Car Dealers on Brink: Chrysler Alone May Lay Off 140,000 Employees from JUST Dealers

Chrysler, which borrowed $4 billion, hasn’t publicly discussed discontinuing individual brands. If the Auburn Hills, Michigan-based carmaker doesn’t form an alliance with Fiat SpA, it said it will wind down operations, including all three brands, which support 3,300 dealerships that employ 140,000.

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Dealer Jobs Disappear as GM, Chrysler Bankruptcy Threat Looms
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By Doron Levin

April 21 (Bloomberg) -- Martin “Hoot” McInerney, an auto retailer in southeastern Michigan for about 40 years, sold his Cadillac dealership for $5 million last year rather than wait for General Motors Corp. to determine his fate.

“How many Cadillac dealers will GM decide it needs?” said McInerney, 80, who still owns seven other dealerships. “Someone says 600, maybe it’s only 150.”

Thousands of GM and Chrysler LLC dealers across the U.S. are preparing for the probability that as many as 5,000 of them will be forced to close because of an automaker’s bankruptcy. Dealers say they’re ordering fewer vehicles, cutting expenses, retiring debt and firing workers to preserve cash.

“We’re ahead of the curve and ready to absorb shocks if one of these manufacturers liquidates,” said Sid DeBoer, chief executive officer of Lithia Motors Inc., a publicly owned dealership chain that said it relies on Chrysler brands for 32 percent of its revenue.

Lithia, based in Medford, Oregon, has sold or shut 17 stores in the past year, using $100 million in 2008 from sales of stores and other property to help reduce debt 19 percent to $645 million, according to data compiled by Bloomberg. Lithia has cut its workforce to 4,500 from 6,000 a year ago.

Brands at Stake

GM, negotiating a restructuring with the U.S. Treasury Department after borrowing $13.4 billion, has said repeatedly it will sell or end the Saab, Hummer and Saturn brands. Pontiac and GMC are both under review, people familiar with the matter said. Chevrolet, Cadillac and Buick are GM’s other U.S. brands and are also sold in other markets.

Chrysler, which borrowed $4 billion, hasn’t publicly discussed discontinuing individual brands. If the Auburn Hills, Michigan-based carmaker doesn’t form an alliance with Fiat SpA, it said it will wind down operations, including all three brands, which support 3,300 dealerships that employ 140,000.

“I’m urging all of our dealers not to spend money they don’t have to spend,” said Earl Hesterberg, chief executive officer of Group 1 Automotive Inc., a publicly owned dealership chain based in Houston, Texas. “Of all the brands in peril, I’m least worried about Chevrolet. There will always be a Chevrolet.” It is GM’s best-selling brand.

For dealers, franchise cancellation means the abrupt loss of the right to sell new vehicles and spare parts, as well as to service vehicles under warranty. Each dealership, including building and equipment, often represents an investment of $1 million to $10 million.

GM Declines

GM closed Monday at $1.66 a share, down 92 percent from a year earlier. GM’s $3 billion of 8.375 percent bonds due in 2033 rose 1.15 cents to close at 9.65 cents on the dollar in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The Detroit-based automaker has lost $82 billion since 2004, its last profitable year.

U.S. sales of new cars and light trucks plunged 18 percent last year as energy prices rose and consumer confidence fell. The sales rate in the first quarter of this year was the lowest since the fourth quarter of 1981.

U.S. automakers, which have more dealers than their foreign counterparts, have said for years that they want to consolidate their retail networks as market share has fallen. According to the National Automobile Dealer Association, the average Chevrolet dealer sells 586 vehicles per year, while the average Toyota brand outlet sells 1,821.

‘Very Lean’

U.S. auto dealers have been protected for decades by state franchise laws, which make unilateral termination of their franchises difficult, if not impossible. The federal code trumps state law, say bankruptcy experts, allowing the automakers to shrink their retail networks at will.

Anticipating weak demand for vehicles as well as the potential collapse of Detroit automakers, Autonation Inc., the biggest dealer chain in the U.S., “cut vehicle orders 60 percent in the first quarter,” said spokesman Marc Cannon. “We intend to keep ordering very lean.”

Michael Charapp, an attorney in McLean, Virginia, who has 300 dealer clients, said “we tell them cash is king. You’ve got to keep the business lean in case something happens. Nothing should be spent on anything but essentials. Cut back on personnel.”

Chrysler must merge with Turin, Italy-based Fiat by May 1 or risk the cutoff of rescue funds from the Treasury. GM, whose deadline is June 1, said in February it intended to shut down 2,100 of the 6,248 dealers it had at the end of 2008.

Who Keeps Going

That leaves dealers wondering who has to close shop and who gets to keep going. “You don’t really know which way to run, what to tell your employees,” McInerney said, adding his son was “disappointed” about not getting to inherit the family Cadillac business.

