Testimony underway on dealer closings before the U.S. House of Representatives Energy and Commerce Subcommittee on Oversight and Investigations.

Critics of GM’s plan to cut new car dealerships that claim keeping them open is essentially free to auto companies were confronted today by GM CEO Fritz Henderson, who claimed a savings potential of $928,000 per closed dealer — if and when they are fully phased-out under GM’s reorganization plan.

It was the first time that bankrupt GM publicly revealed the cost numbers that underpin its strategy to drastically cut its dealer organization.

In an SEC filing on May 14, GM said it planned to reduce its dealer network from 5,969 stores then to approximately 3,600 by the end of 2010. The basic plan has not changed since GM filed for bankruptcy on June 1, although bankruptcy, with its canceling of contracts including dealer agreements, will make it easier for GM to proceed.

"What options were offered to those dealerships slated for closure," asked Stupak.

What has changed is the political uproar, some of it coming from the same Congressmen and Senators who said domestic auto companies should be allowed to fail at hearings last December when Chrysler and GM requested government loan guarantees. These politicians now say, with straight and grave faces, that the dealership closings caught them off guard.

Chrysler closed 789 dealerships this week as it emerged from bankruptcy, and GM wants to eliminate about 2,500 dealerships by the end of next year as part of its restructuring.

A failure of either automaker, of course, would have closed all of their dealerships. So the implications of auto restructurings, which all admit requires the closing of some dealers, are just becoming clear to politicians. Since car dealers are active in their communities, and donate millions of dollars to these same politicians, previous abstract free market economic theories that most espoused, have given way to a classic Washington expression of outrage and a search for the guilty by members of both the Senate and Congress.

Henderson’s numbers appeared during a hearing by the U.S. House Commerce Subcommittee for Oversight and Investigations this morning. It was the first hearing held in the U.S. House on the proposed closures. Yesterday, a Senate committee also touched on the issue as part of a larger hearing on the vastly unpopular taxpayer bailouts of GM and Chrysler.

Jim Press, deputy CEO of Chrysler LLC  presented similar numbers. “Some have suggested that because an auto manufacturer like Chrysler sells cars to the dealerships, and these dealerships are independent businesses, they are not a cost to Chrysler. This is simply not true,” Press.

“For Chrysler, excess dealerships are costly in several ways. First is the problem of maintaining several dealership channels. Maintaining multiple distribution networks is inefficient and costly. Product complexity is increased because of the need to provide products in the same segment to different networks. For example, Chrysler currently supplies dealers with two similar minivans, Chrysler Town & Country and Dodge Grand Caravan; two similar full-size sport-utilities, Chrysler Aspen and Dodge Durango; two similar mid-size SUVs, Dodge Nitro and Jeep Liberty; and two similar sedans, the Chrysler Sebring and Dodge Avenger. Based on six major vehicle launches between 2005 and 2008, Chrysler incurred approximately $1.4 billion in incremental costs to develop these multiple pairs of “sister vehicles,” said Press.

“Second, as a result of over dealering, the marketing and advertising messages are split between multiple products, diminishing the reach and frequency of each campaign. For example, in 2008 we spent about $100 million on each of two marketing and advertising campaigns to launch our two redesigned minivans instead of spending half as much to support a single launch to attain virtually the same sales volume,” Press concluded.

U.S. Congressman Bart Stupak (D-Menominee, Michigan), chairman of the  House subcommittee, said he wanted to learn “the criteria used in determining which dealerships to close and what options were offered to those dealerships slated for closure.”

Not coincidentally Chrysler announced plans to close five dealerships in Stupak’s Congressional District last month. GM, at the request of dealers, has not released a list of dealerships slated for closure.

Henderson said; “We simply cannot undergo this sweeping transformation without a comparable effort to reshape our retail network, one which was largely created in the 50s and 60s.”

“We have been called upon to make tough, commercial decisions and we will do so responsibly and compassionately,” he said. “And, in the case of our dealers, to act as carefully, responsibly and objectively as we can…to help them wind down their business in an orderly fashion with a structured assistance package that benefits them relative to their alternatives. This approach is in stark contrast to what happens to most contracts in bankruptcy, where contracts are typically simply rejected with no assistance. And, unfortunately, we are a company in bankruptcy.”

Henderson proceeded to address the core issue, “A concentrated and highly profitable dealer network will reduce costs for GM at a time when every dollar is precious, “he said. Cost savings come two ways:

“First, a right-sized network of strong dealers will allow GM to systematically over time reduce direct dealer support programs which today involve $2 billion in costs ($1,000 per retail sale), or a gross savings potential of about $928,000 per dealer if and when fully phased-out.

“Our consolidation will also provide an estimated $415 million in gross fixed cost savings potential on items like guaranteed local advertising assistance, service and training, and information technology systems, or a potential $180,000 per closed dealer.

“Second, our dealership consolidation is not just about saving money, but about creating opportunity and revenue growth. It’s about our dealers augmenting our efforts to greatly enhance consumer perception in our products, brands and General Motors, directly and on a daily basis. That is why in every other aspect of retail business, from Harley Davidson, to the Apple stores and yes, Toyota and Honda, you see the premium that is placed on creating a distinct, consistent and topnotch retail experience,” Henderson concluded.

So far these cost estimates have not been seriously challenged, but in fairness we should note that GM’s costs to carry a dealer might be significantly higher than other, more efficient companies.

Still, GM’s math looks reasonable. It took 3,500 to 3,800 U.S. GM dealers by the end of 2010, and assumed a retail sales market of just over 10 million said it could hold its 18% share. This and a means that the number of units sold per dealer would nearly double. In theory, the surviving dealers can make more money and promote and advertise and sell more GM vehicles in their area.

Even with these cutbacks GM will still have the largest dealer network in the country compared to Toyota’s 1,200.

The political problem is that some dealerships will close in some Congressional districts. But in doing so GM claims will preserve more than 200,000 jobs at its remaining dealers along with hundreds of thousands of jobs with GM’s direct manufacturing and supplier network.