The future of GM and Chrysler

Area dealers discuss the effects of American automakers' bankruptcies

By Greta Weiderman
CIBM Editor

No one is quite sure how taxpayers' 60 percent stake of General Motors will change the company.

David Parkhill, the president of Champaign-based car dealership Sullivan-Parkhill, which sells Chevrolet, Cadillac, Mercedes-Benz and Volvo, said, "What does that mean? I don't know what that means for the future. My inkling is that I'm going to feel a lot more like a bank with regulations."

And although GM will not be required to file regulatory documents that disclose quarterly earnings, major business transactions or executive compensation, its executives say the company will continue to release regular financial statements after it goes private, even though it will no longer have an obligation to do so.

"There will continue to be a significant level of disclosure," Chief Financial Officer Ray Young told Detroit radio station WJR-AM in early June. "In fact the new GM will be the most public private company."

General Motors

GM filed for Chapter 11 bankruptcy on June 1, and its executives hope it will emerge in two to three months, smaller, leaner and less burdened with debt. Its ownership structure will completely change.

The Treasury Department, which is bankrolling the bankruptcy with $30 billion, will own 60 percent while the Canadian government will take 12.5 percent in exchange for its financing.

Parkhill said, "I'm confidant that GM, with their reinvention, will be able to pay back their notes to the government. I am very confidant that they will be successful."

GM's other stakeholders will include the United Auto Workers, with a 17.5 percent stake, and GM's bondholders, who will get a 10 percent share. GM's current shares are expected to become virtually worthless once the company sells its best assets to a "New GM" and liquidates the rest in bankruptcy court.

Parkhill said GM's new agreement with the UAW will help GM compete with Honda and Toyota.

"Most importantly, products coming from GM are better than ever," he said. He cited GM's second best selling vehicle, the Malibu, which gets 22 mpg city and 30 mpg highway.

"The perception that we don't have fuel-efficient vehicles is something we fight every day," he said.

Parkhill said the 2010 Chevrolet Equinox, a compact SUV which will be available later this month, gets a 22/32 mpg city/highway fuel economy figure.

Although GM plans to cut about 40 percent of its 6,000-dealership network by the end of 2010, Parkhill said his dealership has been confirmed as a future GM dealership.

Chrysler

While Parkhill was confirmed as a future dealer for Chevrolet, three east central Illinois car dealers were not as fortunate in Chrysler's bankruptcy saga. They were among the 789 dealerships that lost their Chrysler franchises as part of the automaker's ongoing bankruptcy.

The list included O'Brien Auto Park in Urbana, Carmack Car Capitol in Danville and the Four Seasons Auto Plaza in Tuscola. All three dealerships sell other brands besides Chrysler and will continue to sell those brands.

Chrysler LLC closed about 25 percent of its 3,200 dealerships by June 9.

In the meantime, Jennifer Shelby, president of Shelby Motors, which sells Dodge and Jeep vehicles in Champaign, is preparing to start ordering and selling Chrysler vehicles later this month as part of the Chrysler Group LLC's plan to get all three franchises under one roof at its dealerships, she said.

"I have to make a few changes in the building," she said, describing a remodel that will include a Dodge, Jeep and Chrysler wallpaper and new signs on the building's exterior.

Although Chrysler had 32 different models in 2007, analysts think that number might drop to only 13 by next year to make room for new Fiats at its dealerships, the New York Times reported.

"I hope they do," reduce the number of models Shelby said, explaining that reducing the model lineup would make dealer incentives simpler and make it easier for customers to choose a vehicle.

She's also waiting to see how Chrysler combines Fiat's fuel efficient powertrain technology with its own car body styles.

"I do feel good about the future," she said. "We'll get the Chryslers brought in, and maybe someday we'll be selling Fiats, too."

Chrysler emerged from bankruptcy protection on June 10, the same day most of its assets were transferred to a new company run by Fiat, which now controls the Auburn Hills, Michigan-based automaker.

