Administration demands auto restructuring

March 30, 2009 7:06:37 PM PDT
General Motors and Chrysler both got handcuffed by President Barack Obama. The message was no more rescue money would be given out until they shape-up, and do it quickly under some very strict conditions. As a result, there could ultimately be fewer auto dealers around the Bay Area.

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There could be fewer dealers and fewer car brands. That's all specified in the "must do" list created by the Obama Administration. Chrysler has 30 days to comply. 60 days for GM.

The president and his special auto industry team made it clear GM and Chrysler need to endure more pain for them to recover.

GM was told it needs to generate positive cash flow. It lost over $30 billion last year. It must reduce its debt and long-term obligations, such as retiree health care that will reach $6 billion a year in 2013. And it must reduce headcount, brands and its network of dealerships.

Robert Cole, Ph.D., a professor emeritus at U.C. Berkeley, is an expert on global auto making.

"They're basically asking for more severe restructuring on the part of both the unions and the bondholders, and when taxpayer money is at risk, I think they have an obligation to do exactly that," said Dr. Cole.

Chrysler was told to forge an alliance within 30 days with Italian carmaker Fiat. Fiat has technology that would speed up development of fuel efficient cars at Chrysler. They must also seek more concessions from the United Auto Workers and create positive cash flow.

The president also suggested Chrysler and G.M. must also consider bankruptcy.

"Both need a fresh start to implement the restructuring plan they developed. That may mean using our bankruptcy code as a mechanism to help them restructure quickly and emerge stronger," said President Obama.

Industry analyst Jon Fisher, who teaches at the University of San Francisco, thinks that's the right course of action.

"A bankruptcy is what's needed to make the changes," said Fisher.

Fisher and other experts point out that a bankruptcy court can force the hand of debt holders and unions. It can also replace management if it's not doing its job.

"I think these entities will have to make the concessions necessary in order for these businesses to continue by definition because they'll make them either in or out of bankruptcy," said Fisher.

President Obama is also offering tax incentives to get Americans to buy new cars, specifically a tax deduction on sales taxes. He's also offering $3,000 or more in cash if you trade in a gas guzzler for a fuel-efficient car, and the government will back your warranty -- even if G.M. or Chrysler files for bankruptcy. The details are still being worked on.

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