3rd UPDATE: GM: Smaller Dealer Networks Will Cut Costs

Top executives at General Motors Corp. (GMGMQ) and Chrysler LLC defended plans Wednesday to cut ties with thousands of auto dealers, telling skeptical U.S. lawmakers the reductions are critical to their companies' survival.

GM Chief Executive Fritz Henderson and Chrysler President Jim Press, testifying before Congress for the first time since their companies filed for bankruptcy, said plans to close about a combined 3,400 dealerships will reduce expenses, improve brand image and ultimately boost sales.

"This is our last chance to get it right, to fix permanently those parts of the business that have diverted us from consistently building winning cars and trucks and the consumer experience to match," Henderson told the Senate Commerce Committee.

The hearing was held as Congress sought more influence over the Obama administration's auto-industry rescue. Lawmakers from both parties have expressed frustration over their limited role in the administration's plans to take ownership stakes in the auto makers. The administration is guiding the restructuring using funds from the Troubled Asset Relief Program that Congress authorized last year to stabilize the financial system.

"I never would have believed as a candidate for the U.S. Senate that the U.S. government could buy GM without a hearing, with no vote, yes or no," Sen. Mike Johanns, R-Neb., said at Wednesday's hearing. "And I find that to be extremely bothersome. There are billions and billions of dollars at stake here."

He said he would soon introduce legislation requiring the administration to obtain congressional approval any time it used TARP funds to take equity stakes in a company.

Senate Commerce Committee Chairman John D. Rockefeller, D-W.Va., called Wednesday's hearing along with the committee's top Republican, Sen. Kay Bailey Hutchison of Texas, who threatened to hold up a war-funding bill last month because of the dealer closings.

Rockefeller said it was the most crowded hearing over which he had presided. Dozens of auto dealers sat in a packed hearing room.

Dealers told the committee that the cuts won't produce the cost savings claimed by the auto makers. They said the closings were being done hastily and without regard to state franchise laws that require manufacturers to compensate dealers slated to be closed. Chrysler dealers are slated to close within weeks.

"Rapid dealer closings increase unemployment, threaten communities and decrease state and local tax revenue without any material corresponding decrease in the auto makers' costs," John McEleney, a GM dealer in Iowa and chairman of the National Automobile Dealers Association, said in his prepared testimony.

"We are not a cost to Chrysler," said Russell Whatley of Texas, whose dealership is slated to be closed. "We pay for everything we use, and we take all the risk. We are Chrysler's customer."

Many dealers fear they will be unable to sell vehicles that they purchased from GM and Chrysler by the time they close, McEleney said. He called on the Obama administration to provide more money to Chrysler to buy back the dealers' inventory and to give dealers more time before closing.

Press, Chrysler's president, committed to aiding dealers to redistribute parts and inventory. "We don't plan for the dealers to be left with inventory," he said. "We will help any of those that sign a release."

GM plans to sever ties with about 2,600 dealers, while Chrysler is closing 789 dealerships.

Henderson, at the request of committee members, said he will also provide the committee with a list of dealers it intends to close. GM has kept that list private since the dealers are still deciding if they will agree to sign on to GM's plan to "wind them down" by October 2010.

While the average dealer in the U.S. sold 525 vehicles and made a profit of $279,000 in 2008, Chrysler dealers sold on average 405 vehicles and lost $3,431, Press said.

-By Josh Mitchell, Dow Jones Newswires; 202-862-6637; [e-mail]