What's the Big Deal?

Last year, General Motors Corp. acquired majority ownership of several under-performing deal-erships in California's San Fernando Valley.

Fifteen other area GM dealers subsequently filed a formal protest to the plan in which GM put up $18 million and brought in dealer Wes Rydell to invest $2 million and to run the San Fernando dealerships.

The protesting dealers saw the GM Motors Holding arraignment as a violation of the state franchise law's ownership restrictions.

The matter went to the California Motor Vehicle Board whose nine members include four franchise dealers. The panel eventually ruled in favor of the GM ownership plan after GM staffers met with all of the objecting dealers to address their fears of "factory competition."

That was hardly the end of it. In fact some people say retrospectively that it was just the beginning.

Four days after the California vehicle board's ruling, GM stunned the dealership community with a bombshell announcement.

The automaker said it would buy up to 800 of its 7,700 dealerships in 130 markets in the next decade.

"They didn't drop a 1,000-lbs. bomb, they dropped a nuclear bomb," says James Willingham, a California GM dealer and chairman of the National Automobile Dealers Association.

"I'm shell-shocked to say the least," says Russ Shelton, owner of Shelton Pontiac-Buick in Rochester Hills, MI.

GM's formation of GM Retail Holdings as a purchaser of dealerships sets the stage for a classic showdown with its dealers.

The NADA vows to help state dealer associations strengthen their franchise laws even further to ban permanent factory ownerships. Ten states already this year adopted tougher factory-ownership curbs, in response to Ford and Saturn purchase initiatives.

"The laws passed in 1999 sailed through all the legislatures with little or no dissenting votes," says incoming NADA Chairman Harold B. Wells, a GM dealer in Whiteville, NC.

"Democrats and Republicans alike saw the issue as one of dealer equity, preserving their investments and reputations against an onslaught of factory competition," he adds.

Some observers and players believe GM awaited the California vehicle board's action, saw the panel's decision as a "green light" and then quickly anno-unced the stunning nationwide plan to buy dealerships.

Insiders say GM is reacting to the tidal wave among dealers and state legislators in opposition to factory ownership initiatives in the Ford and Saturn "collections," as well as to GM's own pilot in San Fernando.

Ford Motor Co. admittedly stumbled in organizing "Collections" in five cities and has consequently slowed its efforts.

And a new Virginia law stymied Saturn Corp. from adding a factory-connected franchise in Charlottesville.

Regardless Darwin Clark, the GM vice president assigned to take charge of GM Retail Holdings, affirms the corporate mission to control 10% of its dealership ranks.

"We feel very strongly that we need to get closer to the retail environment to better understand these changes and their effect on our business," he says.

Those "changes" reflect concerns deeply felt within GM's ruling group. These include failure of publicly owned consolidators to advance market share and volume of the GM dealerships they control or to "protect" GM product brand equity.

GM also is anxious to explore sales potential of the Internet and its promises of direct ordering and delivery of new and used vehicles with minimal franchised dealer involvement.

One new Internet provider, Austin, TX-based CarOrder.com, a subsidiary of software giant Trilogy Inc., caused a stir in October by getting a $100 million infusion to "buy" dealerships in smaller markets as e-commerce delivery points.

Roy S. Roberts, GM's group vice president for North American sales, service and marketing, calls GM Retail Holdings "a competitive necessity to improve our market performance where we lag, enhance our revenues, understand our customers better and look for ways to reduce distribution costs and improve the customer's buying experience."

But dealers see it as "a slap in the face," says Mr. Willingham.

"Why uproot the most loyal and best retail network in the world?" he asks.

Mr. Shelton says part of the shock was that GM gave dealers no advance notice that such a plan was in the works.

"We're suppose to be partners, but they really don't let us in on these things," he says.

Mr. Clark sought to assuage dealer concerns as he opened for business with GM Retail Holdings. One of his first acquisitions was Cerritos Pontiac-GMC, eight miles from Mr. Willingham's store in Long Beach, CA - much to the dealers ire.

