This week GM and Chrysler will start the crucial and ultimately messy process of trying to dramatically downsize their operations, debt and dealerships. For all the hand wringing you see from people wondering if GM and Chrysler can get the UAW to re-work wages and benefits or for debt holders to agree on a debt for equity swap, the real trick will be closing dealerships.
GM has roughly 6,700 dealers and Chrysler has about 3,500. Both need to cut those numbers substantially. The problem is that franchise laws in each state strip GM (and Chrysler) of the power to just close dealerships. In other words, the auto makers have little leverage over their dealers.
Oh yes, we will hear talk about "streamlining" distribution networks and combining dealers. The fact is, this will only happen if dealers want to deal. That means GM and Chrysler will have to come up with cash, and lots of it, to buy out dealers.
For better or worse, the dealers know they have the power in these talks and to make matters worse for GM and Chrysler, many of these dealers are saying to themselves, "why should I close my dealership and miss out on an auto rebound and what could be a profitable future?" It's a fair point, and the reason these talks won't be easy.
As with any collection of business owners, there are many dealers who run a great company. There are also a fair number of dogs that are limping along and not helping either GM or Chrysler. But how do you tell the guy who does a poor job running his dealership that he should give it up? Odds are, that dealer doesn't see things the same way. On top of that, he has a highly valuable asset (even when poorly run, a dealership is very lucrative) and likely doesn't want to sell at the bottom.
- Ford Sees Sharp Drop in US Sales, No Quick Rebound
So now you see why the dealer downsizing won't be easy. In bankruptcy, GM and Chrysler could have use the courts to kick out the contracts of the poor performing dealers. That is no longer an option.
Good luck GM and Chrysler.
Click on Ticker to Track Corporate News:
- Ford Motor
- General Motors
- Honda Motor
Questions? Comments? BehindTheWheel@cnbc.com