Late Model

What will happen to Hummer dealers when GM stops making Hummers?

Saturn logo. Click image to expand.

General Motors and Chrysler submitted “viability plans” to the Treasury Department on Tuesday in an effort to obtain additional loans and credit lines. GM will pare its lineup to four main brands—Chevrolet, GMC, Buick, and Cadillac—converting Pontiac into a niche marque and probably phasing out production of both Saturns and Hummers. What will happen to car dealerships that sell the discontinued lines?

They’ll get bought out. Dealers are not car-manufacturer employees—they’re franchise owners protected by “franchise laws.” Although these laws vary somewhat from state to state, they tend to favor the rights of dealers over Detroit. Such laws restrict, say, Chrysler’s power to open a new Jeep dealership close to an existing one or to shut an old one down without due cause. Colorado law, for example, holds that manufacturers may not “terminate or refuse to continue their franchise agreements with retail dealers unless the manufacturer or distributor has first established good cause for termination or non-continuance of any such agreement.” In practice, this means manufacturers have to part with a lot of cash.

If GM’s Oldsmobile phaseout from 2000-04 is any indication, it won’t be easy for the company to shed brands. GM initially offered Oldsmobile dealers between $1,600 and $3,100 per car sold in their best sales year from the past three years, plus extra for “special circumstances”—like if a dealer recently made improvements to his showroom. But many dealers weren’t satisfied and sued GM for damages. Ultimately, it cost the automaker more than $1 billion to ax what was at the time the oldest American car marque.

Stung by the Oldsmobile experience, it’s possible GM will take a more aggressive approach this time around. Not all states have laws on the books regulating how manufacturers must handle the discontinuation of a brand. And GM is protected by the federal commerce clause, which includes provisions safeguarding a manufacturer’s right to stop producing an unprofitable good. Saturn and Hummer dealers who are worried that they won’t fare as well at the bargaining table, or in court, can pre-empt the brand discontinuations and give GM notice that they’re turning in their franchises. In that case, GM would probably have to buy back the current year’s models, plus unused parts and signage.

It’s been reported that before resorting to buyouts for Saturn dealers, GM may try to sell the brand. In that case, franchise owners might stay in business, peddling Saturn vehicles made by Indian or Chinese manufacturers. This alternative would allow GM to avoid costly buyouts—but it’s possible no company will step up to purchase the rights to the brand.

Car dealerships have more clout than manufacturers at the state level because local legislatures are eager to keep revenue from sales. In the 1990s, automakers tried selling cars online. The plan, initially, was to sell cars directly to consumers, then use dealerships as distribution centers. Naturally, dealerships fought back: Their lobbies pressed local governments to pass or enforce laws requiring manufacturers to sell cars only through state-licensed dealers.

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Explainer thanks Dave Cole from the Center for Automotive Researchand Richard Sox of Myers & Fuller.