Bloated dealer networks represent annual burdens of $2 billion each to bankrupt General Motors Corp. and Chrysler Group LLC, senior executives tell federal lawmakers in defense of their dramatic cutbacks.

Appearing today before the House Energy and Commerce Subcommittee on Oversight and Investigations, GM CEO Fritz Henderson and Chrysler Deputy CEO Jim Press defend decisions to trim their dealer ranks by 2,426 and 789, respectively. GM’s actions are being phased in over 19 months while Chrysler’s took effect June 9.

While Henderson describes the process as “painful” and Press says it was “gut-wrenching,” both testify the moves are necessary to preserve their respective companies, beneficiaries of emergency government loans worth tens of billions of dollars.

Ironically, the taxpayer-financed loans were contingent on restructuring initiatives such as the dealer cuts, which are displacing thousands of workers across the nation, sparking anger and outrage from affected communities.

Daniel Keikenapp, former general manager of Tacoma Dodge in western Washington, chokes back tears as he tells the subcommittee hearing he’s been forced to dismiss 35 employees as he transitions from a new-vehicle store to a used-car lot.

“Tacoma Dodge was one of (Chrysler’s) most outstanding dealers, using any yardstick you want to use to measure,” Keikenapp says, claiming the operation booked a profit of $1.7 million in 2008.

Press, while sympathetic, explains single-brand dealerships add significantly to the auto maker’s cost structure – a key reason Chrysler is pursuing a plan, known as Project Genesis, to see each of its stores sell the Chrysler, Dodge and Jeep brands.

“Product complexity is increased because of the need to provide products in the same segment to different networks,” Press says. “For example, Chrysler currently supplies dealers with two similar minivans, Chrysler Town & Country and Dodge Grand Caravan; two similar full-size sport-utilities, Chrysler Aspen and Dodge Durango; two similar mid-size SUVs, Dodge Nitro and Jeep Liberty; and two similar sedans, the Chrysler Sebring and Dodge Avenger.”

“Based on six major vehicle launches between 2005 and 2008, Chrysler incurred approximately $1.4 billion in incremental costs to develop these multiple pairs of ‘sister vehicles.’”

For its part, Chrysler is consolidating its product lineup to 20 nameplates in 17 segments from 27 nameplates in 13 segments, Press says. This will happen over the next four years.

Adds Henderson: “The sacrifices, many painful, that we all are making, are necessary to put GM on a brighter path to long-term viability and success. We owe this to the taxpayer.

“A right-sized network of strong dealers will allow GM to systematically over time reduce direct dealer support programs which today involve $2 billion in costs ($1,000 per retail sale) – or a gross savings potential of about $928,000 per dealer if and when fully phased-out,” he adds.

GM's dealer count will shrink to 3,605 from 6,081, while Chrysler’s network is 2,399 – down from 3,188.

In addition, GM’s boss discounts a suggestion by ranking subcommittee member Greg Walden (R-OR) that the Obama Admin.’s auto industry task force micro-managed the auto maker’s dealer cuts as the official “purchaser” of GM. The U.S. Treasury Dept. is described as such in GM’s Chapter 11 filing, Walden notes.

“They said if they were going to buy the company, they want to have a right-sized dealer body,” Henderson testifies. “So they asked the management to develop a strategy to accomplish a world-class, correctly sized dealer body.”

The auto maker’s $30 billion taxpayer-financed lifeline calls for the Treasury to retain a 60% stake in GM.

“Our dealership consolidation is not just about saving money, but about creating opportunity and revenue growth,” Henderson says. “That's why we are building a profitable business plan of between 3,500 and 3,800 U.S. GM dealers by the end of 2010, which with a retail sales market of just over 10 million and a conservative share assumption, means that the number of units sold per dealer would nearly double.

“For dealers this translates into a greater return on investment, more profits and the ability to attract and retain new customers and the best people to service our vehicles.”

Against this backdrop, the National Automobile Dealers Assn. welcomes the hearings.

“Oversight is exactly what is needed due to the lack of transparency and the harsh treatment of dealers during the government-sponsored restructuring of both Chrysler and General Motors,” NADA Chairman John McEleney says in a statement. “These (dealership) closings put more than 100,000 jobs at risk, in communities throughout the country. With unemployment at its highest rate in more than 25 years, eliminating jobs and closing community businesses is not the way to help a struggling economy.

“Everyone agrees that both Chrysler and GM need to decrease costs and increase revenue to survive, but eliminating dealerships does neither. Dealers cost an auto maker almost nothing.”

emayne@wardsauto.com