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Judge Approves Chrysler Dealership Cuts

Tuesday, June 9, 2009 5:31 PM

NEW YORK, June 9 -- A federal bankruptcy court this afternoon approved Chrysler's request to sever ties with 789 dealerships, overruling the objections of hundreds of business owners who begged, at times in tears, that they be allowed to continue to operate.

The ruling means Chrysler's sales network will shrink by a quarter, effective immediately. The rejected dealers must now take down promotional materials and billboards with the Chrysler logo. They are no longer allowed to offer repairs or services of any Chrysler products as an authorized dealer.

The rejection "constitutes an exercise of sound business judgment by the Debtors, made in good faith and for legitimate commercial reasons," U.S. Bankruptcy Judge Arthur Gonzalez wrote. It is "appropriate and necessary under the circumstances."

Gonzalez's decision comes as Chrysler and the Obama administration wait for word from the U.S. Supreme Court, which Monday stayed the sale of the company to a new entity run by Fiat while it considers whether or not to have a hearing. A hearing could delay the government-orchestrated sale of Chrysler's assets to Italian carmaker Fiat by weeks, perhaps months, potentially jeopardizing the Obama administration's efforts to revamp the ailing auto industry.

Attorneys for the dealers had argued during a four-hour hearing earlier today that the business owners be allowed to operate until at least the Supreme Court made its decision.

"Hopefully Congress will remedy it," said Stephen Lerner, who represents hundreds of rejected dealers, said in an interview after the hearing. "Whether they can do anything in time to remedy the Chrysler dealers is unclear."

The dealers had sought to continue providing warranty services on vehicles sold before the April 30 bankruptcy filing, as well as extra time to get rid of their unsold inventory of cars and car parts. Several dealers testified last week that they had agreed, at the pleading of Chrysler executives in the weeks leading up to the bankruptcy, to buy hundreds of cars they didn't need in order to help the automaker with its severe cash flow problems. Some said they continued to receive shipments even after they had received a May 15 letter from Chrysler informing them of the termination.

"It's unconscionable," Lerner said in court. "They could have provided a softer landing."

General Motors, which followed Chrysler into bankruptcy last week, plans to cut more than 2,000 of its 6,000 dealers, but most would be allowed to operate until their contracts end next year.

During roughly four hours of oral arguments, Lerner and about two dozen other lawyers argued that Chrysler had used arbitrary measures in choosing which dealers to reject, and that there was no pressing need to shutter the dealerships immediately. The process, they added, trampled on the dealers' their rights under state law, including those that guarantee more than the 25 day-notice the dealers received to wind down their businesses.

Chrysler had sought to terminate its agreements with dealers as of today. Chrysler has been trying to trim down a bloated dealer network for several years. It said it used criteria such as location and sales volume to determine which dealers to keep. The company also wants dealerships that offer all three brands, Chrysler, Jeep and Dodge.

"No dealer wants to be rejected -- we understand that," said Kevyn Orr, an attorney for Chrysler, adding that federal bankruptcy law supercedes local laws.

He urged the judge to approve Chrysler's dealership termination request as is, saying rejected dealers would be in violation of trademark and copyright laws if they were allowed to keep operating under the Chrysler name after the emergence of new Chrysler.

"There needs to be a bright line for rejection," Orr said, adding, "The 2,300 assumed dealers have rights too . . . They have rights not to compete with rejected dealerships."

The U.S. and Canadian governments, which are providing $4.5 billion to keep Chrysler operating while its in bankruptcy, had budgeted for 25 percent fewer dealers. Chrysler dealers are eligible for reimbursements under the automaker's car sales incentive programs, Orr added.

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Prepared Remarks for James Press

Prepared Remarks for James Press
Deputy CEO and Special Advisor
Chrysler Group LLC
House Energy and Commerce Subcommittee on
Oversight and Investigations

June 12, 2009

Chairman Stupak, ranking member Walden, and Members of this Committee, I appreciate this opportunity to discuss why a realigned dealer network is important to the new Chrysler Group.

Despite completing a painful restructuring, the New Chrysler Group will retain 86% of Chrysler dealers by volume, and 75% by location.I can empathize with the dealers who were not brought forward into the new company, and can understand their disappointment. This has been the most difficult business action I have personally ever had to take.

