Big three bailout, auto industry bailout
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Chrysler-Fiat Deal Latest Twist in Auto Bailout Story

January 21, 2009 11:31 AM
by findingDulcinea Staff
Chrysler, the third-largest U.S. car manufacturer, is exchanging a 35 percent stake in its company to Italian automaker Fiat for international sales channels and technology.

Fiat Getting No Cash in Chrysler Deal; Does Not Violate Terms of Auto Bailout

In a move to up its chances of weathering its credit crisis, automaker Chrysler entered a non-binding agreement with Italy's Fiat on Tuesday to trade technology and foreign sales networks in exchange for a 35 percent stake in the Detroit Big-Three company. No cash is involved in the deal.

Chrysler Chair and CEO Bob Nardelli was quoted as calling the deal, which must be approved by the U.S. government, a "great fit" for the automaker, according to MarketWatch. "The partnership would also provide a return on investment for the American taxpayer by securing the long-term viability of Chrysler brands in the marketplace, sustaining future product and technology development for our country and building renewed consumer confidence, while preserving American jobs," he continued.

The U.S. automaker had announced that it had spent at least $6.5 billion during the last two quarters of 2008, and, without receiving its $4 billion federal bailout, would have run out of money by the middle of this month.

The Fiat-Chrysler deal should help the latter revamp its operations, one of the U.S. government's stipulations for receiving auto bailout funds. By March 31, Chrysler, as well as General Motors and Ford, must also cut debt by two-thirds and lower costs of labor in order to hold on to loans and receive an additional $3 billion.

But joint Fiat-Chrysler products are not likely to be rolled out until 2012, which could mean eons for both automakers. Fiat shares dropped to their lowest price since at least Jan. 2, 1985, on the back of concerns over the deal. Plus the Italian car manufacturer "may tomorrow report a 73 percent drop in fourth-quarter net income to 157 million euros," wrote Bloomberg after surveying 13 analysts.

"When Chrysler proposes its transformation plan to the government at the end of March, this will no doubt help," Michael Robinet, an auto analyst at CSM Worldwide, told MarketWatch. "But there are other pieces that need to come together, like the UAW, what's going to happen to bondholders, who's going to take a haircut. The next two years is going to be an eternity in the auto business."

Background: December Bush auto loan; November bailout attempts fail

On Dec. 19, former President George W. Bush announced that the U.S. government will provide General Motors and Chrysler $13.4 billion in emergency funding. Also, an additional $4 billion will be available for the car companies in February, according to The New York Times.

The companies are required to revamp their organizational structures as a requirement for the funding. Bush’s government loan has essentially the same stipulations as the bailout package that the House of Representative approved a week earlier, but the Senate rejected.

“These are not ordinary circumstances, in the midst of a financial crisis and a recession allowing the U.S. auto industry to collapse is not a responsible action,” Bush said.

The money comes from the $700 billion Troubled Asset Relief Program (TARP) instead of from the $25 billion fund meant to assist the carmakers in the production of more environmentally friendly vehicles, The Guardian reported.

Bush said that the government could not let the automakers go into bankruptcy, arguing that consumers would not purchase vehicles from companies in such a state.

The bailout forces the companies to swiftly cut their debt commitments by two-thirds, “mostly through debt-for-equity swaps, and to reach an agreement with the United Auto Workers union to cut wages and benefits so they are competitive with those of employees of foreign-based automakers working in the United States,” according to the Times.

GM and Chrysler must also reduce compensation for executives, among other requirements.

Bush’s plan will make President Barack Obama decide by March 30 if the automakers are making sufficient advancements to stay financially afloat. If Obama does not see improvement, the car companies would have to repay the $13.5 billion immediately, and the government would take precedence over other creditors.

On Dec. 18, the Senate decided to scrap the $14 billion automaker bailout plan in a procedural vote, prompting fears that GM and Chrysler would be forced to declare bankruptcy within weeks, according to Bloomberg.

The U.S. House of Representatives passed a $14 billion bailout bill for the auto industry
the day before by a vote of 237-170, the San Francisco Chronicle reported.

An ABC survey indicated that 56 percent of Americans opposed an auto industry bailout.

Chrysler said it would be “down to its minimum cash requirement by the New Year,” according to BusinessWeek. General Motors said it would go insolvent in January if it did not receive $4 billion right away. Ford said it could stay afloat until at least 2010 if total U.S. auto sales reach a certain number.

The Ann Arbor, Mich.-based Center for Automotive Research indicated “that 1 in every 10 jobs is directly or indirectly affected by the automobile industry and the failure of the three Detroit automakers could result in the loss of 3 million jobs in the first year,” according to the Detroit Free Press.

Out of the Big Three, Ford is unquestionably in the best condition. According to Time magazine, the CEOs of GM and Chrysler made it clear that without the loans, they’re not going to survive until 2010, sparing bankruptcy.

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