Federal Loans Can't Bridge Detroit Disconnect

Unless demand for cars can be revived, it may not matter how much fat GM and Chrysler cut.

General Motors and Chrysler on Tuesday asked the Treasury Department to approve up to $18.6 billion more in federal loans to stay alive, but what they really need is proving more elusive: car buyers.

The credit crisis and weak economy have caused an unprecedented 40% collapse in vehicle sales, now at their lowest per-capita level in 50 years. Many dealerships look like ghost towns. Customers who are ready to buy often discover they can't get an affordable loan. And things have only worsened since December, when Detroit automakers first approached Congress for help, which is why General Motors (nyse: GM - news - people ) and Chrysler now say they need more money.

GM is asking for $22.5 billion (of which it has already received $13.4 billion) and perhaps up to $30 billion, if car sales worsen further. By 2013 or 2014, GM said it could require additional funding if its once-fully funded pension plan doesn't bounce back with the stock market. Separately, GM estimates it will receive $6 billion by 2010 from the governments of Canada, Germany, the United Kingdom, Sweden, and Thailand to support its operations in those countries.

Chrysler, which has received $4 billion of the $7 billion it originally requested, is now seeking $2 billion more, for a total request of $9 billion.

In the viability plans they submitted Tuesday to the Treasury Department, GM and Chrysler even included analyses of the pros and cons of bankruptcy, though executives from both companies concluded that option would be too risky for the U.S. economy and too expensive for taxpayers left holding the bag. Instead, both companies said they were making good progress on discussions with creditors and the United Auto Workers union to reduce debt in an out-of-court restructuring.

To support their request for further aid, the companies announced separately they would cut even more jobs, factories, brands and dealerships than they outlined in their initial request for government help two months ago.

Importantly, the companies also said--along with Ford Motor (nyse: F - news - people ), which has not sought federal loans--that they reached a tentative deal with the UAW to reduce labor costs. The changes, if ratified by union members, would bring Detroit's labor costs more in line with Japanese carmakers operating in the U.S., the carmakers said.

 

But as of the Tuesday deadline to prove their long-term viability, there were some big items under the terms of the government loans that were still unresolved. None of the three automakers has yet to reach agreement with the UAW to reduce their enormous health-care obligations to retirees. And GM said it is still negotiating with bondholders on a plan to convert $27 billion in unsecured debt to a combination of debt and equity, reducing its net debt by at least $18 billion. Deals on the health-care liability and the debt reduction, both crucial to GM's survival, are expected by May.