I’ d like to begin by answering the four questions I’ve been asked most often here in Washington:

First: Was discontinuing these dealers really necessary to Chrysler’s survival?

o Today’s automotive industry cannot support the number of dealers currently in the marketplace.

o We’ve gone from 17 million new vehicle sales in 2006 to less than 10 million today.

o As a whole, the Chrysler dealer network is not profitable, and not viable.

o In 2008, the average U.S. auto dealer sold 525 vehicles and made a profit of $279,000

o But Chrysler dealers sold only an average of 405 vehicles…and on average lost $3,431.

o Without profits, dealers can’t invest in people, in training, facilities – and as a result,sales and customer satisfaction suffers.

o The old Chrysler’ s multiple dealer channel was also too costly to support - and I’ll give you an example of that in a minute

o To complete our bankruptcy process and alliance with Fiat, we needed a realigned, new dealer network for the new company on day one.

o On June 9, the bankruptcy court authorized the discontinuation of dealer agreements as part of our optimization plan. In his order, Judge Gonzalez said that the dealer restructuring plan was (quote) “an exercise of sound business judgment … made in good faith and for legitimate commercial reasons” (unquote). The judge also said in his ruling that the dealer reorganization was ( quote) “appropriate and necessary”

o On June 10, the Fiat-Chrysler alliance was launched with a right-sized, new dealer network.

Second: Dealers Don’t Cost t he Company Anything, Do They?


 First, all dealers have a minimum sales responsibility every year – which is realistic and conservative
 Underperforming dealers cost Chrysler unit sales as well as revenue

 In 2008 …of the 789 discontinued dealers, 80% of them failed to achieve their sales responsibilities.

 This translated into 55, 000 lost sales, and $1.5 billion in lost revenue

 Second, the old Chrysler dealer network included many dealers that sell only one or two of the company’s three brands.

 This has led to redundancies and inefficiencies in product development and brand strategy-

For example, we spent

o $1. 4 billion over 4 years i n product engineering and development costs for “sister vehicles” - or similar products in the same segment for different dealer channels

o For example, Chrysler currently supplies dealers with
o two similar minivans,
o two similar full-size sport-utilities,
o two similar mid-size SUVs, and
o two similar sedans,

 Other cost inefficiencies include :
o $150 million annually in marketing and advertising costs, and
o $33 million annually in administrative costs.

Third Question: My discontinued dealer says he’s profitable….why not keep him?


 Chrysler’s discontinued dealers were, for the most part, the least profitable dealers in the network.

 On average, discontinued dealers lost $73, 000 in 2008

 Some of them are profitable…but their new Chrysler business may not be.

 In fact, most of the profitability of these dealers in question is driven from their used car business

 Several problems, beyond profitability, contributed to certain dealers being discontinued:

o Many dealers are i n the wrong location.

o 555 are standalone only – and without all three brands they won’t be viable.

o 50% sell 100 or fewer vehicles per year

o 84% sell more used than new vehicles

o 44% sell competing brands from the same showroom…and of those dealers
Chrysler is only about 12% of their business.

 Here’s a typical example:

o A Dodge dealer in the mid Atlantic region is profitable. However -
o He also sells Buick, Pontiac, Subaru and Isuzu…and of his new car sales, Dodge represents only 3% of his total.

o Last year, he achieved only 12% of hi s minimum sales responsibility for Dodge,selling only 24 new Dodge vehicles …while selling 210 used vehicles

 So while some of the 789 may be profitable, chances are they’re making money selling used and competitive vehicles, and, by our assessment, drag down the profitability of Chrysler 3

And Fourth: I heard You’re Leaving Your Dealers High and Dry? ABSOLUTELY NOT TRUE

 Every dealer was contacted and we are providing assistance

 We arranged financing - completed a comprehensive agreement with GMAC to provide assurances that allowed us to help redistribute inventory, part s and tools

 We have found buyers for EVERY SINGLE UNSOLD VEHICLE at discontiued dealers.

 Dealers requesting assistance have commitments for 80 percent of their parts inventory.

 Even though June 9th has come and gone, we’re still going to work with our dealers to redistribute all inventory, parts, and special tools.
There’s no question that Chapter 11 has been a painful process, but it was not Chrysler’s first choice . Many of our stakeholders were required to make unprecedented sacrifices – including our dealers. Facing that reality, we used a thoughtful, fair process to select dealers for the new company, and we are working very hard t o minimize the impact on everyone affected.
Moving forward with 75 percent of our dealer network is far better than the alternative of liquidation.

Rationalizing our oversized dealer network was a key part of preserving the Company and the hundreds of thousands of associated jobs. Members of Congress, the Treasury Department, andthe President called for significant and dramatic restructuring at Chrysler, and a consolidation of
our dealer network was one of the painful, but most important steps we have taken to ensure that the New Chrysler has a bright future.

Thank you.
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