March 30, 2009 - Federal Auto Task Force, Washington D.C.

White House questions viability of GM, Chrysler

Obama gives Chrysler 30 days to join Fiat, forces Wagoner out at GM

Obama gives Chrysler 30 days to join Fiat, forces Wagoner out at GM

Neither General Motors nor Chrysler submitted acceptable plans to receive more federal bailout money, the Obama administration said as it set the stage for a crisis in Detroit that would dramatically reshape the nation's auto industry.

The White House pushed out GM's chairman and directed Chrysler to move quickly to forge a partnership with Fiat if it expects to receive additional government assistance.

President Barack Obama and his top advisers have determined that neither company is viable and that taxpayers will not spend untold billions more to keep the pair of automakers open forever.

In a last-ditch effort, the administration gave each company a brief deadline to try one last time to convince Washington it is worth saving, said senior administration officials who spoke on the condition of anonymity to more bluntly discuss the decision.

Obama was set to make the announcement at 11 a.m. Monday in the White House's foyer.

In an interview with CBS' "Face the Nation" broadcast Sunday, Obama said the companies must do more to receive additional financial aid from the government.

"We think we can have a successful U.S. auto industry. But it's got to be one that's realistically designed to weather this storm and to emerge - at the other end - much more lean, mean and competitive than it currently is," Obama said.

Frustrated administration officials said Chrysler cannot function as an independent company under its current plan. They have given Chrysler a 30-day window to complete a proposed partnership with Italian automaker Fiat SpA, and will offer up to $6 billion to the companies if they can negotiate a deal before time runs out.

If a Chrysler-Fiat union cannot be completed, Washington plans to walk away, leaving Chrysler destined for a complete sell-off. No other money is available.

Shawn Morgan, a Chrysler spokeswoman, said the company wants to work with the Treasury Department and Obama's auto task force but declined to comment on the White House's plans.

"With the administration's announcement on the restructuring of the automotive industry imminent, it would be inappropriate to comment on speculation," Morgan said in a statement early Monday.

For GM, the administration offered 60 days of operating money to restructure. A frantic top-to-bottom effort began Sunday after chairman and CEO Rick Wagoner stepped aside under pressure from the White House.

Fritz Henderson, GM's president and chief operating officer, became the new CEO, the company said in a statement Monday. Board member Kent Kresa, the former chairman and CEO of defense contractor Northrop Grumman Corp., was named interim chairman of the GM board.

In a major management shake-up, new directors will make up the majority of GM's board, the automaker said.

"The board has recognized for some time that the company's restructuring will likely cause a significant change in the stockholders of the company and create the need for new directors with additional skills and experience," Kresa said in a written statement.

Obama advisers saw public outrage come to a head in recent weeks, as populist anger escalated over bonuses paid to American International Group executives. They realized Americans are frustrated with the economy and its business leaders; they also said they would not invest one dollar more than was necessary to keep the companies alive and would walk away if it looked impossible.

Officials said GM had failed to make good on promises made in exchange for $13.4 billion in government loans, although there are currently no plans to call in those loans.

Administration officials still believe GM's chances are good, given its global brand and its research potential. Officials say they are confident GM can put together a plan that will keep production lines moving in the coming years. They planned to send a team to Detroit to help with that restructuring.

Chrysler, meanwhile, has survived on $4 billion in federal aid during this economic downturn and the worst decline in auto sales in 27 years.

In progress reports filed with the government in February, GM asked for $16.6 billion more and Chrysler wanted $5 billion more. The White House balked and instead started a countdown clock.

Administration officials acknowledged the short turnaround time was harsh; one described it as a nanosecond in a business cycle.

Two people familiar with the plan said officials will demand further sacrifices from the automakers and bankruptcy would still be possible if the automakers failed to restructure. Those officials spoke on condition of anonymity because they were not authorized to make details public.

Administration officials said they hoped large-scale bankruptcy could be avoided, especially if it might be stretched over many years. Any efforts to use the bankruptcy courts would have to be targeted and aggressive and must not prolong a restructuring process, they said.

GM and Chrysler, which employ about 140,000 workers in the U.S., faced a Tuesday deadline to submit completed restructuring plans, but neither company was expected to finish its work. The White House's plan renders them, as well as a potential discussion about the companies' borrowed money, moot.

GM owes roughly $28 billion to bondholders. Chrysler owes about $7 billion in first- and second-term debt, mainly to banks. GM owes about $20 billion to its retiree health care trust, while Chrysler owes $10.6 billion.

