GM gives tough love to its dealers

NADA Chairman John McEleney owns GM and other dealerships in Clinton, Iowa.

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NEW YORK (CNNMoney.com) -- After announcing it will cut thousands of its car dealers, General Motors is asking its remaining retailers to sign more demanding contracts in what one auto dealer group calls "a gun-to-the-head" scenario.

GM's (GMGMQ) remaining dealers have been presented with new agreements asking them to stop selling other brands of cars in the same showroom, meet higher sales goals, upgrade and even relocate their dealerships.

"I've been a dealer for 36 years and it's a very unilateral and onerous agreement," said John McEleney, president of the National Automobile Dealers Association.

McEleney has several GM franchises in Clinton, Iowa, and is of one of 3,600 GM dealers that won't be forced to close following the automaker's bankruptcy.

Shape up or ship out: The actual sales targets aren't defined in the agreement and GM retains the right to change the goals at any time. Under the agreement, failure to meet a target could be sufficient grounds for GM to pull the contract.

"If they want to close a dealer, they can raise that number to unattainable level," McEleney said.

A GM spokesman insisted that, while that is theoretically possible, it's not the automaker's intent.

Auto dealerships are independent businesses that are, ordinarily, protected by strong state franchise laws that restrict what automakers can demand of them and do to them.

Bankruptcy rules can override those laws, though, giving an automaker the ability to quickly back out of a dealership franchise agreements. That gives GM unusual powers for the next few months.

"With this bankruptcy process we have the leverage to move quickly," said Mark LaNeve, GM's vice president of sales.

A new landscape after bankruptcy: Once all the agreements have been signed and GM has made all the changes it wants, a process that is expected to take about 18 months, GM will be 90% of the way to the dealer network it would have wanted if it could have designed one from scratch, LaNeve said.

"We're getting done what would have taken us the next 15 years," LaNeve said.

GM dealers also must sign away their right to object to any dealership moves the automaker wants to make. In many states, said LaNeve, dealers can formally object to a nearby dealer being moved even a short distance if they feel it might hurt their own business.

"We don't want to put up with a myriad of protest rights to do that," LaNeve said.

GM dealers have little recourse, said McEleney. So far, he said, lawyers have told him the agreements are likely to hold up in court.

Short-term pain, long-term health? Not all dealers are objecting to the new requirements. The demands are being made uniformly of all dealers and, ultimately, will result in a stronger dealership network said an executive with a large dealership group. The executive asked not be named since his opinion goes against that of some fellow dealers.

"The ones that are complaining are complaining because they have to act like an organized, functioning unit," he said.

Departing dealers are actually being treated much better than those that will stay on, said McEleney

For the dealerships GM is dropping, the automaker is offering up to $1 million to pay for continuing operations until the franchise agreement runs out in October, 2011, according to a source who has seen several of the letters. GM also said it would buy back remaining inventory after the October, 2010 deadline

"In fairness, I think the wind-down makes much more sense," McEleney said. "It's reasonable and much more compassionate."

In contrast, when Chrysler LLC told 789 dealers last month it was ending their business relationship, those dealers were given only about a month to sell off their inventory. Chrysler also said it would not buy back the inventory that was left after the June 9 deadline.

The goal for GM is to trim the number of its dealers in densely populated metro areas where it no longer has the market share to support them all. At the same time, GM wants to maintain dealerships in rural areas where competition from Asian automakers is scarce.

A GM spokesman insisted these new agreements would not be used to punish or close down dealers. The carmaker simply wants them to be better dealers.

"When we are done with all this, these will all be dealers we dearly need," said GM's Peter Ternes.

In Senate hearings on Chrysler and GM dealership cuts held Tuesday, GM chief executive Fritz Henderson said the automaker had scheduled a meeting for Friday with NADA to disuss the "most objectionable parts of that agreement."