Image: General Motors Headquarters
Paul Sancya  /  AP
General Motors world headquarter in Detroit. About 1,100 General Motors dealers are being told their franchises willl be shut down by end of next year.
updated 5/15/2009 4:12:18 PM ET 2009-05-15T20:12:18

A day after Chrysler LLC said it was cutting 800 dealerships, General Motors Corp. on Friday told about 1,100 of its U.S. dealers their franchises will be terminated late next year.

GM said the move targets "underperforming" dealers with small sales volumes and markets in which they are not competitive.

"Dealers are not a problem to GM; they're an asset to GM. Too many dealers, in actuality, are a problem," said Mark LaNeve, GM's vice president of North American sales and marketing, in a conference call with reporters.

The company did not disclose the dealers it plans to eliminate and left it up to dealerships to reveal if their franchises will not be renewed.

The cuts are part of a larger GM plan to drop 2,600 of its 6,200 dealerships as the automaker tries to restructure to become profitable again. The moves likely will cause the loss of thousands of jobs and governments will lose untold dollars in tax revenue as dealerships are forced to close.

Besides the 1,100 dealership cuts, the company will provide updates to about 470 Saturn, Hummer and Saab dealerships on the status of those brands, which it plans to sell.

Friday's cuts will not be the last. GM said it expects to lose more dealers through attrition. Ultimately, about 90 percent of the remaining dealerships will stay with GM, the company said.

FedEx letters bearing the bad news began arriving Friday morning at GM dealers around the U.S. The letters state that dealers were judged on sales, customer service scores, location, condition of facilities and other criteria.

Both Chrysler and GM say they are cutting the number of dealers because they have too many outlets that are too close to each other, and the competition drives down prices. But as the ranks of dealers thin and competition decreases, that likely will mean higher prices for car and truck buyers.

As GM and Chrysler lost market share to Japanese and other overseas brands, the automakers, as well as Ford Motor Co., ended up with too many dealerships. Many are barely getting by and can't afford to upgrade their facilities or hire the best personnel to compete with the Japanese, who have far fewer dealerships.

With fewer dealers, consumers won't see as much competition, said Aaron Bragman, an automotive industry analyst with the consulting firm IHS Global Insight.

"No longer will people be able to shop between three or four dealers within 15 minutes of each other for the best cutthroat price," he said.

GM knows it will lose sales in the short-term, but over the long haul, fewer dealers will mean higher per-vehicle profits, Bragman said.

"As the dealers go, so goes the company in terms of financial health," he said.

In the 1980s, GM, Chrysler and Ford controlled more than 75 percent of U.S. sales, but that dropped to 48 percent last year. GM alone held nearly 51 percent of the market in 1962, but only 22 percent last year.

Bragman said GM likely will go into bankruptcy protection on June 1, but it's starting to negotiate deals ahead of the filing to speed up the Chapter 11 process.

"GM has been ... acting as if they are negotiating a prepackaged bankruptcy," he said.

Video: Chrysler President: 'Too many dealers' Chrysler is operating under bankruptcy protection, so it is likely to have an easier time tearing up its franchise agreements with its dealers than GM. A hearing is scheduled for June 3 in U.S. Bankruptcy Court in New York for the judge to determine whether to approve Chrysler's motion to fire its dealers.

Chrysler executives said Thursday the company is trying to preserve its best-performing dealers and eliminate ones with the weakest sales. More than half of the dealerships being eliminated sell less than 100 vehicles per year, they said, and account for 14 percent of U.S. sales.

Chrysler has received $4 billion in government aid, while GM has received $15.4 billion. GM is continuing to restructure out of court and faces a government-imposed deadline of May 31 for doing so. Several difficult hurdles remain, and many experts say that it is all but inevitable that it will follow Chrysler into Chapter 11 bankruptcy.

To remake itself outside of court, GM must persuade its bondholders to swap $27 billion in debt for 10 percent of its risky stock. In addition, it must work out deals with its union, announce factory closures, cut or sell brands and shutter dealers.

Swapping its bond debt for equity may be its most difficult task. The company is trying to get 90 percent of its bondholders on board for the so-called debt-for-equity swap. A committee representing the bondholders has rejected the swap, saying it unfairly favors the government and the United Auto Workers union. They have counteroffered seeking a 58 percent ownership stake, which the automaker in turn rejected.

On Thursday, GM said that bankruptcy is possible if it doesn't get enough takers on the exchange. If that happens, it likely would sell most of its assets to a new company and liquidate the rest, the automaker disclosed in a regulatory filing.

The automaker also says it could seek court approval of its reorganization plan even if creditors vote against it.

Copyright 2009 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Video: GM drops 1,100 dealerships

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