Besieged car dealers are on their own

The Philadelphia Inquirer (MCT) - News flash to auto dealers, from the floor of the North American International Auto Show: If you think General Motors, Chrysler or Ford will rescue your franchise, you might be in for a rude awakening.

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Executives with the nation's Big Three automakers say they love you. They sympathize with you. But they think there are too many of you out there, and they're not about to come to your rescue if you're hanging on by a thread.

When pressed about the plight of dealerships during media sessions before the show opened to the public, executives from the Big Three were resolute about what they saw as the need to reduce the number of dealerships as the recession grinds on.

The restructuring plans of all three companies include reducing the number of dealers in communities across the country. But rather than forcing the reduction through corporate strong-arming, which could lead to costly lawsuits or buyouts, executives this week suggested it would be achieved through natural selection: The weakest would go; the strongest would survive.

"When you take a third of the market out, a third of the dealers don't really have a business to go forward with," Jim Press, vice chairman and president of Chrysler LLC, said Jan. 11, referring to how the Big Three have lost sales to foreign competition.

Striking what was perhaps a diplomatic note, Press said Chrysler was trying to "thin the dealers out in a natural way that really is a win-win for both the dealer that's leaving and the dealer that's going to continue the business."

General Motors chairman and chief executive Rick Wagoner expressed empathy, along with a similar conviction that some dealers, after nearly a century in business, had simply reached a crossroads.

But he and his counterparts at Cobo Hall in downtown Detroit believe that big-city hubs saturated with U.S. brand-name dealerships need fewer Big Three showrooms, so that each one can be more profitable and nimble. That need, they believe, has been made more urgent by Honda's and Toyota's taking sales away.

Wagoner, whose Detroit-based GM has been most specific by telling Congress it hoped to eliminate a quarter of its dealerships by 2012, said he hated to see franchises go.

"Particularly for people who have been in business so long, for generations," Wagoner said, "it's difficult when they close down."

But he said the financial model had changed. Gone are the days when selling and fixing up cars and maintaining a moderately profitable operation could keep a dealer in business for years.

Now, dealers need cash on hand to satisfy the creditors whose loans finance millions of dollars of inventory on dealer lots. And as automakers move toward electric-powered cars, dealers will need to upgrade their service bays, buy new equipment, and train their mechanics. All that will cost money.

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"So by definition, they're going to have to have better volume, stuff like that," Wagoner said. "So this is part of the evolution.

"But having said it," he added, "if you're the guy who's going out of business, it's no fun. You know, we sympathize."

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Dealer distress has taken a backseat this week to the automakers' instead talking up fuel economy and fielding tough questions about their dependence, in the case of Chrysler and GM, on taxpayer funds to stay afloat.

But the Big Three goal of cutting the number of dealers remains strong, albeit elusive.

Each dealership holds a contract with manufacturers that cannot be broken at will by the automakers. The men and women who own dealerships hold franchise agreements and have invested millions in opening the businesses. Many state laws are protective of their contractual rights.

But some dealers bemoan the fact that Ford, Chrysler and GM _ burdened by their own financial woes _ have not been forthcoming with buyout funds.

As a result, those struggling the most right now are having a hard time paying their bills.

The manufacturers welcome the unassisted thinning out, if only because it allows them to achieve their goals without paying what in some cases are millions of dollars to shut down a dealer.

"To an extent, the manufacturers are getting their wishes," said Sheldon Sandler, founder and managing director of Bel Air Partners. The Princeton, N.J.-area company helps broker auto franchise deals. "Maybe not in the orderly way they would have liked, but domestic dealers are closing."

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Sandler said GM reportedly spent upward of $1 billion to buy out its Oldsmobile dealers several years ago when it discontinued the brand. It simply is unrealistic, he said, to expect GM would do the same thing now.

"They can talk all they want to talk about it," Sandler said. "It's going to take billions of dollars to buy out dealers, and they don't have the money. It's a chimera. It's not real. The dealers are going to go out of business of their own accord."

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Alan Mulally, president and chief executive of Ford Motor Co., offered essentially the same assessment when asked about dealers' concern over whether Ford could produce the cash needed to ease their exit.

"There's not enough money to buy out everybody," Mulally said. "The real thing is the businesses deciding where it makes sense to consolidate. And we just help with that."

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© 2009, The Philadelphia Inquirer.