If a dealer does get his or her franchise canceled, calls from bankers won’t be far behind. Most loan agreements for dealer inventories require immediate repayment in the event of bankruptcy. According to the NADA, the average dealer inventory loan is $4.9 million; dealers collectively borrow about $100 billion nationwide.

“If there’s a bankruptcy, things will happen quickly,” Charapp said, noting that bankers usually have the right to seize and sell unsold vehicles to recover their loans. “The automakers won’t have time to be too selective. If they’re not careful they’ll lose good dealers who quit because they lose their wholesale financing.”

Other Brands Affected

The repercussions from GM and Chrysler franchise cancellations could spread swiftly to other carmakers. According to the NADA, there were 19,790 new-car dealerships in the U.S. as of March 1, fewer than 3,000 representing a single brand. Since most dealers own multiple franchises, their borrowings often cover multiple brands and properties.

If vehicles in a Chrysler showroom were seized and sold at auction, for example, the proceeds might not cover the dealer’s loan. A lender could thus demand repayment on related loans covering the dealer’s non-Chrysler brands.

“We’re warning Toyota dealers to watch out, to segregate their finances as much as possible” from those of their GM and Chrysler businesses, said Jerry Pyle, chief executive officer of Gulf States Automotive Group in Houston, Texas, a Toyota Motor Corp. wholesale distributor.

A reason for keeping inventories tight is that panic- selling of unsold vehicles after a GM or Chrysler bankruptcy almost certainly would drive down prices and the value of all dealers’ vehicle inventories.

“If the banks dump their collateral on the market, that would be a disaster,” said David Fischer, a multi-line dealer based in Troy, Michigan.

To contact the reporters on this story: Doron Levin in Southfield, Michigan, at dlevin5@bloomberg.net
Last Updated: April 21, 2009 00:01 EDTp

 

They just printed more money for both of them....

 

It seems I've been stalking you tonight, BuyLow .

IMO, America must have faith in creative destruction. The Big 3 were bleeding money during the Bull market runup. Now its a serious recession and they're hemorrhaging.

This "new economy" cannot support the auto sector at traditional production levels.

The Big 3 have serious management, engineering, design and labor issues. Legacy Corporations are resilient to change and innovation. Bankruptcy will smash whats left of their obstinance and better American Car Makers will rise from their ashes.

We must have faith in it. Darwinian capitalism is responsible for Americas Greatness. Why turn our backs on it now?

 

These are just my thoughts I’m sure that some of you could think of more things….but this do not sound like a good thing for the USA….sounds more like the tipping point of a possible decline into Depression

<b> If Chrysler collapses </b>

Banks will foreclose & take inventory

Banks will get not only Chrysler inventory but other brands as well

Banks will sell that inventory at liquidation prices

This will result in lowered values of remaining dealer inventories and may cause more bankruptcies and liquidations

This will cause declined values in “used car” dealer inventories which could cause more bankruptcies and liquidations

This could cause more unemployment beyond the 140,000 projected from Chrysler dealers alone

This could cause parts suppliers to go bankrupt, which would increase the unemployment

This could cause laid off workers in uniform industries, like GK, Cintas, First, etc

Decreased revenues of Medical Insurance companies

The ripple effect from this will be felt more in state unemployment benefits, housing, grocery stores, utilities, cable companies, tax revenue collections

More foreclosures in the real estate industry both residential and commercial

Increased Unemployment will mean less daycare thus laid off workers at daycare facilities

Increases in criminal activity resulting in overcrowding at jails and court systems

Less fuel sales, so gas stations closing and more unemployment

Bigger strain on Church budgets from less collections and increased needs

Less sales at restaurants, movie theatres, theme parks, etc

 

I recommend the following educational films.

Escape From NY
Mad Max
Road Warrior.

 

Post Chicken Little post.

 

Well you could get a new car at bankrupt auction rates

 

FACTS ARE THERE HAS BEEN ZERO CHANGES IN PRICES OF PRE OWNED LUXURY CARS ON EBAY.

SOMEONE IS BUYING AND PAYING THE SAME AS THEY DID LAST YEAR.

WONDER WHY, IF THE BUSINESS IS SO BAD OVERALL??

 

Finally we agree on something.

Luxury vehicles are not being discounted. Even average cars are not seeing extreme discounting (which they would have to do to sell cars in this economy).

 

yes, i agree. i keep my eye on and have bought several range rovers, jaguars and certain mercedes benz ( AMG ) on ebay over the last 5 years--- noticed NO price changes-- i really would like to see some big discounts, getting close to new purchase!

what are your thoughts on why this is? doesn't seem to make sense.

surf