One More Reason Chapter 11 Is The Right Solution

Bloomberg has a story about GM and Chrysler grappling with how to trim their dealer network. It has to be done but it isn’t easy as state franchise laws protect the dealers.

Restructuring the network of independent retailers is more difficult than negotiating with bondholders or the United Auto Workers union, which can bargain as groups. Dealers, employing more than 1.1 million salespeople, accountants and mechanics, are protected by state franchise laws. GM spent more than $1 billion to dissolve its Oldsmobile unit, partly on lawsuits over forced closures.

“In a number of states there’s these very elaborate procedures that you have to go through to shut dealerships,” University of Chicago law professor Douglas Baird said in an interview. “In some states you just can’t do it at all.”

GM has a goal of closing 1,750 showrooms, or 27 percent, over four years. Chrysler hasn’t set a target for its plan to cull 3,300 dealerships. Chrysler’s and GM’s sales have plunged a combined 24 percent this year.

In order to get their product lines down to a size appropriate for the U.S. auto market, the two have no choice but to cut their dealer network. The only way to do that as they are currently structured is to buy out the dealers. So a portion of the money coming from the government is going to flow right through the auto makers and into the pockets of the dealers. Not quite what you may have seen in the papers.

There is one other way to handle this situation. In Chapter 11 the court has the ability to negate any contract including the dealer agreements and no cash passes hands. We will probably get to that point but we will spend a lot of cash in the meantime.

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