General Motors and Chrysler each need to close underperforming car dealerships if they hope to regain competitiveness. The scope of the closures is hard to overstate: between the two of them, they will close more dealerships than Toyota operates in the United States.
Reuters reports, "GM, facing a U.S. government-imposed deadline of June 1 to restructure or file for bankruptcy, is expected to send termination notices to up to 2,000 dealers -- a third of its roughly 6,000 U.S. dealers." Chrysler, already in bankruptcy protection, will "tell up to 1,000 of its 3,189 U.S. dealers it is terminating their franchise agreements."
Dealers have already begun fighting the cuts on several fronts. Politico reports, "The National Automobile Dealers Association organized a dealer fly-in to Capitol Hill, with more than 100 new-car dealers are scheduled to meet with House and Senate members. The dealers will ask the lawmakers to urge the Presidential Task Force on the Auto Industry to slow down the planned reduction of the GM and Chrysler dealer networks."
Meanwhile, Reuters notes, "The involuntary terminations are also widely expected to prompt a legal challenge from dealers who are independent retail networks protected by state franchise laws."
But, the Wall Street Journal explains, "American car makers have been handicapped by their large dealer networks, which have fostered price battles among those serving the same market. Foreign makers such as Toyota Motor Corp. have more closely controlled the growth of their U.S. networks, giving dealers larger and thus potentially more profitable territories and ridding themselves of weaker locations." Last year, General Motors sold fewer cars in the United States than Toyota - though it had more than three times as many dealerships. Most analysts believe the American car companies cannot regain competitiveness while competing with themselves for sales through such huge dealership networks.
The closures will also show how far the economic impact of the auto industry's struggles has spread beyond Detroit. According to CNN Money, the National Automobile Dealers Association claims that "The cuts, as planned, will result in the loss about 140,000 jobs" nationwide. The loss of dealership advertising will also hurt local media outlets.
The automakers themselves, CNN adds, "may have to buy back excess inventory," which they will have to try to sell off through their remaining dealerships, many of which already have inventory backlogs.
Carroll Smith of Monument Chevrolet in Houston, who was in Washington to lobby lawmakers to step in and slow to cuts, told Reuters that "a rapid wind down of outlets could lead to a flood of new vehicles hitting the market simultaneously at much lower prices, further undercutting hard-hit dealers."