Automakers Face Costly Road to Cut Unpopular Brands
Sunday, December 7, 2008
The Frank Kent Hummer dealership -- complete with an indoor waterfall and a massive curved roof reminiscent of an aircraft hanger -- opened in Fort Worth in the spring of 2005 with hopes as high as the giant "H" that dominates its entrance.
Three years later, General Motors wants to get rid of its lagging Hummer brand. But what's good for GM in this case may not be good for its 400 Hummer dealers, who have invested millions of dollars with the expectation of selling a line of new products for years to come.
Moreover, auto dealerships are protected by stringent franchise laws around the country and by contracts with manufacturers that make it difficult -- and potentially costly -- for automakers to walk away from brands. And dealers, who are politically powerful, are mobilizing elected officials to provide further cover as the industry prepares for a huge overhaul.
"To think they'd sell the franchise and leave the top 150 dealers hanging, I don't think they'll do that," said Will Churchill, co-owner of Frank Kent Motor Co., which paid to build the $3.5 million Hummer dealership to GM's specifications. "They'll do something to help minimize that blow."
This weekend, aides to congressional Democrats met to draft legislation that would provide enough money to the auto industry to keep GM and Chrysler afloat for a few months. The accord would dip into loans approved last year to promote fuel efficiency, but which haven't been dispensed yet. House Speaker Nancy Pelosi (D-Calif.), who has opposed using those funds, said Friday that she would agree if the funds were replenished from a new bailout package or from existing financial rescue programs. The Bush administration yesterday signaled its support as long as the companies were willing to make the "difficult decisions" necessary to keep their businesses viable.
"Taxpayers should not be asked to finance assistance for automakers without a strong likelihood that they will be paid back," said White House press secretary Dana Perino.
Dealerships represent one thorny issue facing automakers, whose production capacity currently exceeds what is needed to supply the U.S. car market. Eliminating brands and closing down dealerships is central to their strategy for survival. GM dealers are the biggest target; the company has about four times as many dealerships as Toyota even though the two firms sell about the same number of cars in the United States. GM told Congress last week that it plans to shed 1,700 of its 6,400 dealerships by 2012.
Gone are the days when a company would pursue a strategy of making "a car for every purse and purpose," as GM chief executive Alfred Sloan put it in the 1924 annual report. Last week, GM CEO G. Richard Wagoner Jr. said the company would focus on just four brands that make up 83 percent of the company's sales.
But untangling the web of relationships with dealerships could be time-consuming and costly.
The car companies established their dealership networks decades ago because they figured that independent businesspeople would work harder than employees and take on the burden of capital costs for retail buildings. But the arrangement was not without friction. In the 1920s and 1930s, for instance, manufacturers forced dealers to take on inventory even in weak markets, and the dealers sought help from state legislatures. Today, state laws set all sorts of rules. In Texas, no two dealers of the same brand can be less than 15 miles apart. In Maine and Florida, dealers can charge auto manufacturers full retail price for parts that manufacturers supply the dealers for warranty repairs.
State laws "keep dealers from getting taken advantage of by manufacturers," said Churchill, the Fort Worth Hummer dealer. "It's a David and Goliath situation. It kind of gives the dealers a little bit more muscle."
Now, if an automaker wants to close down a dealer for whatever reason -- known as a "forced termination" -- it can take six months to two years, including court appeals. Many analysts say that GM paid more than $1 billion to dealers when it killed off its Oldsmobile line. GM would not say how much it spent.