A Harsh Future?

With much of the media's attention on dealers being eliminated by General Motors Corp. and the old Chrysler LLC, the question of how the bankruptcies and dealer cuts might affect the automotive retail system has gone unanswered.

Are their actions merely a blip brought about by extraordinary circumstances that will dissipate as sales return, or are auto makers ushering in an era of dealers and manufacturers fighting openly for control of the retail system?

At the very least, the recent actions GM and Chrysler have taken with their dealers — both the terminated and surviving — have created a potentially poisonous environment. Meanwhile, dealers selling other brands shouldn't be too comfortable, say some attorneys and analysts.

Dealers are wondering if their future is a dangerous one in which their manufacturers have significantly more say in what goes on in the dealership.

There is no doubt auto makers would like more control over their dealers. The issue dates back to the early days of the auto industry when manufacturers contracted with independent businesses to sell their cars to avoid the financial costs or risks of selling and servicing their own vehicles.

While transferring the costs to dealers, auto makers quickly learned they also had relinquished a large measure of control over their networks. With the formation of the National Automobile Dealers Assn. along with dealer-created state associations, dealers began resisting attempts by their manufacturers to control them.

Dealers started leveraging their local political power, stemming from being big taxpayers in their communities and states, to get tough franchise laws passed that hold auto makers at bay.

However to some, it appears GM and Chrysler may be using the cover of bankruptcy circumvent the state franchise laws, not only in eliminating dealers, but also in trying to exert greater control over their dealer networks.

Several dealers tell Ward's that Chrysler is demanding 30-year site control in exchange for granting an additional franchise.

Say the Dodge dealer across the street is being terminated and Chrysler wants to give the franchise to another dealer to round out the Chrysler Dodge Jeep Genesis initiative at his store. In some cases, Chrysler is demanding the dealer give it control over the property for 30 years.

Meanwhile, in much bolder move, GM sent new franchise agreements to its surviving dealers in early June.

The contracts created a firestorm. Attorneys tell Ward's GM is requiring dealers to comply with whatever facility upgrades it deems necessary. Other stipulations include sales, profitability and capitalization requirements.

Additionally, dealers selling other brands alongside GM vehicles have until the end of the year to remove the competing models from their property.

What's worse is that GM seems to be eliminating any recourse dealers have to object, including the use of state franchise laws.

Dealers had till the middle of June to sign the contract. “I'm not sure I want to sign the agreement, or if I even want to continue being a GM dealer,” one dealer tells Ward's after reading the new contract. He asks not to be named because of fear of repercussions from the auto maker.

Ted Smith, president of the Florida Automobile Dealers Assn., says the agreements amount to corporate extortion. “And you can quote me on that,” he adds.

Duane Paddock, owner of Paddock Chevrolet in Kenmore, NY, and the chairman of GM's Northeast Dealer Council, says he personally does not find the agreements “as alarming as some dealers do.”

He says he has concerns he believes “are legitimate,” but there is nothing that will keep him from signing the agreement.

Paddock, who is one of the top-selling Chevrolet dealers in the world, declines to speculate on what GM's intentions are with the new agreements.

A Chevrolet dealer in Florida, in an email to Ward's, expressed concern prior to receiving the agreement, but later, after reading the document, says he thinks his dealership will be ok.

Susan Garontakos, GM's manager-dealer and field communications, says the auto maker is “trying to make sure we have the best dealers as we move out of bankruptcy.”

The agreements are tailored according to each dealer's specific situation. GM appears to be trying to fix what it believes are deficiencies in the way it previously approached its retail network.

GM developed the agreements based on “a thorough market study and a dealer performance analysis,” Garontakos says. “We've been lenient on certain aspects of the franchise agreement in the past.”

The auto maker wants to employ consistent standards across its dealer body, she says. “We want to make sure they are in line with what the market is telling us.”

Dealers selling multiple brands on the same property should be okay as long as they had the foresight set up separate addresses for the other brands before now, says Don Hall, president of the Virginia Automobile Dealers Assn.

On May 29, New Jersey Saturn dealer Stuart Lasser won the right to sell Kias at his Denville Saturn store when a federal judge issued a preliminary injunction prohibiting GM from enforcing an exclusivity provision in the Saturn franchise agreement.

