The Obama administration plans has rejected the revamp plans of General Motors and Chrysler and has insisted on far more wide ranging changes at the two struggling auto giants, otherwise neither will get any more aid and both will go into some sort of bankruptcy protection.
The Government will give General Motors enough government aid to enable it to recast its plan and restructure over the next two months, while Chrysler has been told it must complete a deal with Italian automaker Fiat to qualify for its money.
The news set off a global sell-off in shares with markets down 2% to 5%, oil, copper and gold led commodities lower as the US waved a big stick at the two struggling US car groups.
GM has received $US13.4 billion in Government loans and is asking for up to another $US16.6 billion to remain solvent and reshape itself for the future.
Chrysler has received $US4 billion and it wants another $US5 billion.
Unlike GM, where chairman and CEO Rick Wagoner has been forced out by the Government, CEO Bob Nardelli, hasn’t been asked to resign.
Fiat would link with Chrysler via a 35% stake, but that would not involve any assumption of responsibility for the US group’s debts, including Government loans, according to previous statements from the Italian car group.
Linking with Fiat is the only way Chrysler will get new money; if it doesn’t, it will be put into bankruptcy.
The decision has come at a cost: it now looks as though running a car company is becoming as dangerous as running a big bank: two global car group CEOs have gone in the last 24 hours.
Besides the forced departure of General Motors head, Rick Wagoner, France’s PSA Peugeot Citroen fired its CEO.
The news of the pressure on the GM CEO came a day before the US Government’s car industry task force is due report on the plans by General Motors and Chrysler.
Ford isn’t part of the bailout, but its plans have been discussed.
As news spread of Mr Wagoner’s intention to depart, there was speculation his head was demanded as a quid pro quo for more US Government help, It was.
There was also speculation the Obama Administration wanted more changes from the car companies.
And it does, more sweeping changes, with strong suggestions it would prefer to see both companies go bankrupt and be restructured quickly.
It was later confirmed that the GM CEO’s head was part of the deal with the Administration.
It seems the Administration wants a sacrifice up front for the public when more money is given to the ailing duo.
GM has lost about $US82 billion since 2005 when its problems began to mount in the US market. GM has lost about 95% of its value since Wagoner took over as CEO in 2000.
Wagoner was in Washington last Friday for talks with the White House-appointed task force on restructuring the car industry.
Falling sales this month mean the car companies will have to cut deeper, as will Ford, which has remained outside the aid loop, but is facing growing pressure on its relatively stronger financial position.
And the Obama Administration seems to have latched on to that to push both companies to make further changes in their restructuring plans over the next two months.
According to media report, the Administration wants GM and Chrysler to revamp their recovery plans with deeper concessions to justify further taxpayer aid.
GM’s chief operating officer, Fritz Henderson is to be the new CEO; the Administration wants the company to replace most of its board and it says the company has to place greater reliance on producing more fuel-efficient vehicles.
Chrysler will get $US6 billion in aid only if it completes a partnership with Fiat within a month.
Unless that happens, there won’t be any more US Government aid because the car industry task force says it isn’t viable as a stand-alone company.
Bloomberg reported that the task force found that the recovery plans of both companies were deficient and fell short of what was needed to turn both around:
The aid plans submitted to the government on February 17 were not enough to justify additional assistance.
GM’s plan wouldn’t lead to success even in an improved economy, the administration found. The cuts to brands, capital use, production costs were too timid; Chrysler’s poor quality and high costs meant that it couldn’t survive for much longer anyway.
The new strategy sought by the administration would focus on sustainable profit and significant changes in brands, workforce, nameplates and the retail network," Bloomberg reported.
"GM, which will continue to receive an undisclosed amount of government aid as it develops a new plan over 60 days, will get greater guidance from the Treasury and outside advisers in the process than previously, according to the administration.
The government was silent on how much more aid GM may receive if it devises a successful plan.
"Chrysler’s plan included assumptions that were unrealistic or overly optimistic", according to the administration.
Chrysler will have to get greater concessions from the United Auto Workers than its plan requires and must get rid of the vast majority of outstanding secured debt.
"The government will support Chrysler for 30 days as it attempts to make final its agreement with Fiat."
Controversially, Bloomberg reported that the task force believes that both companies’ best chance at success may include a quick and surgical bankruptcy.
Unlike a liquidation or conventional bankruptcy, a structured process would make it easier for the companies to clear away liabilities.
But that isn’t the
