Why GM and Chrysler need Uncle Sam’s help

After years of downsizing, the three companies today employ about 200,000 people in the U.S. But the ripple effect, according to the Center for Automotive Research, reaches about 2 million jobs, including suppliers and dealers. Those jobs are concentrated in already-devastated state economies of politically important Michigan, Ohio, Indiana and Illinois.

Chrysler is another matter. Though it has about $11 billion in cash, the company reported last August, analysts believe there is no long-term plan for the company staying independent. "Chrysler is fairly hollowed out," says David Cole, chairman of CAR.

But there is considerable disagreement outside the halls of GM and Cerberus about whether GM actually needs Chrysler to survive. "GM is looking to put together huge economies of scale, which will lower its costs going forward, but it is only one scenario, not the only one," says Cole.

Excess capacity would be everywhere
A combined GM-Chrysler would control roughly a third of the U.S. auto market. But it would face enormous pressure to restructure rapidly and immediately cut costs stemming from excess capacity in almost all facets of the business. Those would include an unwieldy stable of 11 brands, more than 10,000 dealers and 97,000 union-represented factory workers.

Indeed, GM may be lobbying Congress for help to acquire Chrysler for its own good, but it is also doing Cerberus a favor by taking Chrysler's automotive operations off its hands. Part of the deal being worked out by GM and Cerberus has the private equity firm acquiring some of GM's 49 percent stake in GMAC at a friendly price, while GM absorbs the liabilities of Chrysler's troubled vehicle business and its employee and retiree expenses. "There is no question that Cerberus wants out of the auto business and to remain in the financial-services business," says one industry source, a consultant close to Chrysler executives.

That leaves the White House, the next president and Congress to decide how it will help the automakers stay in business. In the end, the money needed may come from three or four different sources in the forms of loans and lowered borrowing costs facilitated by the government. In that scenario, GM may manage to use the boost to its cash flow and liquidity — one formula pitched by GM is $5 billion in advanced loans to build greener cars and $5 billion in liquidity for its GMAC unit — to pull off the acquisition of Chrysler it feels it needs, without the federal government being seen as GM's investment banker. As one Capitol Hill source with knowledge of the negotiations said: "Money is money, however they get it."

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