Car Dealers Brace for Closings, or for a Fight, as Detroit Seeks Help
As Denny Fitzpatrick, a Chevrolet-Hummer dealer near Oakland, Calif., has watched the top Detroit auto executives plead for money from Congress, he has been rooting for them — but with no great conviction.
With a bailout moving through Capitol Hill, “we have a chance of being hung with a softer rope,” said Mr. Fitzpatrick, chairman of the California New Car Dealers Association.
His gallows humor is typical of dealers these days who believe they are on the chopping block, whatever happens to the Detroit automobile companies. All three carmakers have told Congress they need to cut their dealer networks as a fundamental element of their survival plans. Even as Congress works on a bailout for Detroit, many dealers are still likely to be nudged, or forced, out of business.
It is possible fights could erupt between some dealers and the auto companies. Virtually every state has stringent laws that make it difficult for manufacturers to alter dealer contracts, even when they abandon brands, as General Motors is talking about doing. These laws have been a big impediment to auto companies in the past as they sought to cut their dealer networks.
But this time, many analysts say the sheer scale of the economic downturn is reducing the likelihood that many dealers will fight to stay in what has become a money-losing business.
The National Automobile Dealers Association has predicted that 900 of the nation’s 20,770 new-car dealers will have gone out of business by the end of this year, and many automobile industry experts say that estimate will rise to thousands in 2009.
Auto dealerships are an economic force everywhere in the country, employing some one million people. In the past, their sales accounted for as much as 20 percent of sales tax revenue for state and local governments.
The prospective dealer shutdowns would be an acceleration of a trend that goes back a decade. General Motors , which had 8,150 dealerships in 2000, has pared that number to 6,400 as its share of the car market has shrunk. In the plan that Rick Wagoner, G.M.’s chief executive, presented to Congress last week to save the company, he called for reducing that number to 4,700 over the next three years.
Industry experts note that Chevrolet, G.M.’s flagship brand, has about three times as many dealerships as Toyota but sells about the same number of cars. That network is a legacy of the era when G.M. controlled 60 percent of the domestic market, instead of 20 percent or so today. The high number of dealerships means too little business for each, and it also means General Motors is paying higher transportation costs to send vehicles and spare parts to multiple dealerships.
Mark LaNeve, a G.M. vice president for sales, service and marketing, said in an interview that it was vital for the company to reduce the number of dealerships to have “a healthy competitive retail channel.”
Mr. LaNeve said a competing foreign-car dealership with higher sales “has more money to invest in their facilities, in their people, in training, in the customer, in advertising, and that puts us at a competitive disadvantage. That’s why you do dealer reduction.”
As sales dropped precipitously in recent months, Grant Thornton L.L.P., a firm that advises on reorganization, recently estimated that over all, 3,800 dealerships would need to close to maintain each dealership’s annual sales at last year’s levels. “The economics of the situation are forcing the consolidation and rationalization of the network,” said Paul Melville, a partner at Grant Thornton. “That is a good thing.”
The dealers, of course, do not agree that they are part of Detroit’s problem. They argue that they invested millions of dollars in their dealerships, buying the land, building the facilities and providing services for customers. They also said that they build good will for automobile companies by supporting local Little League teams and other charities.
But while leaders of dealer associations want to keep the number of dealers as high as possible, they see no other option than to support the Detroit companies’ efforts in Congress, even when those plans explicitly call for fewer dealers.
James T. Fleming, president of the Connecticut Automotive Retailers Association, said that fewer dealerships “will happen one way or another,” and that a Congressional rescue package “is preferable to bankruptcy or no action.”
The dealers hope that Congress will help them by giving consumers temporary tax breaks on auto loan interest, and they want other help to loosen credit so dealers can finance their inventories. Some dealers are hoping an auto bailout will allow the manufacturers to offer them compensation if they agree to close without a fight.
The economic decline among the dealers is undermining their legendary political clout. Their powerful lobbying organizations secured the franchise laws in virtually every state, which protected them from efforts to winnow their numbers in the past. Now it is possible that Congress will try to suspend or otherwise override those laws as part of a reorganization plan, something dealers have begun to lobby against.
In recent years, dealers that have closed their doors have usually come to severance agreements with the manufacturers, accepting compensation packages worth as much as $500,000.
Lawyers who have represented dealers in the past said that while they foresaw some difficult negotiations between manufacturers and dealers over issues like the size of severance payments, the dealers were under too much financial pressure this time to put up a big fight.
The state dealer-protection laws “may come into play in isolated circumstances,” said Michael G. Charapp, president of the National Association of Dealer Counsel, a trade group for lawyers who work with auto dealers. “But for the most part, market forces will take care of most of this.”