GM Will Reinstate 661 Rejected Dealerships
By Chris Haak
The saga of rejected dealerships – a fallout of the bankruptcies last year of both GM and Chrysler – took another dramatic turn in the past 24 hours. GM announced this afternoon that the company will immediately reinstate 661 of the 1,160 rejected dealerships that have applied for arbitration concerning the loss of their franchises. This means that more than half of the rejected dealers who applied for arbitration will be reinstated without question by GM. The remaining dealerships that have sought arbitration will continue to go through that process, or GM will attempt to settle with them outside of arbitration. Altogether, GM rejected 1,350 stores last year during its trip through bankruptcy.
GM held a dealer briefing at 2:00 p.m. today, and GM North America president Mark Reuss and head of marketing Susan Docherty held a press conference at 3:00 p.m. on the subject of “an update on the dealer arbitration process,” when the company announced the news.
The company has been in the midst of a serious dealer-relations problem since rejecting about a quarter of its dealerships in 2009. Rejected dealers protested furiously, and eventually persuaded Congress to pass – and the President to sign – legislation that called for an arbitration process to determine the reasonableness of the criteria used by GM and Chrysler to terminate dealerships while the companies were in Chapter 11. In recent weeks, GM has taken a more conciliatory tone with its dealer body. After all, as dealers like to point out, they are the company’s true customers, since the public buys cars from them and not directly from the manufacturer.
The intent behind the franchise terminations was to eliminate some of the overlap and unhealthy internal competition (meaning undercutting) that happened between rival GM dealers that were just down the road from one another. Urban areas, where dealership counts were particularly saturated given each manufacturer’s market share, were seen as an opportunity to consolidate or close excess dealerships. However, when word of the victims of GM’s dealer cull became public, it turned out that the company had also cut many small, rural dealers in places where 1) GM owned the market because of a lack of import-brand penetration, and 2) there was no other dealer selling the same brands in convenient driving distance for customers. People are not going to automatically drive 60-90 minutes to the next-closest dealer if their local store was rejected. Instead, they’re far more likely to head right down the road to whatever brand still does have a store in town.
Meanwhile, Chrysler has taken a much stronger stance in these matters. While GM dealers were given about 18 months to “wind down” their operations, their franchises were not immediately taken away as Chrysler’s rejected dealers’ were. Chrysler gave their 789 rejected dealers less than 30 days’ notice of the termination of their franchises. Consequently, a reinstated GM dealer seems more likely to have the ability to resume operations than does a potentially-reinstated Chrysler dealer, who has not been a Chrysler, Jeep, and/or Dodge dealer since mid-2009. Chrysler also noted when it sent arbitration materials to rejected dealers that in spite of its participation in the arbitration process, it reserves the right to challenge the law under Constitutional and other grounds.
Predictably, Chrysler far-tougher stance has given its critics a chance to give it more of a beating than they have levied on GM. Just a few days ago, Republican Reps. Pete Hoekstra of Michigan and Steven LaTourette of Ohio wrote a letter to Chrysler CEO Sergio Marchionne asking him to stop the practice of awarding new franchises in territories where a rejected dealer has applied for arbitration. According to the Congressmen, doing so is not a good-faith way to begin the arbitration process. Over 400 of Chrysler’s 789 rejected dealerships applied for reinstatement through the arbitration process.
Back to GM, though. The decision to reinstate many franchises without a fight puts the company in better graces with many of its stakeholders, although it also damages the competitiveness of a surviving dealer that suddenly has to contend with unexpected competition from a reinstated dealer. The surviving dealer’s sales volume projections can be thrown out the window, unless the market recovers more quickly than expected.
Actually, with the auto market recovering somewhat better than the doomsday-like projections that resulted in the dramatic dealer culls of 2009, GM probably does need more dealers than it had projected at that time. The company is also under an almost completely different leadership team, with Fritz Henderson and Mark LaNeve gone, and Ed Whitacre and Mark Reuss calling the shots now. With different leaders in place, it looks less like backtracking than it would had the two dealer-termination ringleaders made the call to allow some reinstatements. If the reinstatements are given to stronger dealers, with histories of good customer satisfaction, and hopefully in territories that don’t overlap competitors, this may prove to be a shrewd move by GM. It’s far less expensive to ship some new cars to a dealer that’s already open than it is to build a brand new point.
It will be very interesting to see how this all plays out over the next few months. The arbitration law says that all cases have to be decided by mid-June, and the arbitrators may decide to extend that deadline by just one month if necessary, to mid-July.
