Gregory Jackson, owner of five General Motors dealerships believes that as GM whittles down the number of franchises in bankruptcy “those last men standing should do well.†But when the smoke clears, no one is sure how many minority dealerships will be left standing.
“I would say there is a lot of anxiety on the part of the entire industry,†says Jackson, owner and CEO of Prestige Automotive Group (No. 1 on the 2009 BE Auto Dealers list with $646.2 million in revenues).
The bankruptcy proceedings of Chrysler L.L.C. and now GM could trigger adverse consequences for minority-owned dealers and the communities that they reside in, says Damon Lester, president of the National Association of Minority Automobile Dealers.
If the shakeout at Chrysler is any warning, there could be a disproportionate amount of black-owned franchises closing this year. Of 19,000 new automobile dealerships, less than 1,200 or 5% were owned by ethnic minorities, said Lester in a testimony before the House Judiciary Committee in May. Chrysler’s termination of 800 dealer contracts that month condensed ethnic dealerships by 25%. GM, which had about 40 black-owned dealerships before the closings, says they will reduce their dealer body by about 1400 to 3600 businesses.
While Chrysler sought to close dealerships in less than four weeks, GM will be giving approximately 1,400 dealerships 18 months to unwind and sell-off their inventory and parts. However, GM has not spelled out how much money it will use to assist in the dissolution of dealers, and bankruptcy law gives them the right to reject dealers sooner if they choose to.
“It is very ambiguous,†says Marjorie Staten, executive director for General Motors Minority Dealers Association. “We don’t have the details of whether [GM] will buy back every single vehicle and every single part. [If not] that could leave some dealers exposed.â€
Those dealers, whose contracts were not rejected, will fall under the “new GM†during the restructuring process; terminated dealers will remain under the “old GM.†This will produce two classes of dealers that will both continue to operate their companies under extreme duress as they try to sell off a glut of inventory.
Dealers typically use floor plan financing to buy the vehicles from the manufacturer at a discount
and then pocket the difference when they sell them. This year, auto sales have been historically low. Chrysler would not buy back or help sell the excess inventory after the bankruptcy, but helped dealers redistribute parts and inventory to surviving dealers. Still, some dealers will be liable for the vehicles and loans they can’t trade or sell. Dealers are afraid that GM management might change their mind and do the same.John D. Rockefeller IV (D-WV), chairman of the U.S. Committee on Commerce, Science, and Transportation said Wednesday at a hearing that dealers had a right to be concerned about whether GM would honor its commitment. The government will be making a $30 billion investment in GM and has committed $15.5 billion to Chrysler.
“I don’t believe that companies should be allowed to take taxpayer funds for a bailout and then leave local dealers and their customers to fend for themselves with no real notice and no real help,†said Rockefeller.
Lester wants Congress to step in and force the manufacturers to relieve the dealers from all personal guarantees for term loans and floor plan loans
so that the dealers can keep their personal assets. Lester also argues that terminated dealers should be able to keep the proceeds from their parts and receive fair and reasonable compensation for property.“Although a manufacturer can file for bankruptcy, restructure, and create a new company, that is not an option for a dealer. Dealers are caught holding everything,†Lester said, in an interview with BlackEnterprise.com.
The ‘New GM’
The number of units sold per dealer will nearly double, once they close the other dealerships, according to Fritz Henderson, GM CEO, at the Senate Commerce hearing Wednesday. But just because their contracts were renewed doesn’t mean that the remaining dealers have an easy road ahead of them. The surviving dealers will continue to operate in an environment that is capital poor.
To help alleviate the problem, the Small Business Administration instituted a new Dealer Floor Plan financing program, a subsidy that will guarantee up to 90% of loans made by small auto dealers for working capital. Some 50% of minority dealers are now eligible for the subsidy, says Staten.
Even with the program, banks refuse to lend to dealers without 100% collateral, says Staten. “The banks are not willing to lend to them because they feel they are toxic assets,†she says.
Although NAMAD has asked congress to encourage TARP-sponsored banks to work with dealers, that too might be a dead end.
“Those [dealers] that remain will face a long period of slow sales, significantly smaller profit margins, and uncertain revenue forecasts,†according to a statement issued Wednesday by Rep. Nydia M. Velázquez (D-NY), the chairwoman of the house committee on small business. She questions why the SBA would implement a program that could result in a significantly higher risk of loan defaults.
Lester hopes that the new fleet modernization bill, which offers consumers incentives to purchase fuel efficient vehicles, will help stimulate car sells. But Lester is quick to remind that a dealer can’t sell cars without floor plan loans.
“Long term [the reduction of franchises] may help the [remaining] dealers,†says Lester. “In order to survive this storm we need an infusion of working capital.â€
Further Reading: