A GMC vehicle sits at a Los Angeles dealership in May. Closing dealers have until June 12 to sign wind-down agreements to get incentives. (Mark Ralston / Getty Images)
General Motors Corp. is eliminating more dealers than initially reported and taking a tough stance with the rest of its retailers who must agree to stricter sales and performance targets or be eliminated in bankruptcy court.
Dealers nationwide started receiving letters Thursday that outline higher standards that essentially replace contracts voided when GM filed Chapter 11 bankruptcy Monday. GM initially notified about 1,100 dealerships last month that their franchise agreements would not be renewed next year, but 250 more dealers were added to the list Thursday.
The move would have been difficult, if not impossible, without a bankruptcy filing, which lets GM play hardball with its dealers. GM is now free to eliminate retailers because state laws that protect franchises do not apply in federal court.
The letters arrived on the eve of a Senate committee hearing scheduled for today that will discuss plans by GM and Chrysler LLC to eliminate dealerships.
"Rapid dealer reductions increase unemployment, threaten communities and decrease state and local tax revenue without any material corresponding decrease in an automaker's costs," said John McEleney, chairman of the National Automobile Dealers Association.
The agreements sent to dealers spell out higher sales targets, set goals for dealer profitability, capitalization, sales effectiveness and, in some cases, demand facility improvements.
"They are higher standards designed to improve the quality of the customer experience," GM spokesman John McDonald said.
Dealers who are being eliminated have up to 17 months to dispose of their unsold vehicles, and GM is offering financial incentives to those who sign a "wind-down" agreement. Those incentives could include money to keep the dealership open through the end of this year or early 2010 until the remaining vehicles are sold. The dealers must sign the agreements by June 12. Those who sign must consent to staying open until at least Jan. 1.
"Dealers will handle their inventory instead of vehicles hitting the market and taking huge losses," said Mark LaNeve, GM's vice president of sales service and marketing.
"We believe it's much better for the dealer and us to work down the inventory in a logical manner."
Since Pontiac will be phased out by the end of 2010, GM is targeting underperforming dealers with stores that also sell Buick and GMC brands.
Those dealers are being asked to sign agreements to eliminate their stores or consolidate the dealership with another one located nearby, spokeswoman Susan Garontakos said.
If those dealers refuse to sign, their dealerships will be lumped into the "Old GM."
"We want the best dealers in the best locations," Garontakos said. "It only makes sense."
In its bankruptcy filing, GM said it would immediately try to cut 2,100 dealerships -- far more than the 1,100 it had originally announced would be closed.
GM CEO Fritz Henderson said the company wants to close 400 dealers that sell fewer than 50 cars a year and 630 dealers that substantially sell vehicles from brands that are being discontinued. GM is closing or selling Hummer, Saab, Saturn and Pontiac.
Meanwhile, General Motors of Canada Ltd. sent letters to its dealers last month, including 242 who learned their agreements will not be renewed next year.
The terms of the wind down for those dealers are being negotiated on an individual basis, said GM Canada spokesman Stew Low.
Now that GM is in bankruptcy court, the automaker can try to immediately terminate dealer franchise agreements, which are protected under state law.
GM plans to speed its way through bankruptcy using the same process Chrysler used -- Section 363(b) of Chapter 11 -- to transfer its best assets into a new company that would emerge first from bankruptcy.
The so-called "Old GM," consisting of unwanted assets, obligations and some dealers, likely will remain in bankruptcy court for years.
Until GM filed bankruptcy, dealers were required to meet targets set for market share penetration, customer satisfaction and facility standard -- but the targets were rarely enforced, dealers and a company spokeswoman agreed.
Since filing bankruptcy Monday, GM is essentially creating new dealer contracts that will make it easy for GM to shed unwanted retailers, dealers said.
"Now they'll be pretty much strong-arming dealers to put the right contracts in place," said Stuart Lasser, a New Jersey dealer who owns three Saturn stores. "Everything that was in place is basically down the toilet."
He credited GM for giving dealers time to wind down their businesses instead of adopting Chrysler's approach of giving unwanted dealers a few weeks before being forced to shut down.
GM says it has no choice but to hold dealers to higher standards and the pain is being spread among all aspects of the automaker's business, Garontakos said.
"It is strong, but what we're doing with employees, it's the same thing," she said. "With our manufacturing operations, it's the same thing."
GM is shuttering or idling 14 plants, cutting more than 20,000 hourly jobs and cutting about 3,000 more salaried workers.