The cuts are part of a larger GM plan to slash 2,600 of its 6,200 dealerships as the automaker tries to restructure to become profitable again. The moves likely will cause the loss of thousands of jobs across the U.S. Local governments will lose thousands of dollars in tax revenue as dealerships are forced to close.
The dealerships notified will have until October 2010 to close out their businesses, reports CBS News correspondent Jeff Gilbert.
Those dealers, which the company considers under-performing, will eventually be joined by dealers of brands GM is shedding. Stand-alone Pontiac dealers will be phased out while sellers of Saabs, Saturns and Hummers will have to wait to find out if their brands have a future.
Both Chrysler and General Motors say they are cutting dealers because they have too many outlets that are too close to each other, and the competition drives down prices. But as the ranks of dealers thin and competition decreases, that likely will mean higher prices for car and truck buyers.
As GM and Chrysler lost market share to Japanese and other overseas brands, the automakers, as well as Ford Motor Co., ended up with too many dealerships. Many are barely getting by and can't afford to upgrade their facilities or hire the best personnel to compete with the Japanese, who have far fewer dealerships.
With fewer dealers, consumers won't see as much competition, said Aaron Bragman, an automotive industry analyst with the consulting firm IHS Global Insight.
"No longer will people be able to shop between three or four dealers within 15 minutes of each other for the best cutthroat price," he said.
GM knows it will lose sales in the short-term, but over the long haul, fewer dealers will mean higher per-vehicle profits, Bragman said.
"As the dealers go, so goes the company in terms of financial health," he said.
In the 1980s, GM, Chrysler and Ford controlled more than 75 percent of U.S. sales, but that dropped to 48 percent last year. GM alone held nearly 51 percent of the market in 1962, but only 22 percent last year.
Bragman said GM likely will go into bankruptcy protection on June 1, but it's starting to negotiate deals ahead of the filing to speed up the process.
"GM has been ... acting as if they are negotiating a prepackaged bankruptcy," he said.
In in a filing with the Securities and Exchange Commission Thursday, GM said bankruptcy is possible if it doesn't get enough takers on an offer to swap $27 billion in bond debt for stock.
The automaker also says it could seek court approval of its reorganization plan even if creditors vote against it.
To remake itself outside of court, GM must persuade its bondholders to swap $27 billion in debt for 10 percent of its risky stock. In addition, it must work out deals with its union, announce factory closures, cut or sell brands and shutter dealers.
Swapping its bond debt for equity may be its most difficult task. The company is trying to get 90 percent of its bondholders on board for the so-called debt-for-equity swap.
GM offered last month to give bondholders 225 shares for every $1,000 worth of bonds. The company would issue 62 billion new shares and then do a 100-for-1 reverse stock split.
Bondholders would end up with 10 percent of the company's shares under the offer, which expires May 26. But a committee representing the bondholders has counteroffered seeking a 58 percent ownership stake, saying it unfairly favors the government and the United Auto Workers union. They have counteroffered seeking a 58 percent ownership stake, which the automaker in turn rejected.
Shares of GM closed Thursday at $1.15.
European Dealers Try To Save GM Opel
Dealers for General Motors Corp.'s Opel unit hope to help save the European auto maker and secure a minority stake by investing up to $680 million, their association said Friday.
Representatives of the European Opel Dealer Association from 25 countries met in Vienna to endorse the plan, originally floated in March. They hope to secure a seat on Opel's supervisory board with their proposal.
The plan foresees that, over three years, Opel and Vauxhall dealers would put $204 into a fund for each new car sold.
It was unclear how large the resulting stake might be. Euroda's deputy chairman, Albert Still, said a 10-15 percent range looks likely, with the realistic maximum at 20 percent.
Euroda chairman Jaap Timmer said in a telephone conference call that "we still have to fill in a lot of details" on how the plan might work. If a major investor wants money up front, "we will have to negotiate that," he said.
Timmer said the dealers hope to start talks next week with GM, Opel and European governments, and also would like to talk with potential major investors to determine whether they are interested.
Italy's Fiat SpA wants to make GM Europe, including Opel, part of a global powerhouse also including Chrysler LLC.
As a possible alternative, Canadian auto parts maker Magna International has said it is in talks about options for Opel that might include taking a minority stake, but otherwise has given few details.
The German government expects both of those suitors to give more details of their plans by May 20.
Euroda's Still said every country's dealer association endorsed pursuing the plan on Friday apart from Finland's representatives, who abstained.
"To what extent our ideas can be fulfilled of course depends on negotiations and to what extents investors want us in a new Opel-Vauxhall company," he said.
"It could be historic that, for the first time, dealers participate in their manufacturer in a noteworthy extent and so gain a certain degree of influence on the future policy of the producer," Still added.
Berlin is keen to ensure the future of Opel - which employs some 25,000 people in Germany, nearly half GM Europe's total work force.
Opel spokesman Andreas Kroemer said the company welcomes "the dealers' dedication to Opel and strong bond with the brand." He did not comment further on the dealers' plan.