Genesis has suspended vehicle sales, service and marketing in Louisiana indefinitely, citing word from the state's Motor Vehicle Commission that Hyundai Motor America was not properly licensed to sell the luxury brand's vehicles in the state.
The move sets up a battle between Genesis and its Louisiana dealers over whether this amounts to a breach of contract by the automaker. It also could have nationwide implications if other states' licensing requirements trip up Genesis, which Hyundai created in 2015 as a separate luxury company and brand, without setting up a separate U.S. sales channel.
At least one dealer involved is concerned that Hyundai Motor America may welcome the news because the result could be advancing Genesis' goal of reducing its dealership count nationwide.
The problem arose in June when Genesis General Manager Erwin Raphael told Louisiana dealers during a conference call that Genesis' business model was changing and as a result, just two points in the state — reserved for Baton Rouge and New Orleans — would sell the brand, down from 13.
An account of the call was provided to Automotive News by Ryan Navarre, president of Billy Navarre Hyundai of Lake Charles, who was on the call, and Claude Reynaud, Louisiana Automobile Dealers Association general counsel, who was briefed by two other dealers on the call.
The move would have given the culled stores 30 days to remove signage, suspend marketing and sales and stop taking service orders from Genesis customers.
Dealers on the call balked at the idea, according to Navarre, having spent tens of thousands of dollars to improve sales and service areas to Genesis' standards — and previously to Equus standards to be eligible to sell what was then the Hyundai brand's top-line car — and because of customers who would be left in the lurch.
Besides, Reynaud said, the proposal wasn't legal.
Genesis could have wiped the slate clean and pulled out of Louisiana altogether, after settling with each affected dealer.
"The difference here is they're talking about retaining two dealers, so what they're doing is treating the dealers differently, and that is strictly forbidden by our law," Reynaud told Automotive News.
Genesis' desire to reduce its 352-dealer count is no secret. "I definitely want to get below 300," Raphael told Automotive News in August 2016. The automaker cites Lexus, which has about 237, as an enviable target.
Several weeks after the conference call, the situation took another turn, one with a potentially far-reaching impact and cost for Genesis and Hyundai Motor America nationwide.
On July 20, Raphael sent a letter to Genesis stores in Louisiana notifying dealers that the automaker was immediately halting the shipment of Genesis vehicles to the state. The letter cited the company's lack of a license to sell Genesis vehicles in the state as the reason.
Fitzgerald: Fast pace lead to "an oversight."
This was the result of Hyundai Motor America moving quickly to set up the brand, according to Genesis' global head, Manfred Fitzgerald.
"Everything happened at a fast pace," Fitzgerald told Automotive News. "I think it was an oversight."
Yet Hyundai Motor America has known of the situation for at least 10 months, according to a company spokesman. Genesis is looking into other states where it may also be improperly licensed to sell vehicles.
Hyundai Motor America didn't make Raphael or other executives available to comment last week. In a statement, the company said, "Genesis respects the concerns of the Louisiana Motor Vehicle Commission and is taking all necessary steps so Genesis sales can resume in the state."
In the July 20 letter, a copy of which Automotive News obtained, Raphael alerted the dealers that they would hear separately from the Motor Vehicle Commission about the dealerships' lack of an appropriate license. In Louisiana, automakers and dealers need state licenses to add a brand.
The Motor Vehicle Commission's letter went out a day later. It summoned dealers to an informal conference with the commission in September ahead of a formal hearing scheduled for November, and gave them 10 days to file a written reply and avoid a default judgment. The commission didn't respond to multiple requests for comment last week.
In the meantime, many affected Louisiana dealers are considering legal action against Genesis to recoup costs associated with floorplanning interest charges on the vehicles they are prohibited from selling as well as lost service income.
Raphael, in his letter to dealers, pledged to address the problem. "HMA recognizes its responsibilities in that regard and intends to address them," he wrote.
Because Hyundai Motor America had been shipping vehicles to Louisiana and allowing them to be sold by dealers without proper licensing, the fallout could get costlier for the automaker.
If the Motor Vehicle Commission "considers this an egregious action on the part of Hyundai, it could be a large fine in the realm of large fines," Reynaud said, adding that Genesis could be forced to pay from $10,000 to seven figures to the state.
Liability to dealers is another matter.
"Having said they're a manufacturer and not having their license, that's a breach of contract," Reynaud said.
"In addition to everything else, that could be a civil suit, not just an action before the Motor Vehicle Commission."
Navarre, for his part, sees a more sinister motive behind Genesis' actions. With dealers facing potential Motor Vehicle Commission fines and legal costs for challenging the Louisiana ruling and Hyundai Motor America, "my opinion is that dealers will start saying 'These legal bills are so high so I'm just going to back off,' " Navarre said.
"They'll either take some small settlement [from Genesis] and lose money on it or just get tired of fighting it."
The end result would be Genesis reducing its dealer network — just as it has wanted, Navarre said. "It's mind-blowing," he said. "I've never seen anything like this in 25 years."
Fitzgerald said, "Right now we are examining the dealer body with an eye toward optimizing it in the future," but said the licensing debacle was all a misunderstanding on Genesis' part.
"I don't think there was any intent behind it," he said.
Hyundai Motor America's statement called Genesis' store-within-a-store a "temporary arrangement," adding that a process to develop a distinct Genesis dealer body is "underway and will unfold in stages."
Hans Greimel contributed to this report.
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