The new agreements also stipulated that dealers surrender their right to refuse additional inventory. Dealers also surrender their right to protest should GM locate another dealership in their vicinity, Hall says.

GM is taking away the dealers' due process rights, he says. “You're (dealers) waiving all your rights under these agreements.”

Despite the harsh words, Hall admits dealers wanting to remain with GM will have to sign the agreement.

Michael Charapp, partner with Charapp & Weiss LLP, a McLean, VA, law firm, says the inventory and sales requirements concern him the most, because they appear to be vague and open ended.

“GM is using the cover of bankruptcy to get done what it's been trying to do for years, and that is gain control of its dealers,” Charapp says. “I've never seen anything as oppressive as this.”

Yet, Charapp agrees dealers have few options but to sign. “It's easy for me to be the guy telling dealers to fight this when it's not my business at stake,” he says. “The problem is, there is no evidence from the Chrysler (LLC) deal that dealers have any real recourse.”

National Automobile Dealers Assn. Chairman John McEleney blasted the new GM requirements in testimony to a Senate committee.

“If I sign it, I will be committing my business to spend hundreds of thousands of dollars that I know about today, and committing to millions of dollars of potential financial obligations in the future,” McEleney says.

“Also, I will be subjecting my business to sales performance standards that are not specified in the contract,” he adds. “Even worse, GM can alter the terms of these requirements at any time at its sole discretion. The final blow: I must waive any right of protest to any action taken by the manufacturer.

“This is a classic example of opportunistic and overreaching behavior by the manufacturers that has prompted the enactment by the legislatures of all 50 states of franchise laws. No other manufacturer has forced dealers to sign such an onerous agreement. This is not necessary for GM's viability, and federal funds are being used to empower GM to do this.”

McEleney's strong comments got the attention of Mark LaNeve, GM's sales and marketing chief. Following a five-hour meeting on June 5 and numerous email exchanges over the weekend with NADA officials and members of its national dealer council, GM decided to amend the stringent franchise agreements.

The meeting went so long, members of GM's contingency, including executives Troy Clarke and Mark LaNeve, had to reschedule their flights back to Detroit.

The amendments, or clarifications, for the most part, soften language found in the initial agreements.

NADA also sent a letter to its GM dealer members outlining the auto maker's clarifications. “Don't trust them,” warns one dealer in an email to Ward's.

Regarding the more demanding sales requirements, NADA's letter says GM will hold a Reinvention Business Plan with its continuing dealers in the first quarter of next year “where ‘appropriate’ sales targets will be agreed upon.” The new requirements will take effect in the second half of 2010 or in 2011, “based upon overall market factors.”

Similar language is provided for the new inventory requirements.

Meanwhile, NADA says GM has agreed to work with its dealers “reasonably” regarding exclusive showrooms and may extend the Dec. 31deadline in certain cases.

GM also clarifies that the dealer's waiver of protest “is not designed to allow GM to add new dealers into an existing dealer's area of responsibility. GM intends only to realign current points, not add dealers to a market.”

According to NADA, GM will eliminate a paragraph, which had provided special rights to GM in cases where a dealer allegedly fails to meet the requirements of its franchise agreement. Instead of reserving special rights, any remedy sought by GM will be in accordance with state franchise laws.

Despite the changes, 30dealers refused and will have their franchise agreements placed in the “old GM” destined to be liquidated as part of the auto maker's Chapter 11 filing when it emerges from bankruptcy.

Although GM has backed down, somewhat, dealers say the auto maker is creating an environment of mistrust and is pitting dealer against dealer.

The week after the amended new contracts went out, LaNeve sent a letter to the surviving dealers asking them to lobby Congress to allow the dealer cuts to go through.

LaNeve was responding to congressional bill HR2743, the Automobile Dealer Economic Rights Restoration Act of 2009, which seeks to overturn GM and Chrysler's dealer eliminations.

In an email to Ward's, a Florida GM dealer says, “We are loyal to GM but I can't turn my back on the dealer body. Call me stupid, but we could have been in the same shape they are and I would hope that the dealer body would have supported me.”