March 15, 2009 - Abercrombie Chevrolet, Hartselle Ala
GM faces struggle in dropping dealers
State laws and contracts prove to be thorns in process of trimming outlets
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GM faces struggle in dropping dealers
A rural Alabama dealership is showing how difficult it could be for General Motors Corp. to follow through on its restructuring plan to reduce its sprawling network of more than 6,200 U.S. dealerships by about 25% by 2012.
Abercrombie Chevrolet of Hartselle, Ala., has filed a lawsuit against GM and its minority-held finance arm, GMAC, claiming a conspiracy by the two to unlawfully break its franchise agreement "in an effort to shut down dealers and avoid paying franchise buyout fees."
Reducing Detroit's dealer network, which is necessary as U.S. sales shrink, has bedeviled the industry for years because automakers face state laws and individual franchise contracts that make the process costly and slow. It's also an emotional process for many dealers who have had the business within the family for generations.
The lawsuit filed in Morgan County Circuit Court claims GM wrongly withheld rebates, warranty claims and other money due to the dealership while GMAC demanded a bigger cash deposit "in an effort to drive them out of business."
While GM said Abercrombie's complaints are not part of the automaker's reduction plans, the lawsuit illustrates the complicated nature of what GM could face over the next few years as it seeks to reduce its dealership numbers.
"GM has been under intense political fire for not having a plan. But the public needs to know that GM has a plan: to get taxpayer money to prop up their own finances while sticking it to loyal and family owned auto dealerships," Abercrombie Chevrolet's lawyer Douglas Jones, a former U.S. attorney for the Northern District of Alabama, said in a statement last week.
GM denied wrongdoing, saying this was an issue between GMAC and the dealer, and called the accusations "nonsense."
"GMAC makes its own independent business decisions on whether and in what amount to extend wholesale flooring to dealers like Abercrombie. It is a requirement of the dealer agreement that a dealer have an acceptable line of wholesale floor-plan credit to purchase vehicles from GM," said Susan Garontakos, a GM spokeswoman. "In this instance, even though Abercrombie Chevrolet's flooring line was suspended by GMAC, GM has not terminated the dealer agreement with the dealership."
Floor-plan financing is the loans dealers use to acquire vehicles to sell.
She added that GM hopes Abercrombie can work out its issue with GMAC and continue as a Chevrolet dealer.
"In no event does GM want to see the Abercrombie dealership close its business," Garontakos said.
Mike Stoller, a GMAC spokesman, said, "There is absolutely no conspiracy under way. Our credit lines are built entirely around the creditworthiness of the dealer."
Cuts are a tall order
GM has said it wants to cut its U.S. dealer body by 1,726 through 2012.
The Feb. 17 restructuring plan submitted to the U.S. Treasury called for closing an additional 600 dealerships by 2014.
The plan was submitted as part of GM's effort to seek an additional $16.6 billion in government loans on top of the $13.4 billion it has already received to keep it in business.
Industry analysts have warned that executing the plan, especially the dealer-reduction goals, will be a difficult challenge.
State franchise laws and dealer contracts give the independent dealers great protection against changes by the automaker.
Planning for shrinkage
GM CEO Rick Wagoner said the restructuring plan includes money to help buy out dealers and indicated that the company expects it will have to go about cutting its network dealer by dealer, state by state, as it deals with a patchwork of local franchise laws that protects the independent dealers.
"We have reserves in our plan to help facilitate that," Wagoner said in unveiling the plan last month.
But he noted that over the past five years, as GM has concentrated on consolidations, it has been mostly done with the dealer's financing deals within their own market.
"We would generally envision that approach going forward, but it's prudent, and we do have in our plan, some resources to help facilitate those," Wagoner said.
Wagoner declined, however, to say how much has been set aside. While GM struggles in the market -- the automaker posted a $30.9-billion loss last year, as its U.S. sales plummeted 22.7% -- its independent dealers are also having a tough time.
"A lot of these dealers today because of the decline in business have suffered some tremendous losses," said Jeffrey Bennett, a former car dealer and an instructor at Northwood University. "A lot of these guys' cash flows have been compromised."
Credit becomes scarce
Dealers are struggling to find credit to buy new vehicles for their lots at a time when their own financial situation has become rocky.
"What is going on with GMAC and other flooring institutions pulling these dealers' arrangements or demanding more cash is really a function of that and not GM trying to eliminate dealers," Bennett said.
Abercrombie Chevrolet has been family owned for more than 52 years and has working capital in excess of the minimum required by its contract with GM, according to court records.
Last fall, GMAC began changing the terms of its financing with the dealership, including requiring an additional $300,000 cash security deposit, court records said. Meanwhile, GM was delaying incentive payments and withholding unpaid warranty claims, the dealership alleged in the lawsuit.
The dealership said it couldn't come up with the cash deposit but offered to take a second mortgage on the dealership's land and property, which GMAC refused.
"Abercrombie's cash flow has been so severely strained by GM and GMAC that its continued operations are severely jeopardized," the dealership claimed. "Under the franchise agreement, if Abercrombie closes for seven days, the franchise agreement is null and void and GM does not have to pay Abercrombie its buyout provision."