GM Plans 'Orderly' Dealer Cuts To Boost Sales, Prices

General Motors Corp. (GM) is counting on cuts to its U.S. dealer network to help the auto maker eventually sell more cars and trucks at higher prices through remaining outlets.

The auto maker is sending letters Friday to around 1,100 auto dealers informing them their days of selling GM vehicles are numbered, according to people familiar with the plans. GM is planning a noon conference call to discuss its plans.

The cuts are part of GM's efforts to downsize as it faces a June 1 deadline from the Obama administration to restructure or file for bankruptcy.

Determined to avoid the huge costs involved with cutting Oldsmobile brand dealers earlier this decade, GM has said it will draw down dealer inventories and allow contracts to run out naturally.

Dealers franchise contracts in most states prohibit auto makers from abruptly shutting down stores without a legal settlement. Additionally, auto makers typically agree to buy back unsold dealerships when they shutter a store.

This time, GM is preparing to close stores by refusing to renew contracts with what it considers underperforming dealers, the person familiar said. Most of GM's contracts with dealers expire in October 2010.

The company has said it's aiming for an "orderly" process in which it draws down inventory so to avoid being saddled with excess inventory from shuttered dealers.

GM's restructuring calls for reducing its dealer network of around 6,000 by 42% and shedding four of eight brands - Saturn, Saab, Hummer and Pontiac. Dealers of those brands will be hit hard, though some stores that sell GM's healthier brands will go.

GM believes having fewer, healthier dealers helps it better compete with rivals such as Toyota Motor Corp. (TM), which have newer, better financed dealerships in attractive locations. An over concentration of dealerships also can erode profits because stores are forced to compete against each other by driving down prices.

Even after the cuts, GM will still have more than twice as many dealerships as Toyota, which had a 15% share of the U.S. market in April compared to GM's 21% share.

In a much more abrupt move, Chrysler LLC announced Thursday it would cut 789 U.S. dealerships, or about one-fourth its stores, as part of bankruptcy proceedings. The moves come as GM dealers in Europe look to secure a minority stake in the auto maker's European Opel unit with a $680 million investment.

-By Sharon Terlep; 248-204-5532; [e-mail].