GM's New Agreements Threaten Automotive-Retail System

Commentary

General Motors’ dealer strategy revealed this week may be one of the greatest threats to the automotive retail-franchise system in recent memory.

It certainly is far more dangerous than when Ford and GM attempted to compete with their dealers 10 years ago by buying up dealerships – an initiative dealers soundly defeated.

Don Hall, head of Virginia’s dealer association, says GM’s strategy is the most oppressive thing he has seen in 30 years of working in dealer-manufacturer relations.

Hall’s counterpart in Florida, Ted Smith, calls it “corporate extortion.”

We’re not talking about GM’s eliminating 1,350 dealers, which is bad enough. Instead, this is GM’s strategy for dealers it wants to go forward with once the company emerges from bankruptcy that is creating such concern.

In addition to “wind-down” contracts sent to dealers it is terminating, GM also mailed participation agreements to surviving dealers on June 2. The agreements are designed to replace current franchise agreements GM has with its dealers.

The contracts impose on dealers significantly more stringent operating requirements, including facility upgrades, increased sales, inventory, capitalization and financing.

The requirements are objectionable given current economic conditions. What’s worse is GM reserves the right to change the requirements in the future, put new dealerships in any location when and where it wants, while forcing its dealers to waive their rights to object or dispute such actions.

GM is giving its dealers 10 days – until June 12 ‒ to sign the agreement. Those dealers that refuse lose their businesses.

John McEleney, chairman of the National Automobile Dealers Assn. and a long-time GM dealer, says, “No manufacturer has ever imposed such outrageous terms in dealer operator agreements.”

McEleney is one of the most calm, level-headed and cool gentlemen in the business, but his testimony before a Senate hearing earlier this week includes some of the harshest statements by a NADA chairman in recent memory.

It appears GM is using the cover of its bankruptcy to seize control of its dealers’ operations, while circumventing state franchise laws that protect the dealers.

GM’s actions aren’t driven by a nefarious desire to rule with an iron rod over it dealers. The company believes it needs to establish consistent guidelines and standards for its dealers, and that is what the new contracts seek to do.

The relationship between auto makers and their dealers long have been marked by periods of calm with the occasional, and sometimes violent, flare-up.

Often the flare-ups result from auto makers inserting themselves into a dealer’s business. Auto makers try to maintain strict control over their dealer operations but with limited success. Even this week, a GM spokeswoman tells Ward’s the auto maker has been too lenient in certain aspects of it franchise agreements in previous dealings with its retailers.

Dealers have responded by convincing their state legislatures to pass franchise laws that protect their businesses by limiting what actions an auto maker can take.

For example, most, if not all, state laws set limits on how closely dealerships of one brand can be located to each other. That law is designed to keep a manufacturer from forcing dealers it doesn’t like out of business by putting a more powerful dealer close by.

The problem is auto maker executives have forgotten one key point ‒ along with the automotive task force that apparently never has understood: it is the dealers that own the dealerships.

Dealers are the ones who often have scraped and saved and begged for money from banks, friends and family in order to buy their stores.

It’s the dealers who have signed personal guarantees on loans from banks and have taken out second and third mortgages on their homes to finance their dealership operations. They are the ones who bear the costs.

The Casesa Shapiro Group estimates the average dealer invests $11.3 million in each store they own.

Don’t be fooled by Chrysler President Jim Press’ numbers provided at the Senate hearing this week as to what its dealer network costs the manufacturer. Whatever costs or investment auto makers have made in their dealers are passed onto the dealer. Distribution, marketing, training, tools – it’s all passed onto the dealer.

One surviving Chrysler dealer somewhat jokingly laments this week he’s probably going to have to spend $100,000 on service-related tools for the two Fiat 500s he’ll sell a year.

If an auto executive loses his job, he takes his severance and finds another job. If a dealership goes out of business, he loses a livelihood, perhaps a home, and faces financial ruin.

Chrysler, which is eliminating 789 dealers on June 9, also is wrestling for control over its retailers, only it isn’t being so up front about it.

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

Let’s say the Dodge dealer across the street is being terminated and Chrysler wants to give the franchise to you to round out the Chrysler Dodge Jeep Genesis initiative at your store. For you to get the franchise, Chrysler is demanding you give it control over your property for 30 years.

The line drawn in the sand is now. If the auto makers are allowed to continue using bankruptcy as a way to fundamentally change their relationship with dealers, the end of the entrepreneurial dealer as we know it will not be far off.

Other auto makers likely will try to find ways to accomplish what GM and Chrysler are doing. It’s too tempting not to.

NADA currently is meeting with GM to discuss the new contracts. However, attorneys are telling their dealers to lay low, sign the contract and get ready to fight when the dust settles.

In an email to Ward’s, attorney Richard Sox says the argument will be that “any provision contrary to state franchise law is void and that the waiver provision in the Participation Agreement, which waives all rights under state law, is of no effect because the agreement was not entered into ‘voluntarily’ and with no consideration.”

In other words, dealers are being forced to sign the contracts with a gun pointed at their heads.

This is one fight dealers cannot afford to lose.

[email protected]