Money and Main Street

Next on the block: 2,600 GM dealers

GM is due soon to start notifying dealers of plan to cut 42% of network. Metro-area and suburban dealers to feel the deepest hit.

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By Chris Isidore, CNNMoney.com senior writer

Do you think the changes being made at Chrysler and General Motors will save the companies?
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NEW YORK (CNNMoney.com) -- The next auto businesses on the chopping block will be 2,600 General Motors dealerships.

GM Chief Executive Fritz Henderson said Monday that the company would by the end of the week start notifying dealerships it wants to eliminate over the course of the next year. The company said last month that it planned to eventually eliminate 42% of its 6,250 dealer locations, which employ more than 300,000 workers among them.

On Thursday, Chrysler LLC's announced that it is dropping nearly 800 Chrysler, Dodge and Jeep dealers, or about a quarter of its network, as part of its bankruptcy restructuring.

GM (GM, Fortune 500) is not yet in bankruptcy court, although Henderson has said such a filing is "probable." The company has until the end of the month to win agreement from creditors, unions and dealerships on a turnaround plan or the Treasury Department, which has been bankrolling GM's ongoing losses, has said it will force the company to file for bankruptcy.

GM, Chrysler and Detroit rival Ford Motor (F, Fortune 500) all have far larger U.S. dealer networks than their Asian rivals, a remnant to the days when the so-called Big Three dominated the market in a way they no longer do.

Many of the GM dealership cuts have been telegraphed by the company's broader cuts in its brands.

The company intends to close about 400 Saturn dealerships as it drops its youngest brand, as well as about 200 Saab dealers, another brand the company intends to give up.

Two other GM brands on the way out, Hummer and Pontiac, face a different scenario. National Automobile Dealers Association figures show there are 18 Hummer and 39 Pontiac dealerships that don't sell other GM brands.

But most Hummer and Pontiac dealers will stay with GM because they have other GM brands under the same roof. For example, almost all of Pontiac's 2,600 dealers also sell either Buick, GMC or both.

The other 2,000 dealers to be cut will be in major metropolitan and suburban areas. GM's own turnaround plans say "dealership overcapacity is most prevalent" in those markets.

The expectation is that the surviving dealerships will become larger and more profitable as a result of the thinning out, which in turn will allow them to spend more on advertising and facilities. But GM also acknowledges that its long-term decline in U.S. market share will continue as a result of the smaller network of dealers.

Typically it is an expensive proposition to buy out dealers. GM spent about $1 billion dropping Oldsmobile at the start of the decade, mostly in payments to 2,800 dealers and the repurchase of their inventory of vehicles and parts.

The company believes that the threat of bankruptcy, plus the difficult financial condition that has led to hundreds of dealership closings in the past year, will allow a far less expensive cutting of the dealership network this time.

GM's 2,700 rural dealership locations are relatively safe, even if they have lower sales volumes than some of the dealerships that will be cut. GM's turnaround plans released in February anticipated few cuts in the rural dealers in the near term.

But GM has since announced plans to cut much deeper into its overall dealership network. That earlier version of the turnaround plan called for it to cut its network to 4,100 dealerships by 2014. Now it expects to get that number down to 3,600 by next year, with most of them being eliminated this year.

The NADA and dealership groups at GM and Chrysler are fighting the dealership reduction plans, lobbying Congress and hiring bankruptcy attorneys. They hope that state franchise laws will give them the leverage they need to at least reduce the extent of the planned cuts. To top of page

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