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Loans are a lifeline for GM, Chrysler

DETROIT — Tossed a $13.4-billion lifeline from the White House on Friday, General Motors and Chrysler will survive for the next few months while they revamp.

But will they thrive again?

GM and Chrysler now leap into about three months of feverish long-term planning and blunt dealing with creditors, shareholders, workers and dealers or face bankruptcy and possible dissolution by spring.

The plans so far from the car companies offer little in terms of fresh ideas. Instead, they focus more on slow-selling models, persuading GM's debt holders to accept stock, and getting union wages more in line with those paid by foreign brands in the United States.

Such moves are necessary in the short term, but no company can keep cutting its way to prosperity. President-elect Obama, whose administration will inherit the loans and be asked to decide whether to accept the carmakers' plans or essentially force them into bankruptcy by March 31, warned GM and Chrysler Friday that it must not "squander the chance" to reform.

For the government's part, the loans call for it to receive nonvoting stock worth 20 percent of the cost of the loans, limit executive compensation, eliminate corporate jets and require the government's debt to be paid before others if the companies fail and liquidate their assets.

The government will have the authority to veto transactions of more than $100-million and receive, by Feb. 17, plans for how the companies plan to achieve viability, become profitable, make autos that meet strict fuel-efficiency standards and produce "a product mix that is competitive in the United States."

Another $4-billion will be available for GM if and when the rest of the $700-billion bailout package is released in February. Treasury Secretary Henry Paulson will temporarily administer the program as "car czar."

The Detroit carmakers have to find some new hits, just as they did in the 1990s with the SUVs, minivans and pickups that helped them — along with a national policy that encouraged the cheap gas that fueled the big and profitable vehicles — earn billions.

The car companies' next great hope will be in fuel-efficient vehicles that they can sell in the hundreds of thousands, not just as niche models, and earn a profit from them.

"They quite obviously need to get a different management culture that's capable of getting consumers to pay close to the same price of a Honda or a Toyota," said Brian Johnson, an analyst with Barclays Capital. "That's been the challenge for a decade."

Detroit still depends heavily on pickups and SUVs, as well as crossover vehicles, which are sport utilities built on car underpinnings. Through November, light trucks made up 58 percent of GM's sales; they account for 72.2 percent for Chrysler.

Toyota has sold more Camrys alone this year than Chrysler has sold of all its cars, according to Motorintelligence.com.

The Detroit companies say their sales mix will change soon. GM has pinned its future on the Chevrolet Volt, a plug-in electric car due in two years, and another small Chevrolet, the Cruze, aimed at many of the same customers who have bought Toyota Corollas the last 40 years.

Chrysler discontinued its only hybrid model this fall. It is relying on Nissan of Japan to develop its small cars.

At a briefing this week, Chrysler showed future models that included more new Jeeps, including an electric one, new pickups and muscle cars, according to Jalopnik.com, a Web site that follows the industry (and whose term for the crisis in Detroit — "carpocalypse" — is catching on).

"GM and Ford both have game plans," said Ray Wert III, the Web site's editor in chief. "Chrysler's is mired in the last decade."

Even with falling gas prices, GM and Chrysler can no longer rely so heavily on SUVs and pickups for their future — particularly the future that Obama appears to have in mind. That may mean pushing the market in a direction not all car buyers want.

"For the American consumer, the drive to fuel economy revolves around the price of gasoline," said Ron Pinelli, president of Motorintelligence.com. "When gas is cheap, they don't want to spend the money to get a car that's fuel-efficient."

Information from the Detroit Free Press was used in this report.

Fast facts

$350B, please

Treasury Secretary Henry Paulson said Friday that Congress will need to release the second half of the $700-billion rescue fund because the first $350-billion has been committed. Now that automakers are getting a share, the floodgates are almost certain to open for other nonfinancial industries that want government help.

Wobbling insurance companies would likely be among the first to ask for help. Whether they actually get the money will probably be determined only after Barack Obama is sworn in as president.

Under terms of the $700-billion rescue fund Congress approved Oct. 3, when the administration determines the second $350-billion is needed it has to submit a report to Congress detailing how it plans to use those funds.

Associated Press

Loans are a lifeline for GM, Chrysler 12/19/08 [Last modified: Monday, December 22, 2008 11:40am]

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