Mr. Clark declares that GM will buy out only "willing" dealers in the top markets, between a maximum of 800 and a minimum of 400.

It has no plans to "take over" a market or sell non-GM brands, and wants its dealerships to be run by "dealer people" and not function as discounters or "factory outlets," says Mr. Clark.

Mr. Shelton says, "When they talk about having 'retail experts' running their stores, I have a feeling the experts are going to be coming from my store and others."

Mr. Clark also says GM would not pursue dealerships in states with total bans on factory ownership, such as Virginia, New Jersey or Massachusetts.

This reflects the model established by Mr. Rydell and GM in the San Fernando Valley, where the partnership owns four new-car dealerships and one used-car superstore.

Mr. Willingham says the main concern with company-owned stores is that they may potentially get preferential treatment.

"They claim there's going to be no favored treatment," he says. "But if two babies are crying and one's yours, which one are you going to pick up first?"

Adds veteran GM dealer Frank Ursomarso of Wilmington, DE, a GM dealer council activist, "They've gone from being my protector to my competitor."

Still, some GM dealers say - with a shot of irony - that they'd welcome the corporation getting into the dealership business.

"Those dealers say, 'Let them come because I'd rather have them as competition, instead of the guy down the street who's beating my brains out,'" says Mr. Willingham.

That's a reference to GM's past failed attempts at running dealerships. Mr. Willingham cites two factory-owned dealerships in California that were losing money until GM got of out the business and sold them. "Within months, they were making money."

Says Mr. Shelton, "One of the happiest days in GM's life is when they closed their stores. They were miserable failures."

Mr. Willingham, Mr. Wells and other NADA officials traveled to Detroit last month to meet with GM Chairman Jack Smith, President of North American Operations Ron Zarrella and Mr. Roberts.

In a joint statement afterwards, the meeting was described as "direct, candid and constructive."

NADA asked GM to reconsider. GM says it will proceed "cautiously" with GM Retail Holdings in order to receive dealer input.

NADA officers in attendance say Mr. Smith appeared taken aback and unhappy by what he sees as unfair negative publicity. Mr. Zarrella reportedly looked away a lot during the discussions.

"Smith said GM would slow it down and work with dealers," says one participant.

According to those attending the pow-wow, Mr. Smith said he viewed GM Retail Holdings as a long-range plan, and thought the NADA was portraying it as a crisis with an immediate impact.

NADA officers say they felt better coming out of the meeting than going in.

Mr. Roberts says the plan still is in the early stages.

"We will work with our national dealer councils to include dealers as partners where possible, says Mr. Roberts. "Furthermore we have no intention to own factory stores."

GM's new dealership interest could run into trouble on two legal fronts, say dealer attorneys.

First, GM could fail to get a license to operate dealerships in states with prohibitions on "permanent" ownership by automakers.

Second, GM could face potential lawsuits seeking declaratory opinions.

Technically, however, GM Retail Holdings' investments in co-owned dealerships may not be covered by state laws on factory ownership.

Donald L. Hall, president and CEO of the Virginia Automobile Dealers Association predicts legal resistance "all the way to the U.S. Supreme Court."

"I hope they start it in Virginia," says Mr. Hall. "Our metro dealers in the Washington, DC suburbs, Norfolk and Richmond, and our rural dealers all were united on this legislation, and we didn't lose a vote in the committees or the state house and senate, whether liberals, conservatives or in the middle.

"My fellow state association managers found their legislatures just as receptive, once they understood the dangers of factory competition to dealers' investments and reputations. We Virginians are ready to defend our state law."

In Texas, where Ford had organized a "collection" in Fort Worth and automakers hoped that a factory-ownership ban would be vetoed by Gov. George W. Bush. Instead, he signed it after near-unanimous passage in the state legislature.

His brother, Gov. Jeb Bush of Florida, also is regarded as a supporter of that state's stringent dealer code.