An exasperated administration official noted that the companies had not done enough to reduce debt; in some cases, it actually increased during this restructuring and review process.

In February, GM said it intended to cut 47,000 jobs around the globe, or almost 20 percent of its work force, close hundreds of dealerships and focus on four core brands - Chevrolet, Cadillac, GMC and Buick.

In an effort to bolster consumer confidence, Obama planned to announce government backing of warranties for GM and Chrysler vehicles. An administration official said there is no price tag yet associated with that promise.

Obama's aides, aware of the outrage the White House faces if thousands more Americans lose their jobs, appointed a former deputy labor secretary, Ed Montgomery, to lead assistance efforts to cities and towns that depend on the auto industry. The move signaled the White House already was looking to a time when assembly plants may need to operate with far smaller staffs or shut down completely.

Aides note that Obama inherited the auto mess from his predecessor, President George W. Bush.

Under the terms of a loan agreement reached during the last administration, GM and Chrysler are pushing the United Auto Workers to accept shares of stock in exchange for half of the payments into a union-run trust fund for retiree health care. They also want labor costs from the union to be competitive with Japanese automakers with U.S. operations.

Little progress has been made between the companies and the union.

Original Story - Arizona Republic

Task Force Says GM Can Bounce Back With Changes

President Barack Obama's auto task force believes General Motors Corp. can bounce back and become a competitive auto maker -- but only if the company shakes up its management and dramatically accelerates its restructuring efforts.

After weeks of reviewing company's operations, the panel concluded GM's current restructuring plan "is not viable" and is not scheduled to reach many of its goals until 2014, according to a memo summarizing its findings that was released late Sunday night.

"A great deal of progress needs to be made," the task force wrote, "and GM's plan contemplates initiatives that will take many years to complete."

Using the threat of withholding additional loans, the task force forced GM Chief Executive Rick Wagoner to step down on Sunday. He will be replaced by Frederick "Fritz" Henderson, currently GM's chief operating officer.

In its memo on the company, the task force also said that the majority of GM's directors would be replaced and that Kent Kresa, a long-time director, would serve as interim chairman.

Despite the pessimistic view on GM's restructuring plan, members of the task force said they are "confident that with a more fundamental restructuring, GM will emerge from this process as a stronger more competitive business."

To help the GM, the Administration will provide it with working capital for 60 days to develop a more aggressive restructuring plan and a credible strategy to implement such a plan."

A five-page summary reviewing GM's financial health is largely an evisceration of the plan GM presented to the task force earlier this year. It challenges the auto maker's rosy projections on almost every front, from how quickly the company expects to lose more U.S. market share to its ability to price competitively to its ability to introduce and sell new, fuel efficient cars.

In one section, the task force examined GM's optimistic view of its sliding market share by recounting its 30-year decline. In 1980s, GM's market share was 45%; last year, it was 22%. But the company only forecasted a rate of decline through 2014 at half the rate it has lost a year for the last three decades - 0.3% a year versus 0.7% annually.

Most important to the task force, the company simply is burning through more cash than it can bring in, "failing a fundamental test of viability," the government panel concluded. Task force members said while they considered many factors, GM's ability to generate future profits is the truest test of the company's viability.

Critics of the company long complained that GM had been saddled by too many brands, too many dealers and too many retirees to whom they had promised generous lifetime health care benefits. Like other U.S. auto makers, GM had also become overly dependent on sales of trucks and SUVs for profits while shunning less profitable cars.

The government body also took aim squarely at the Chevy Volt – GM's heavily hyped electric car of the future – saying it will likely be too expensive to be commercially successful in the short-term."

Looming over all of GM's financial woes is the massive obligation GM has to its retirees. The task force found that GM's own plan to deal with retiree health care and pensions "grow to unsustainable levels, reaching approximately $6 billion per year in 2013 and 2014."

To pay those bills, GM would need to selling 900,000 additional cars per year, according to the panel. GM sold 8.35 million vehicles globally last year.

The company does not clearly address "the lingering consumer perception that GM makes lower-quality cars," the task force found. The implications of that perception mean most consumers will pay less for GM cars against its competitors, forcing the auto maker to entice customers with hefty price reductions through incentives.

"While the Company has made meaningful progress in its turnaround plan over the last few years, the progress has been far too slow, allowing the Company to continue to lag the best-in-class competitors," the government panel concluded.

Original Story - Wall Street Journal