The future of the American auto industry

Although many have been critical of the government's bailout of GM, Hadi Esfahani, a professor of economics at the University of Illinois who was once an economic policy researcher for World Bank, said it was the right thing to do, but he does understand the critics' point of view.

"We don't have an alternative world in which we let GM collapse and we watch and say 'OK we don't like this,'" he said. "Letting a network like GM fall apart would be very costly."

He mentioned intangible assets - like jobs, and tacit knowledge, like ways of designing cars, relating to customers, etc. - that would all be lost if GM was just allowed to fail. He also said the government's part of the company is basically a guarantee that the new GM will be very productive, agile, technologically innovative and will develop fuel-efficient new vehicles.

As far as the American automobile industry overall, Esfahani predicts that the real recovery is still a while off.

"It's going to be a couple of years," he said. "It's not the next six months. It's not even a year. Maybe two years. Maybe three years."

- The News-Gazette's Tracy Moss and Dan Strumpf of the Associated Press contributed to this story.

Why GM, Chrysler want fewer dealers

By Bree Fowler
AP Auto Writer

Both General Motors Corp. and Chrysler LLC have announced plans to dramatically reduce their networks of thousands of dealers to cut costs as part of their restructuring efforts.

But the dealers argue that they don't cost the automakers much of anything -- in fact, they make money for the companies, they say -- and that the termination of the nearly 2,000 franchises between the two automakers could result in the shuttering of many of the businesses and the elimination of thousands of jobs.

Also, if the dealers are forced to close, cities around the country could be left with empty buildings, vacant lots and possibly hundreds of thousands of dollars in lost tax revenues.

All of which raises the questions: Just how much do dealerships actually cost their respective automakers? And what other incentives do the companies have to pare back their dealer bases?

Here are some questions and answers about why the automakers are ending their franchise agreements with so many dealers.

Q: What exactly are Chrysler and GM doing?

A: As part of its Chapter 11 proceedings, Chrysler released a list of the 789 dealers for which it plans to terminate franchise agreements.

The affected dealers, which account for about 25 percent of the company's dealer base, had until June 2 to sell off their inventory. After that, they weren't able to offer Chrysler-sponsored financing and other sales incentives.

Meanwhile, Detroit-based GM plans to drop about 1,100, or 20 percent, of its dealers when their contracts end late next year, but the automaker has declined to reveal which dealers were chosen.

The move is part of GM's plan to cut about 40 percent of its 6,000-dealer network by the end of 2010. Besides the 1,110 dealership cuts, the company will shed about 500 dealerships that market the Saturn and Hummer brands, which the company has reached deals to sell, along with the Saab brand, which GM also plans to phase out or sell.

And when the surviving dealers' contracts are up in late 2010, GM will cut still more by not offering renewals to about 10 percent of the dealers that are left.

Q: What's keeping the automakers from just closing the dealerships immediately?

A: Contrary to what a lot of people think, GM and Chrysler don't own the dealerships that sell their cars and trucks. The dealerships are franchises owned by independent companies or business people who sign a contract with an automaker to market their vehicles.

The dealers pay for the vehicles up front with a loan from either an automaker financing arm or an independent bank. Dealers also pay for things like local advertising, along with tools and parts for their repair shops.

Normally, dealers are protected by strict state franchise laws that make it tough for automakers to terminate franchise agreements without showing significant cause.

Q: Why is it so important for the automakers to cut dealers?

A: Both Chrysler and GM claim that having such a large dealer base results in billions of dollars of extra costs for them that they need to cut in order to be competitive in today's global automotive market.

Chrysler has said that most of the dealers it wants to eliminate are either unprofitable, don't carry all three brands of Chrysler vehicles, or are located too close to other Chrysler dealers.

Given the steep drop in the U.S. new vehicle demand in the past year, along with the increase in competition from overseas automakers, there just are too few sales to go around, the automakers say.

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