GM's Henderson: Smaller Dealer Network Will Reduce 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 Officer Fritz Henderson and Chrysler President Jim Press, testifying before Congress for the first time since their companies filed for bankruptcy, suggested the auto makers waited too long to reduce their dealer networks. The companies' plans to close about a combined 3,400 dealerships will reduce expenses while improving brand image and sales, the executives said in prepared remarks for a hearing scheduled for Wednesday afternoon before the Senate Commerce Committee.

"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 said in his prepared remarks.

The planned dealer closings have blown up into a major political issue on Capitol Hill, where dealers have ramped up lobbying in recent weeks to oppose the auto makers' plans. Lawmakers from both parties, whose districts stand to be equally affected by the closings, have responded by pressuring President Barack Obama's auto industry task force. Dealers have accused the administration of requiring deeper cuts than needed.

Wednesday's hearing was called by Senate Commerce Committee Chairman John D. Rockefeller, D-W.Va., 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.

Dealers told the committee 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.

"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.

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.

GM plans to sever ties with about 2,600 dealers, while Chrysler is closing 789 dealerships. The plans are part of the auto makers' Obama-led reorganizations, and will accompany major concessions from other stakeholders, including the United Auto Workers union, big lenders and individual investors.

"Today's automotive industry cannot support the number of dealers currently in the marketplace," Press said.

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.

"There's not enough business for the number of dealers Chrysler has today, given that we have less than two-thirds of our former sales volume," Press said.

Henderson said that the closings will help GM reduce dealer-related expenses for information technology systems, sales incentives, training, service parts and advertising. He estimated that GM spends about $1,000 per vehicle in dealer support.

Even after the cuts, GM will still have the nation's largest dealer network, Henderson said, which he estimated would be between 3,500 and 3,800 dealers by the end of next year. The number of units sold per dealer would nearly double compared to today's levels, he said.

"Consolidation will enable us to focus our resources on top performers and core brands of Chevrolet, Cadillac, Buick and GMC," Henderson said.

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