcy protection. GM says it's trying to restructure outside of bankruptcy because of the stigma of Chapter 11.
Chrysler dealers have fewer options because the company has already filed for bankruptcy protection, and federal bankruptcy judges generally trump state law. And Chrysler said on Thursday that its cuts were final.
GM outlined a plan to cut about 40 percent of its 6,000-dealer network by the end of 2010 in hopes of getting the company back on its feet. Besides the 1,110 dealership cuts, the company will shed about 500 dealerships that market the Saturn, Hummer and Saab brands, which GM plans to phase out or sell.
And when the surviving dealers' contracts are up in late 2010, GM will cut still more by not offering renewals to about 10 percent of the dealers who are left. Dealers could stay open selling used cars or other brands, but GM and Chrysler cuts will still leave cities across the U.S. with empty buildings, vacant lots and perhaps hundreds of thousands of dollars in lost tax revenues.
FedEx letters bearing the bad news began arriving Friday morning at GM franchises around the country. The letter states that dealers had been judged on sales, customer service scores, location, condition of facilities and other criteria.
While the targeted dealers represent about 20 percent of GM's total, they make only 7 percent of its sales, the company said.
The cuts will allow the surviving dealers to expand the size of their markets, so they have a better chance of staying healthy and attracting private investment, said Mark LaNeve, GM's North American vice president of sales and marketing.
"Over time, they just can't afford to invest in their business to the degree the competition has," LaNeve said.
Toyota, for example, generally has larger and newer showrooms and service departments than GM and Chrysler dealers — making those dealerships more attractive to potential buyers.
The Obama administration's auto task force, which is overseeing the GM and Chrysler restructuring because both have received billions of dollars from the government, was aware GM would cut dealers, LaNeve said. But he stressed the company made the decision on how many and where.
Chrysler is aiming to close its nearly 800 dealers by June 9, and those outlets may try deep discounts to clear out their remaining inventory. But in the long run, prices for cars and trucks will probably rise for customers as dealerships disappear.
"No longer will people be able to shop between three or four dealers within 15 minutes of each other for the best cutthroat price," said Aaron Bragman, an automotive industry analyst with the consulting firm IHS Global Insight.
As GM and Chrysler lost market share to Japanese and other overseas brands, they ended up with too many dealers. So did Ford Motor Co., which has managed to stay healthier than either of its Detroit siblings.
In the 1980s, GM, Chrysler and Ford accounted for more than 75 percent of U.S. sales, but that dropped to 48 percent last year. GM alone held nearly 51 percent of the market in 1962, but only 22 percent last year.
Bigelow was stunned to get his termination letter. He said he believed the dealership was meeting all of GM's criteria to stay in business. He said sales had dropped in the recession — but he didn't know of many dealers who were doing better.
Many of the dealership's 45 employees have been there for 30 years or more. He said they pledged to stay and fight the closing "until there's no more fight left."