GM Reverses Itself On Dealer Closings

GM will spare 900 of the nearly 2,000 dealerships it planned to close.  That will leave it with 5,000.

The revised plan will save GM money. Closing dealerships adds to the company’s costs because of unsold inventory and legal fights with angry dealers.  Many GM dealers have taken their grievances to arbitration, so the No.1 U.S.  car company will save money on attorney’s fees as well. GM said last year it was shutting the dealerships because they were no longer needed after the Pontiac and Saturn brands were killed. Another reason was that GM’s sales plummeted by a third in 2009. The entire domestic market produced only about 10 million unit sales, down from 16 million in 2005 and 2006.

GM now has a greater need to keep several hundred dealers open other than saving a modest amount of money. The car company’s sales are up 35% this year when the shuttered brands are backed out. It cannot compete against  rivals such as Toyota Motor (NYSE: TM) and Ford Motor Corporation (NYSE: F) if its dealer network does not reach the same areas that they do.

GM is still gambling that its sales will be good enough this year to support an IPO. The firm has cut as much costs as it can. That leaves revenue improvement as its only realistic way to increase its net income.

GM’s risk in maintaining a larger dealer base than planned is modest. The potential of incremental sales may end up being essential. CEO Ed Whitacre has made promises to the Treasury and the taxpayers. Keeping 900 dealers open that might have gone away is an ace in the hole.

Douglas A. McIntyre