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The New Economy

Fewer car dealers: Good for GM, bad for America?

By / June 12, 2009

Leonard Bellavia, legal counsel for a group of auto dealers whose franchise agreements with Chrysler have been canceled, spoke at a news conference last month in New York. The automaker plans to eliminate franchise agreements with 789 Chrysler dealerships.

Shannon Stapleton/Reuters/File

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When it comes to closing dealerships, what's good for General Motors and Chrysler may not be good for America.

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That was the message from many lawmakers at a congressional hearing Friday on plans by the two bankrupt carmakers to downsize their retail network.

Representatives of GM and Chrysler said that cutting dealerships is an essential step as the automakers restructure in a bid for survival. But the move will affect communities across America, raising difficult questions about whether the nation will gain or lose in the process.

The car companies and many dealerships could gain – and that could have positive spillovers for the economy. But at the same time, the changes could push up the cost of cars for consumers, make car owners drive further for repairs, and cause significant job losses in towns nationwide.

So the outcome for the economy is complicated. At the core of Friday's hearing was a basic question: Are such deep dealership cuts really vital to the automakers' survival plans?

"The logic [of closing dealerships] is you want dealers to be profitable," says Jeremy Anwyl, CEO of auto information provider Edmunds.com. "That usually also is a code word for saying the customers might be paying more money."

More profits, more service?

The car manufacturers say that with fewer dealerships, the surviving network will have profits that enable them to hire better sales people, improve facilities, and boost customer service. That might help US carmakers compete with foreign-based rivals like Toyota, which typically sell twice as many cars per dealership in the US. The number of dealerships, they say, is the legacy of an era when GM and Chrysler had a much larger share of the US car market.

"We don't produce enough vehicles to have every dealer stay in business," Chrysler deputy CEO Jim Press told the House panel Friday. He said that as a whole, Chrysler's dealer network is not profitable without the cuts that are now occurring.

Chrysler is closing 789 dealerships, about one-fourth of its network, as it emerges from bankruptcy. GM wants to close about 1,350 dealerships by the end of next year, a similarly deep cut of its network.

"We'll still have the most extensive dealer network in rural America" after the downsizing, said GM CEO Fritz Henderson.

Dealers weigh in

But the hearing pitted their views against owners of dealerships from places ranging from Oregon to upstate New York.

They argued that the dealership closings are often unnecessary and represent an illegal taking of personal property – in which the carmakers are arbitrarily transferring wealth from the closing dealerships to the ones that will remain. The carmakers don't own their dealer franchises, but are using the leverage of their relationship and the bankruptcy process to enact their plans.

"How can a man's property be taken ... with no due process, and given to another?" asked Frank Blankenbeckler, owner of a Texas dealership.

Many of the dealerships facing shutdown say they are profitable and a bedrock source of employment in their communities.

"These are good jobs," that pay almost twice what other retail jobs typically do, John McEleney, chairman of the National Automobile Dealers Association, told the House Energy and Commerce Subcommittee on Oversight and Investigations. He estimates that 100,000 jobs nationwide are at risk because of the closings.

Skeptical congressmen

Lawmakers questioned whether the closings would help car customers, the economy, or even carmakers themselves.

"With all due respect ... I would be shocked to see your brand loyalty maintained in light of these shutdowns," Bruce Braley (D) of Iowa told the GM and Chrysler executives.

Greg Walden (R) of Oregon cited an example where some residents of his state will now find the closest GM dealership for a car purchase or repair to be 130 miles away in Payette, Idaho.

"We have yet to get an answer on how this will save money for GM or taxpayers," he added.

– Guest blogger Mark Trumbull is a Monitor staff writer.

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