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Auto Dealers Fight To Stay On The Map

President Obama's newly-announced plan for General Motors and Chrysler has again put the spotlight on what the future holds for the floundering companies and an already downtrodden Detroit.

Equally uncertain, however, is the fate of the nation's roughly 20,000 auto dealerships, many of whom are already struggling to stay in business.

Though they are not owned by the auto companies themselves, dealers are dependent on them for product and enter into complicated agreements with the automakers related to sales, service and presentation. A dealer might invest millions of dollars to create a dealership showcasing the Hummer line of GM vehicles, for example, and training workers to service those vehicles. If the line goes away, as could happen Tuesday when GM will announce whether or not it is phasing out the brand, they would be stuck with a dealership built to sell vehicles that will no longer be rolling off assembly lines.

The National Automobile Dealers Association (NADA) estimates that at least 1,200 dealerships will close nationwide this year; another 760 were closed in 2008. Though President Obama's announcement that he "will not let our auto industry vanish" on Monday was good news for dealers, they were less heartened by his suggestion that he would not be opposed to letting the companies go into bankruptcy.

Automakers and dealers worry that consumers, concerned about warrantees and parts availability down the road, will not purchase a vehicle from a company whose name is associated with bankruptcy.

"Bankruptcy, under any circumstances, should not be an option," NADA said in a statement released Monday. "It would further erode consumer confidence and, therefore, our ability to sell at the retail level. Moreover, it would further exacerbate the availability of credit. "

The plan GM initially submitted to the Obama administration included plans to cut one third of its 6,200 dealers by 2014. That wasn't enough for the White House, which suggested in a "determination of viability" statement Monday that the company is "burdened" by an "excess of dealers" and that it has not been acting aggressively enough to address the problem.

Cutting down on dealers is complicated for an auto company: They can't unilaterally shut them down since they don't own them, and any effort to cut them off could be met with legal action from owners who have built their dealership around the company's product. In addition, there are legal agreements between the parties that could be expensive and time consuming to deal with, and state franchise laws often require that the company continue supplying its product.

At first, it would seem counterintuitive that shedding dealerships would help struggling auto companies. At the most basic level, after all, more dealers means more sales, at least in theory. And while cutting brands, staff or products directly helps the companies save money, cutting dealers does not have the same effect.

The potential benefit to the company comes from the negative outcomes of competition, says TNS Global analyst Lincoln Merrihew, who studies the auto industry. When two GM dealers are close to each other, they cut costs in order to win business, shrinking margins and ultimately lowering the car's residual value.

As the Chicago Tribune reports, many dealers have become "addicted to selling vehicles through unprofitable financial incentives" even as the Internet has made the best deal easy to find; NADA estimates that by the end of last year margins had fallen to a mere one percent of sales.

Dealers thus now face a landscape in which automakers are being pressured to shed them, competition is fierce, and the few Americans who are looking to buy cars are not having an easy time with financing. (The president said he will offer incentives to get Americans buying again.) In addition, they are losing access to so-called "floorplan" financing, which allows them to buy cars on credit and is deemed essential to their survival; unless something is done to address the floorpplan situation, NADA warns, "the restructuring plan will not work."

If the recession ends relatively soon, gas prices stay low, credit starts to flow and the auto companies stay in business, most dealers should be able to weather the storm. But Merrihew said that if he were a dealer, he would be "feeling very worried."

"I'm looking for the government to do something to instill consumer confidence," he said. "I'm looking for the recession to end. I'm trying to drive people into service areas. I'm letting sales and service people go. I'm hesitant to restock my own supplies. And I'm trying to decide if I need to add more hours of operation or fewer."
By Brian Montopoli