GM, Chrysler Will Need Miracle To Avoid Bankruptcy

It is getting near the end of the penny-section for GM and Chrysler. President Barack Obama has given GM two months to prove its viability, and Chrysler one month to complete its merger with Fiat. Failure on either count will see the two giant automakers cut adrift from further Federal loan funding and left to slide into bankruptcy.

Having reviewed and considered the restructuring plans for each, President Obama has effectively told GM and Chrysler, 'not good enough, try again'.

Having already received USD$17.4 billion in Federal bail-out aid in December, the taps are to be turned off unless GM and Chrysler can reach new concessions with workers and suppliers and lay out a case for their viability and future profitability. Time, it would appear, is quickly running out.

President Obama said that the automakers, their workforce and creditors will need to endure more pain if the companies are to continue to receive aid.

"It will require unions and workers who have already made painful concessions to make even more," the President said. "It will require creditors to recognise that they cannot hold out for the prospect of endless government bailouts." (Reuters)

Astonishingly - to give a perspective on the scale of the difficulties in the US market - US automakers, car dealers and suppliers, have cut 400,000 jobs over the past year. GM has previously signalled that it is to cut 48,000 additional jobs this year from its global operations. Expect that figure to rise dramatically after President Obama's announcement yesterday (US time).

Compounding the difficulties for GM and Chrysler is that, in raising the prospect of bankruptcy, even fewer car buyers (of the few prepared to buy in the recession strangling the US economy) will choose a GM or Chrysler product. There is nothing like the spectre of bankruptcy, even a US Chapter 11 type, to spook buyers from showrooms.

New GM CEO Frederick ‘Fritz’ Henderson.

Effectively, in rejecting the plans, the President's announcement may also have raised the showroom pressure on GM and Chrysler and amplified their troubles. The administration would appear to be aware of this. President Obama also signalled his support for a Germany-style tax-credit program giving car buyers a deduction of up to $5,000 to trade in their 'clunkers' - older, less fuel-efficient cars.

GM is to receive funding for the next 60 days only, and not the additional USD$16 billion it had been seeking, while it works like hell on a new plan palatable to the US administration and tax-payers. One part of the new plan sought by the President's task force was clearly the departure of Rick Wagoner. He's gone, and soon to follow him out the door will be most of the GM Board.

Chrysler also has a poison chalice at its lips. The threat of Its bankruptcy, like GM's (and as we have been predicting for months), would seem to nearly certain barring a miracle.

It has been given thirty days to complete a merger with Fiat; if it can pull it off, and secure the necessary concessions from its workers and suppliers, Chrysler will be eligible for a further USD$6 billion in Federal aid. Failure to do so will see it cut free from government funding.

Bob Nardelli.

Commenting on the announcement today and its planned future with Fiat, Chrysler LLC Chairman and CEO, Bob Nardelli, said, "By providing Chrysler with product and platforms, technology cooperation and global distribution, Fiat strengthens Chrysler’s ability to create and preserve U.S. jobs; gives U.S. consumers more choices for environmentally advanced vehicles; gives its dealers more of the products they need to be successful; helps stabilize the supplier base; and allows Chrysler to pay back government loans sooner."

There may be more than a dollop of hope in Mr Nardelli's statement. Fiat, who has not yet commented (at the time of writing this piece), has huge troubles of its own and has been bumping along on various forms of bail-outs and aid from the Italian Government for years. It may require a special kind of wizardry if it is take anywhere near the 35 percent stake in Chrysler that had originally been mooted.

Our take on things: regrettably, both GM and Chrysler look increasingly like ex-parrots. They will both surely join the 'choir invisible' unless a miracle of biblical proportions comes along to save them.