Obama says automakers need 'drastic changes'

[March 27, 2009]  WASHINGTON (AP) -- President Barack Obama plans to announce a new aid package for General Motors and Chrysler in the coming days and says the carmakers must make "pretty drastic changes" to save their industry.

Obama gave a preview of his administration's approach to fixing the struggling U.S. auto industry during an online town hall meeting Thursday, promising additional aid only if the Detroit change its ways and receives concessions from stakeholders.

"We will provide them some help," Obama said. "I know that it is not popular to provide help to auto workers -- or to auto companies. But my job is to measure the costs of allowing these auto companies just to collapse versus us figuring out -- can they come up with a viable plan?"

He added: "If they're not willing to make the changes and the restructurings that are necessary, then I'm not willing to have taxpayer money chase after bad money."

General Motors Corp. and Chrysler LLC have received $17.4 billion in federal loans since December and are seeking billions more to stay afloat. A task force created by Obama has been meeting with industry officials and studying restructuring plans submitted by the companies to put them on the path to long-term profitability through tough concessions.

"Everybody is going to have to give a little bit -- shareholders, workers, creditors, suppliers, dealers -- everybody is going to have to recognize that the current model, economic model, of the U.S. auto industry is unsustainable," Obama said.

The president said he agreed with a questioner at the town hall -- a Maryland woman with family members who work for GM and Ford Motor Co. -- that "there's been a lot of mismanagement of the auto industry over the last several years."

Obama stressed that the industry must be preserved, not only symbolically but because of the large number of jobs connected to the companies and suppliers. Obama said his job was to protect U.S. taxpayers and he wouldn't spend federal dollars on "a model that doesn't work."

"A lot of it's going to depend on their willingness to make some pretty drastic changes. And some of those are still going to be painful," he said.

The government can recall its loans to GM and Chrysler if they fail to sign deals for debt restructuring and other concessions from stakeholders, including the United Auto Workers union, by March 31. But the administration has not indicated it plans to do so. Efraim Levy, an auto analyst with Standard & Poor's Equity Research, said the companies likely will need to come close to the terms of the loans.

"There's going to be grading on a curve," Levy said. "They've got to show a plan that's close enough to get it."

The loan terms call for debt holders to accept equity in the companies for two-thirds of the automakers' debt. GM owes roughly $28 billion to bondholders, while Chrysler owes about $7 billion in first and second-term debt, mainly to banks.

Also, the UAW needs to swap equity in the companies for 50 percent of the companies' cash contributions into a union-run trust fund for retiree health care. GM owes roughly $20 billion to its trust, while Chrysler owes $10.6 billion.

Bondholders have been reluctant to go along with the cuts, saying they're being required to sacrifice more than other parties, but have been holding discussions about the changes.

The union has agreed to other terms of the loans, including work rule changes and reducing total hourly labor costs to be comparable to those at Japanese automakers with U.S. factories.

On Capitol Hill, lawmakers who have talked to members of the task force in recent days said they expected the administration to provide additional loans to GM and Chrysler, but it would be the first in a series of announcements and would carry strict conditions.

"I expect them to support additional funding related to specific actions," said Sen. Debbie Stabenow, D-Mich. "I think it will be tied to specific actions that need to be taken."

The president said the industry has been hamstrung by the sharp decline in auto sales. Last year the industry sold 13.2 million new vehicles in the U.S., but the annual sales rate has dropped to around 9 million for both January and February. Obama said many Americans are struggling to get auto loans and are wary of big-ticket purchases as jobs disappear.

The president said that even as the economy bounces back, Detroit can't focus on "trying to build more and more SUVs and counting on gas prices being low."

In that vein, the administration on Friday is expected to announce plans to raise fuel efficiency standards by 2 miles per gallon to 27.3 mpg for new cars and trucks in the 2011 model year, an administration official said Thursday. That would be the first increase in passenger car standards in more than two decades.

Under the changes, new passenger cars will need to meet 30.2 mpg for the 2011 model year and pickup trucks, sport utility vehicles, and minivans will need to reach 24.1 mpg, according to the official, who spoke on condition of anonymity because the person was not authorized to speak in advance of the announcement.

White House spokesman Robert Gibbs said Obama will announce his strategy for the auto industry before he leaves for Europe on Tuesday. The announcement is likely to come on Monday.

Gibbs said Obama still thinks U.S. automakers build cars that Americans want to buy. Both he and the president own Ford Escape hybrids. "It's a nice car," Gibbs said. "It really is."

[Associated Press; By KEN THOMAS and TOM KRISHER]

Associated Press writers Ben Feller and Philip Elliott contributed to this report. AP Auto Writer Tom Krisher reported from Detroit.

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