IE 11 is not supported. For an optimal experience visit our site on another browser.

Dealers could toss wrench in automakers’ plans

Thousands of auto dealers threatened with closure are mobilizing, and they look like they’re girding for a prolonged fight with Chrysler and General Motors.
Image: Mike Breyfogle, general manager of Tempe Dodge Chrysler Jeep
Mike Breyfogle, general manager of Tempe Dodge Chrysler Jeep, at his car dealership in Tempe, Ariz.Jim Seida /

While General Motors and Chrysler make plans to eliminate hundreds of auto dealers around the country, Mike Breyfogle, general manager of Tempe Dodge Chrysler Jeep in Tempe, Ariz., considers himself one of the lucky ones.

“This is a terrible thing,” said Breyfogle, whose company runs a total of nine dealerships in Arizona and Chicago. “I’m hearing though friends of friends that some of the smaller dealerships are expecting to get the ax. I think we will be fine, so I’m not really worried, but I’m sure there are a lot of dealers around the country that are losing a lot of sleep right now.”

Chrysler's bankruptcy proceedings and GM's severe financial problems are sending a shudder of fear through the nation's approximately 20,700 dealers, and some of them are organizing to fight back. But so far it is unclear how much power they will have to save themselves, especially if GM follows Chrysler into bankruptcy court.

Until recently, it seemed that disgruntled bondholders would be the biggest obstacles to a quick and surgical bankruptcy filing at Chrysler and perhaps GM. Then late last week, dissident bondholders objecting to Chrysler’s government-backed restructuring abandoned their court fight against the automaker.

Now the path is clear for Chrysler, which filed for bankruptcy protection in April, to sell most of its assets to Italian carmaker Fiat. But a battle with the automaker’s 3,188 dealers lies ahead.

On Thursday Chrysler is expected to issue a preliminary list of dealers that it will admit into the “new” company after it emerges from bankruptcy.

On Thursday Chrysler said it wants to eliminate 789 dealerships, saying in a bankruptcy court filing that the network is antiquated and has too many stores. GM also is due to start notifying dealers this week if they will be allowed to continue to sell its remaining brands, including Buick, Cadillac and Chevrolet. All told, GM and Chrysler could notify roughly 3,300 dealers this week that they will lose their franchises.

“This is going to be a monumental week for two of the three U.S. automakers,” said Scott Silverman, a partner with the law firm McCarter & English LLP in Boston, who represents automotive dealers in Massachusetts. “You’re talking about these domestic franchises beginning the process of tearing down their dealer ranks in a matter of days.”

Many dealers are preparing to fight back, citing heavy investments backed by franchise agreements that in many cases date back decades. Legal battles with the dealers could delay Chrysler’s exit from a government-forced bankruptcy within the time frame of 30 and 60 days projected by the Obama administration.

Some Chrysler dealers who fear they will lose their franchises have formed a committee and  hired lawyers. In conjunction with the National Automobile Dealers Association, a trade group, the committee has asked Chrysler dealers to contribute $4,000 each to a legal fund, according to news reports.

About 150 dealers will descend on Washington this week to lobby Congress and meet with members President Barack Obama’s auto task force. An advertising campaign in major publications like the Washington Post this week urge Obama “to choose Main Street over Wall Street,” asking why the task force is demanding drastic cuts in the number of dealers, asserting that “cutting dealers at this time would do absolutely nothing to make either GM or Chrysler more viable.”

Dealer consolidation is nothing new. The nation’s Big Three automakers have pledged to trim their bloated network of dealers, but a byzantine network of state franchise laws has protected the dealers. Dealers defend the system, citing their heavy investments in building a franchise.

But with Chrysler in bankruptcy, dealers may not find much protection in their state franchise laws. Under federal bankruptcy law, Chrysler can cancel contracts without having to pay dealers or repurchase their vehicles. The state-level rights would effectively be superseded by federal bankruptcy law, according to Silverman at McCarter & English.

Dealers would also be left unprotected in other ways, Silverman added. They could be stuck with millions of dollars in inventory, potentially putting them at the mercy of creditors, he said.

Money owed to dealers by Chrysler for warranty work or rebates could just disappear, Silverman said. Given the potentially devastating impact on communities and families, NADA is lobbying to slow down the process of closing down dealers, he added.

“I have feeling the court, in the interest of pressing this through quickly, will simply trample on a lot of dealers,” he said. “So unless someone comes up with way to deal with this situation, you will see a lot of independent dealers that have invested in Chrysler for many years really whacked.”

Analysts say the potential leverage over dealers is one reason GM might file for bankruptcy protection when it hits a June 1 restructuring deadline imposed by the Obama administration.  Last week GM CEO Fritz Henderson called a filing “probable,” and the automaker reported a $6 billion loss for the first quarter.

GM has already said it will not buy out dealers as it did in April 2004 when it dissolved its 106-year-old Oldsmobile brand. The automaker had effectively broken is agreement with dealerships, and had to pay severance to each of them. The bill for shutting down Oldsmobile was $1 billion and $2 billion, “and the most expensive part of that was placating the dealers,” said Aaron Bragman, automotive analyst at consultancy IHS Global Insight.

Despite the expected bloodbath, Mike Breyfogle remains optimistic about the auto dealer business.

“On the one hand you have the human side, which is pretty tragic, but in the bigger picture something good is going to come out of this,” he said. “Chrysler will have the strongest dealers, restructured debt and certainly will be in an enviable position. We’ll be leaner and more efficient, and I think we’ll be fine after this process is over, however long it takes.”