As part of its newly-revamped viability plan,Corp. says it needs to have about 2,640 fewer dealerships by the end of 2010.
The question is, how does the auto maker cut that many dealerships that quickly without violating state franchise laws, which are heavily weighted toward the dealers’ interests?
Officially, the plan is to reduce its dealer count from 6,081 to 3,605 in the next 19 months.
GM’s target may not be as difficult as it sounds, and dealers can expect the auto maker to use all of its tools to pressure stores to close, experts say.
For example, dealers speculate GM is laying the ground work in the form of store audits to force dealership closures. Already, the company is informing dealerships it is auditing customer-satisfaction- index (CSI) scores going back five years to evaluate whether fraud occurred.
In cases where GM determines a dealership submitted fraudulent CSI scores, the auto maker can terminate the franchise agreement, says Michael Charapp, an attorney with Charapp & Weiss, LLP, in McLean, VA.
However, it’s not easy, he says. A car company still has to go through the process established by the state to prove fraud and yank the agreement. The process differs from state to state.
Most states place limits – usually ranging from nine months to two years – on how far back an auto maker can go to determine whether a dealer engaged in fraud.
“My advice to dealers is to stand up for your rights and say ‘No’ when an auto maker wants to conduct an audit beyond what the state law allows,” Charapp says. “They shouldn’t be allowed to go on a fishing expedition to look for fraud.”
Other potential areas GM might audit include warranty claims and sales in which vehicles may have been exported to foreign countries, a practice all auto makers prohibit.
GM might not have to rely on audits to pressure stores into closing, however.
It announced today the shutdown of the Pontiac brand, which has 2,600 franchises. And, by the end of the year, GM will be rid of Hummer, Saturn and Saab dealerships, totaling about 650 stores.
In addition to selling or closing those brands, the easiest way to cut stores is through a bankruptcy, experts say, which could happen by June 1 if GM is unable to convince bondholders to accept a debt for equity swap in the next 30 days.
A bankruptcy judge could void the franchise agreements GM has with its dealers, in which case, all bets are off for dealers, Charapp says.
Additionally, banks providing floorplan loans that let dealers buy new vehicles from manufacturers likely will pull the financing from a large number of GM dealers should the auto maker file for bankruptcy. The result being GM may watch its dealership count plunge far lower than its 3,600 target.
Even if GM avoids bankruptcy, dealers expect hundreds of stores to close due to floorplan and inventory issues. Lack of available floorplan already has claimed nearly 170 GM dealerships this year. The closures likely will continue at an aggressive clip the rest of the year.
A large Chevrolet dealer in Tampa, FL, believes GM’s recently announced 2-month plant shutdown this summer will force many dealers out of business.
“There are a lot of dealers who are carrying thin inventories,” he says. “Because of floorplan costs, they’ve cut their days’ supply to less than 60 days. Those guys are going to have a tough time making it two to three months without inventory.”
Dealers will not be able to rely on used-vehicles, because they won’t be taking trade ins with no new cars to sell. They also won’t be generating cash, which means they won’t be able to buy vehicles at the auction.
In the end, GM might not have to do anything. It’s likely to sit back and watch the market take care of closing its dealerships.