Dealers May Have the Upper Hand as Automakers Look to Consolidate

To hear auto industry analysts tell it, one thing General Motors must do to survive is eliminate Conrad Holt’s business and many others like it.

Holt owns Saturn of DFW, the three Tarrant County dealerships that sell GM’s relatively small, unprofitable Saturn brand, which many analysts say should probably just go away.

Not Holt. He wants to see the Saturn brand and his business survive.

"I feel like Saturn is part of the solution, not part of the problem," Holt said. Even in a tough economy, with auto sales in the Metroplex off 40 percent in November, Holt says his three small locations — in Hurst, Fort Worth and Arlington — are viable businesses.

And as long as Holt, and dealers like him, want to stay in business, it’s going to be hard for manufacturers to shut them down.

"The problem is, you can’t just go in and close a dealership" because they are protected by state franchise laws, said George Magliano, director of auto industry research for IHS Global Insights.

The financial lifeline the U.S. government extended to GM and Chrysler on Friday gives the manufacturers three months to work out some enormously difficult restructuring plans.

And there is widespread agreement among analysts that GM, Ford and Chrysler need to drastically prune their dealer networks. GM has said it intends to cut its 6,450 dealers to about 4,700 by 2012.

That’s easier said than done.

"You can’t get out of those franchise agreements," Magliano said, "without paying a lot of money."

It has been estimated that it cost GM between $2 billion and $3 billion to buy out dealers after it eliminated its Oldsmobile brand a few years back, Magliano said. That’s money the manufacturers can ill afford to pay now.

The only way to cut dealerships quickly would be if the manufacturers were to file for Chapter 11 bankruptcy reorganization.

"I would argue that federal bankruptcy law would override the state franchise laws," said Michael McConnell, a Fort Worth bankruptcy attorney with Kelly, Hart and Hallman.

But the Big Three, with strong support from dealer groups, have argued that they need time and money to reorganize without going into bankruptcy.

The Detroit manufacturers have too many dealers because their market share has declined. Nationally, the average Toyota and Honda dealership sells considerably more vehicles than their Big Three counterparts.

The same is true locally. Tarrant County’s four Toyota dealerships sold an average of more than 3,300 vehicles each in 2007 and the three Honda dealerships averaged more than 2,400 new vehicle sales.

By contrast, the eight Ford dealers in the county sold an average of just 1,400 vehicles and the six Chevrolet dealers about 2,100 vehicles each.

"Everybody knows there needs to be fewer dealerships, but nobody wants to give up their dealership," said Cliff Johnson, owner of Texas Motors Ford in Fort Worth.

By some estimates, it would cost GM $5 billion to buy out dealers it no longer needs, $1 billion alone for the 211 dealers that operate 425 Saturn outlets.

Many states have franchise laws that protect dealers; Texas has some of the strongest. Auto manufacturers must be licensed to sell vehicles in Texas and can only sell them through franchised, licensed dealers.

Once an auto manufacturer enters into a franchise agreement with a Texas dealer, it cannot cancel that agreement without being hauled into court.

"Auto dealers are a protected species in Texas," said McConnell, the bankruptcy lawyer.

There’s good reason for that, says Roger Williams, former Texas secretary of state, probable U.S. Senate candidate and owner of a Chrysler-Dodge-Jeep dealership in Weatherford.

"You’ve got a small-business person that’s invested their own capital" into the dealership, Williams said. "You don’t want to wake up one morning and they [the manufacturer] decide they don’t like you."

The difficult economic times are already reducing the number of new car dealerships as owners shut down unprofitable locations.

"Something like 25 percent of dealerships are losing money in any given quarter," said Paul Taylor, economist of the National Automobile Dealers Association. "The number has been drifting up for the Detroit Three."

Taylor estimates that by the end of this year there will be 700 fewer operating new car dealerships in the U.S. than a year ago; he expects that 900 more will cease operations next year.

If 900 a year close, Taylor says, it won’t take too many years to cut the 3,000 to 4,000 Big Three dealerships that analysts say are no longer needed.

The only way for the U.S. automakers to reduce the number of dealers swiftly outside of bankruptcy court, Magliano said, "is for Uncle Sam to come up with some money to buy some of these people out."

GM officials have said they are studying alternatives for the Saturn brand and hope to keep the division alive, but the company needs to use its cash to keep strong divisions like Cadillac and Chevrolet successful.

Holt thinks Saturn, which has gotten an entirely new portfolio of vehicles in the past two years, and his dealerships should be part of GM’s future.

"We’re pretty nimble, we’ve got brand equity and we’ve got great cars," Holt said. "I just think there’s a whole lot of positive things about Saturn."

Source: Star-Telegram

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