ShouldCorp. drop its Pontiac and GMC divisions, a scenario reportedly being considered as the auto maker races toward a June 1 deadline to deeply restructure its business, the move potentially would eliminate close to 600,000 units of U.S. light-duty vehicle production.
GM reportedly is appealing to 1,700 dealerships system-wide to agree by June 1 to close their stores. The auto maker said in its Feb. 15 viability plan it wanted to trim its dealer body by more than 30% over the next four years, to 4,400 in 2013 from 6,246 today.
John McEleny, National Automobile Dealers Assn. chairman, says he is unaware of any plan to move up the timetable.
Experts say given the cost of such an endeavor and the near-certain dealer backlash, forcing such a plan outside of bankruptcy would be too costly or GM.
“I don’t know how you would do it,” says Erich Merkle, an independent analyst in Grand Rapids, MI. “These dealers are going to want something for their business. (GM) may have as much luck with 1,700 dealers as they have had negotiating a deal with the (United Auto Workers) and bondholders.”
“The only way (GM) can get there is through bankruptcy,” says Mark Rikess of The Rikess Group, a Burbank, CA-based dealer consultancy. “That is a pretty clear signal it will become a fait accompli GM will end up in bankruptcy.”
Killing its Oldsmobile brand and buying out 2,800 dealers earlier this decade cost GM roughly $1.2 billion and took more than five years. Pontiac and GMC account for 4,680 stores, although nearly 90% are clustered with Buick in a 3-brand channel.
But with a bankruptcy judge to override the state franchise laws, as well as the stark reality that many of the stores already are unprofitable, Rikess says the auto maker could pare its distribution network quickly and efficiently.
“It’s not hard to get to those numbers in bankruptcy,” he says. “It will cause a lot of pain in a lot of places, and it’s just a portion of where they need to get to right-size the dealer body.”
Should GM cut the Pontiac and GMC brands as well, that move likely would end up in litigation with numerous dealers, says Michael Charapp, a partner with Charapp & Weiss LLP, a McLean, VA, law firm.
“The dealers would have a claim for breach of contract in that case,” he says. “Under a bankruptcy, GM would have the right to reject the franchise agreement. Dealers would be unsecured debtors and be paid in bankruptcy dollars, which will be much less than the payout Oldsmobile dealers received.”
The loss of Pontiac-GMC production would take a toll on GM workers as well, affecting eight assembly plants, as well as powertrain and stamping facilities from Michigan to Mexico.
According to Ward’s data, the Pontiac and GMC brands accounted for 588,488 units of light-vehicle production in 2008. The total represents 6.9% of total U.S. light-vehicle output last year. For perspective, GM’s Chevrolet brand in 2008 accounted for 1.2 million builds, or 14.7% of all U.S. production.
Sales at the two brands are down sharply. During one of the worst new-vehicle markets in decades, Pontiac-GMC sales last year fell 25.4% to 629,691 units, from 844,082 deliveries in like-2007, according to Ward’s data.
Three GM brands performed worse – Buick (-26.2%), Saab (-34.7%) and Hummer (-50.9%). Along with Saturn, GM wants to divest Saab and Hummer, but executives have said on numerous occasions Buick remains pivotal to the auto maker’s future due to its popularity in China.
“It would hurt Buick in China, if GM killed the brand here,” GM design chief Ed Welburn recently told Ward’s.
However, elimination of Pontiac-GMC would start to chip away at North America’s massive overcapacity problem. Ward’s data shows 6.1 million units of unused capacity in North America last year and estimates 8.6 million units in 2009.
Such a move also would allow GM to sharply focus its resources on the more-stable Chevrolet, Cadillac and Buick brands, Merkle says.
“It’s a convoluted process, but the important brands are Chevrolet and Cadillac,” he says. “If (GM) could get there – to Chevrolet and Cadillac, with Buick because they say it’s important in China – it would be much more manageable and they could make Chevrolet and Cadillac much more competitive.
“They have to wind Pontiac and GMC down,” he adds. “You don’t need a standalone truck company, which just duplicates Chevrolet, and Pontiac is nearly wound down as it is.”
GM spokesman John McDonald declines to confirm whether the auto maker is considering dropping Pontiac-GMC, or if it has had discussion with its dealers about trimming their ranks by June 1.
“We’ve been meeting with our dealers non-stop,” he says. “We’ve been talking to our dealers and(National Automobile Dealers Assn.) about the state of our business throughout this process. There is a lot of speculation about our revised viability plan, but we’re just not there yet.”
Citing unnamed sources familiar with talks, Bloomberg News and Reuters both report GM is scrutinizing its Pontiac and GMC brands, and that the auto maker hopes to speed up the downsizing of its distribution network.
– with Cliff Banks