WASHINGTON — Negotiations over the government's bailout of Chrysler and General Motors have shifted into high gear, and from this point until the end of June, things are likely to get more tense and complicated. My guess is that when it's all over, both companies will have been run through a quickie bankruptcy process and will emerge smaller, with less debt, a lower cost structure and Uncle Sam as the majority owner.
The process is now being driven largely by Steven Rattner and Ron Bloom, the Obama administration's auto czars. They have laid down the parameters for talks among the companies; the United Auto Workers; the banks and bondholders; and, in the case of Chrysler, Italy's Fiat, which seeks to integrate Chrysler with its newly revived European operations.
The Obama team understands that it will get only one good shot at its $40 billion rescue and that if its plan doesn't work, the companies will be shut down and sold off in pieces. Its priorities are to minimize damage to an already weak economy, protect workers and pensioners, and get the government out of the deal as quickly as possible with all of its money back.
What is the final rescue plan likely to look like?
For starters, it will certainly require that workers accept a wage and benefit package that would bring labor costs down to the levels of Toyota and Honda plants in the United States. Unionized workers will have to accept immediate reductions in base pay, along with increased cost sharing for their health insurance.
Even that's probably not enough, however. The generous defined-benefit pension plan that UAW members have always gotten will need to be replaced by company contributions to individual 401(k) plans. And to reduce the tens of billions of dollars that both GM and Chrysler have committed to fund a new retiree health plan, the government is likely to insist that benefits be trimmed.
Both companies will also have to lay off tens of thousands of additional employees as they eliminate brands, close more plants and outsource more noncore functions. Chrysler's product line will be reduced to Jeeps, minivans and trucks, along with a new line of passenger cars using Fiat-designed platforms and engines. GM will be left with its Chevrolet, Cadillac and Buick nameplates, along with GMC trucks.
Going through bankruptcy would allow both companies to bypass state laws and dramatically reduce the number of dealerships without having to take the time and bear the expense of buying back the franchises from their owners.
The toughest negotiations will be with the GM bondholders and Chrysler bankers. The question is how much of the new companies they will own. The government will be entitled to more than half of the stock of the reorganized companies. The union's health fund will probably be entitled to stakes of 20 to 25 percent. At Chrysler, there's also the matter of Fiat's contribution of technology and management services, which it offered for a 20 percent share.
That leaves only about 10 to 15 percent of each company. Bankers and bondholders will kick and scream and call it unfair, but in the end they'll take it because they'll conclude that it's better than the alternative. And that's the way GM and Chrysler will be saved.