Chrysler deal may rely on fed aid

As GM executives pursue acquisition, experts say government assistance may be crucial.

Christine Tierney and David Shepardson / The Detroit News

Talks between Chrysler LLC owner Cerberus Capital Management LP and suitors for the automaker are progressing at a rapid clip, say people familiar with the discussions. But with credit markets still reeling from the banking crisis, a deal may hinge on state and federal authorities’ willingness to aid the struggling U.S. auto industry.

Gov. Jennifer Granholm was briefed last week by industry experts on the potential impact of several scenarios, ranging from an acquisition of Chrysler by General Motors Corp. to a bankruptcy by GM or Ford Motor Co.

While analysts question whether combining GM and Chrysler will produce a stronger entity, GM executives are intently pursuing a deal. People briefed on the talks, which continued through the weekend, said that federal support — specifically to help GM and Chrysler refinance some $10 billion in debt that would come due under a change of ownership — may be essential to making a deal.

In addition to aid for the deal, the industry is seeking assistance for other needs, ranging from mounting technology costs to help for auto loan financing firms.

The amount of government assistance sought pales in comparison with the potential cost to the U.S. economy of a bankruptcy by one of Detroit’s two big automakers, said David Cole, chairman of the Center for Automotive Research in Ann Arbor.

A collapse of GM or Ford would eliminate more than 2 million jobs across the country, according to preliminary estimates. Counting damage to the fragile supplier base, the negative impact would run into the hundreds of billions of dollars.

That contrasts with estimates that the industry needs $20 billion to $50 billion in the form of grants and low-cost loans, he said.

Granholm is soliciting other governors to join her in lobbying efforts to obtain a further $25 billion for the industry, in addition to $25 billion in low-cost loans already approved by Congress. The funds were authorized to help automakers and suppliers develop more fuel-efficient vehicles to meet stricter mileage standards.

Presidential candidate Sen. Barack Obama, D-Ill., supports doubling that amount.

On Sunday, in an interview on CBS’s "Face the Nation," former Treasury Secretary Robert Rubin said: "The auto industry clearly is extremely important to the economy and now has enormous difficulties. I think we do need to … see if there are ways that public policy can be helpful."

But Sen. John McCain, the Republican presidential candidate, said on Sunday that the first $25 billion should be disbursed before the industry seeks more. Speaking on NBC’s "Meet the Press," he said: "Let’s get the first $25 billion to them first."

Last week, GM and Chrysler announced fresh job cuts in response to a rapidly deteriorating environment. Auto analyst Rod Lache at investment firm Deutsche Bank estimates the selling pace slowed in October to a 25-year low of 11 million vehicles on an annual basis. The slide from last year’s sales of 16.1 million cars and trucks reflects consumers’ inability to obtain credit and their concerns about the economy.

GM is now resorting to forced departures of white-collar workers for the first time in many years, and Chrysler announced plans Friday to eliminate more than a fourth of its salaried employees by year’s end.

While some industry experts says the industry’s troubles will lead to further consolidation, others question if GM can address its most pressing issue — the rapid rate at which it’s burning through cash — by acquiring Chrysler.

The Renault-Nissan alliance is proposing an alternative plan to take a stake of around 20 percent of Chrysler and bring the Auburn Hills automaker into the French-Japanese partnership. Carlos Ghosn, CEO of Renault SA and Nissan Motor Co., tried to bring GM into the alliance in 2006.

Both proposals are being studied and compared, with Cerberus continuing to favor a GM-Chrysler combination, according to a person close to the discussions. Cerberus would take a stake in the combined entity. The firm is trying to line up outside financing, according to the source, and the likelihood of a deal in the current environment remains uncertain.

In the short term, a partnership with Renault-Nissan might be easier for Chrysler, Cole said. However, "long-term, it’s an entirely different picture."

GM may well emerge stronger from such a deal. "I’d want to have a piece of GM," he said, referring to Cerberus’s plans to keep a stake. "This industry will be profitable."

In two years, he added, U.S. carmakers will start seeing savings from contracts struck last year with the United Auto Workers union.