General Motors and Chrysler are both scheduled to receive a $4 billion cash injection from the U.S. government today, but that doesn’t necessarily signal the tough times are over for the Michigan automakers. Both automakers are tasked with thinning their U.S. dealer base, which could be much more difficult than first thought.
Due to franchise laws and other regulations, getting dealers to call it quits won’t be an easy proposition. GM plans to shed 27 percent of its dealer base – or roughly 1,750 stores – which could cost the automaker billion in buy outs and legal fees. Chrysler also plans to reduce its 3,300-strong dealer network, but has yet to announce by how much.
“In a number of states there’s these very elaborate procedures that you have to go through to shut dealerships,” University of Chicago law professor Douglas Baird told Bloomberg. “In some states you just can’t do it at all.”
But despite the tough road ahead, it’s a necessary move for both automakers. The high number of dealerships – particularly in urban areas – is making it difficult to compete with other brands. Instead of taking on competition such as Honda and Toyota , most GM and Chrysler dealerships are having to deal with other GM and Chrysler stores just around the block. The dealer congestion is also taking its toll on marketing budgets.
That being said, the move to eliminate stores isn’t completely impossible. Just a few years ago GM closed its Oldsmobile brand, which required the closure of several dealerships. However, dealership lawsuits ballooned GM’s cost to close the brand to over $1 billion.
