Dealers not ‘ambushed,’ GM says
Automaker disputes claims Canadian franchisees didn’t know about downsizing
GM Canada dealers knew long before the auto industry crisis of 2009 that the automaker needed to cut the number of stores in its distribution network, a lawyer for the company told a Toronto court Wednesday. Far from being “ambushed, shocked and surprised” by GM’s proposal to close more than 200 stores, the dealers themselves had asked GM to rationalize the network several years earlier, Kent Thomson, a partner with Davies Ward Phillips & Vineberg LLP said.
“A number of the complaints against GMCL (General Motors of Canada Ltd.) ring decidedly hollow,” Thomson told an Ontario Superior Court of Justice.
Some 181 dealers are suing GM for $750 million saying the company violated franchise laws when it gave them just six days to agree to sign wind-down agreements in May 2009. They further claim they were not given all the facts or allowed to freely associate during this period.
On Tuesday, their lawyer, David Sterns, a partner with Sotos LLP, opened the case against GM saying the dealers felt they’d been “ambushed” and “misled” by the automaker.
GM refuted those claims Wednesday saying the dealers had known for years that all three big U.S. automakers’ market share was in decline as new entrants from Japan and Europe, such as Toyota and Honda, competed for sales.
The financial crisis of 2008/2009 exacerbated the trend, as U.S. consumer confidence plummeted, auto sales plunged and credit markets froze, leaving automakers with no access to funds, court heard.
GM was already struggling as its market share fell from a peak of more than 40 per cent in the early 1980s to below 22 per cent by 2005, court heard.
The company had the largest dealer network in Canada, and though some cuts had been made, it was still over-stored with 705 dealers in operation in 2009, court heard.
As dealers’ profits declined, they invested less in their staff and buildings, which made them even less competitive, court heard. The problem was particularly acute in urban areas, like Toronto, where the newer foreign competitors from Japan and Europe built their flashiest showrooms.
“We ended up in a vicious cycle, a downward spiral,” Thomson said.
Indeed, a GM dealers association representing 40 dealers in Toronto approached GM and asked it to rationalize their numbers “for their mutual benefit” even before the financial crisis of 2008/09, Thomson said.
Lynt Hurdman, owner of Trillium Motor World Ltd., the representative plaintiff in the class action against GM, wrote a letter to a GM Canada executive in June 2007 saying “unless there’s a drastic increase in sales, GM is over-dealered.”
Trillium, which was then a GM Pontiac dealer in Scarborough, had suffered losses for three to four years, was experiencing high staff turnover and lower than average sales, according to a GM analysis conducted in August 2007. At a meeting that month between Hurdman and Marc Comeau, who was then vice-president of vehicle sales, service and marketing for GM Canada, several options were explored, including a consolidation or sale. Neither took place. Then along came the financial crisis of 2008. Though it started in the U.S., with a subprime mortgage crisis and the collapse of Lehman Bros., the credit crunch and rapid decline in consumer confidence quickly spread to Canada and around the globe. At GM, sales plunged, losses soared and access to financing dried up. The company was gripped by a sense of “sheer desperation, chaos and fear,” Thomson said. “Nobody knew what would happen the next day.” The only option was a government bailout, Thomson said. But it would come with strings attached. Having just spent $2 trillion rescuing the U.S. financial sector, U.S. lawmakers were reluctant to extend aid to GM without a commitment to cuts, he said. As well, any U.S. government funds could only be used in the U.S. Canada and Ontario would have to come to the aid of the Canadian GM, he said. GM submitted a restructuring plan but the U.S. government rejected it and gave it just 60 days to come up with something better. The proposal to ask more than 200 GM Canada dealers to sign “winddown agreements” came on May 20, 2009. With the government’s May 31 deadline looming, the dealers were given just six days to decide, Thomson said. If GM failed to get the cuts it needed, the dealers were told the Canadian unit might follow its parent into bankruptcy court protection, where the dealers risked becoming unsecured creditors, Thomson also said. GM unionized employees, retirees, shareholders and bondholders also took a financial hit in the restructuring, he noted. About 85 per cent of dealers signed the wind-down agreement. GM paid out $123 million in compensation to them. A smaller group of GM dealers that opted not to sign the agreement later sued for wrongful termination. They settled out of court in 2010. The trial continues.