Nevada, which prides itself on being in the forefront of dealer-equity legislation, also this year unanimously banned factory-owned service centers as well as factory-store dealerships.

The California franchise law was taken through the Federal courts to the U.S. Supreme Court in the 1970s in a case involving denial of a license to a GM dealer locating within the proscribed "territory limits" of an existing same-brands dealer. GM's Cerritos Pontiac-GMC acquisition could be tested under this statute.

William Rehnquist, now Chief Justice of the U.S. Supreme Court wrote the majority opinion upholding constitutionality of that law and the right of the legislature to enact laws governing dealership practices.

J.D. Power & Assocates' consulting director Chris De Novo says, "It's much more difficult to modify an existing system than start with a clean slate."

He adds, "If an automaker could start over now, none would create a franchise system like the existing one."

WHITE SULPHUR SPRINGS, WV - General Motors Corp. may have created a firestorm by revealing plans to purchase up to 10% of its 7,500 dealers, but GM is convinced it'll be a win-win for both the corporation and independent dealers.

Roy S. Roberts, group vice president-sales and marketing, says during an interview here, that GM will buy "only from willing dealers," that the program will be phased in over 10 years, and that the total may not necessarily reach 10%.

Moreover, Mr. Roberts underscores that there'll be a "firewall" between the parent company and a new subsidiary, GM Retail Holdings (GMRH), which is responsible for carrying out the program. Darwin Clark, a longtime GM marketing executive, is chief executive officer of GMRH.

Here to attend a Society of Automotive Engineers conference, Mr. Roberts says GM is launching the buying spree to beef up sales in "under-performing markets" and to protect and enhance market share.

He says, "The buying experience is rapidly changing, and if we own (some of the GM stores) we want to get the best processes and systems in place" then pass them along to the independents.

With electronic commerce coming on strong, "the whole dealer body will change," he says. "We've got the No.1 dealer body, and now we want to move to a higher level,"

GM sold the last three retail outlets it owned in Chicago, Oakland and Los Angeles in 1994.

"We're going to apply what we've learned in the past, and we're not going to run them like company stores," says Mr. Roberts.

Rather, GM will install retail management specialists and perhaps retain some dealer principals as the plan unfolds, he says. "It (GMRH) won't be tied directly to GM. We're going to hire retailers and get some entrepreneurs," he says.

Mr. Roberts says GM-owned stores won't have what some critics are calling an unfair advantage. "Legally we've got to treat everyone the same way," he says.

"We wouldn't dare treat anyone differently. That would kill the enterprise; we're joined at the hip," he says.

A key goal is "to protect our brands" against "black box" operators, or large dealer groups, such as AutoNation Inc., which have no particular allegiance to specific brands, he points out.

GM stuck its toe in the water two years ago when it put up $18 million of $20 million to purchase dealerships in California's San Fernando Valley where GM had a mere 17% market share. But the automaker decided not to buy up franchises on a city or regional basis, as has the Ford Motor Co.

GM's new effort, however, aims at establishing major positions in the top 130 U.S. markets.

GM clearly intends to take a leadership role in applying Internet processes to its sales and marketing efforts, passing along its expertise to its entire dealer group. In that respect, GMRH will work closely with the new e-GM group organized to take GM into the age of electronic commerce. An e-commerce dealer council is being formed, says Mr. Roberts.

Surprisingly, GM dealerships actually may become smaller as vehicles are delivered faster to customers, creating higher throughput at each point, Mr. Roberts theorizes.

Dealers also may have a crack at making more profit after the original sale, such as providing parts and service procedures via the Internet, he adds.

GM already has incorporated some of its Saturn Corp. subsidiary's buyer-friendly processes into its other dealerships, but Mr. Roberts isn't yet sure what role Saturn might play in the dealerships it acquires. Part of Saturn's success, he suggests, stems from the fact that it began as "a clean sheet of paper," while GMRH will be inheriting existing businesses.