“Think about it. If you are a member of the union right now, you’re spending all your time negotiating about health care. You need to be spending some time negotiating about wages, but you can’t do it," he said.

In fact, the UAW locked itself into a contract limiting wages and changes to health care, without the ability to negotiate with a threat of strike, until 2015. These stands were agreed to by the union at the prodding of the Obama administration, which demanded that union autoworkers accept lower wages -- as a condition to the bailout that saved Lordstown -- to match non-union workers at Toyota plants in Kentucky and Honda plants in Ohio.

Even so, Lordstown is something of a success story for both the UAW and GM, and Obama's remarks were punctuated with enthusiastic applause.  After winning deep concessions from the UAW in 2007, GM agreed to invest $500 million to retool the plant to make a new fuel-efficient small sedan, the Chevy Cruze.

Obama had nice things to say about the Cruze, which GM expects to get more than 40 miles-per-gallon in highway driving.

"I just sat in the car," Obama said of the Cruze. "I asked for the keys. They wouldn't give me the keys. I was going to take it for a little spin. But it was nice sitting in there. It was a roomy car."

Consumers will not get the keys to a new Cruze, either, until the middle of next year when it arrives in showrooms. In the meantime, Lordstown is stuck building the Cobalt, a budget-minded Chevy and vestige of the "old GM." 

Consumer Reports in its October edition branded the Cobalt as one of the five "cruddiest cheap cars" on the market.

(Writing by Kevin Krolicki. Reuters photo by Larry Downing.)

General Motors doesn't do deals in a hurry -- at least when it is selling.

With the Opel sale grinding along, the U.S. automaker is also in the process of offloading its Saab brand to luxury sportscar maker Koenigsegg.

Financing is the major sticking point in the Saab sale process. Koenigsegg -- backed by U.S. and Norwegian investors -- reached a deal in June to buy Saab from GM but the process then stalled.

Now Koenigsegg -- which boasts having developed the world's fastest sportscar -- has apparently sent the Swedish government a new plan for financing the Saab purchase. This we're told no longer includes any extra loan from the government on top of funding guarantees from the European Investment Bank (EIB).  There were reports that Koenigsegg Chairman Augie Fabela thought he needed an additional 3 billion Swedish crowns of financing.

GM has always said it expects to close the deal by the end of the year. Given progress so far and the complications of agreeing autos deals with governments, it looks as though the automaker will have it right.

- Professor David Bailey works at Coventry University Business School. The views expressed are his own -

The UK operations of Jaguar Land Rover lost £673.4m last year after a £640 million surplus the year before, it was revealed last week in accounts filed with Companies House. Adding in actuarial and pensions adjustments, “total recognised losses” at JLR topped almost £1.2bn last year. Not that this is much of a surprise of course. This is a “once in a century” downturn as JLR boss David Smith put it, and most car makers have posted record losses – including Toyota, for the time in its history.

JLR has announced the cessation of X-type production at Halewood at the end of this year, leaving a huge question mark over the viability of the Halewood plant. On current volumes (without the X type) it is difficult to see how JLR can keep open three UK plants.

To keep Halewood operating (which at full capacity is a very efficient plant), the LRX Range Rover concept vehicle needs the green light soon for development and production. This means accessing the EIB loan of £340 million which is already on the table from Europe.

That, of course, brings us back to the loan guarantee from the British government which is still under discussion after months of haggling. Quite why it has so long to sort this out is beyond me. The latest rumour mill suggests that the government has dropped some of its more onerous conditions like appointing the chairman, and is now prepared to offer JLR a guarantee for a £175m commercial bridging loan over six months.

However, that’s way short of what Tata was looking for, both in terms of the scale of the guarantee and the term. Just six months of guarantee seems to ignore the reality of the credit crunch facing Tata, and a guarantee covering just 50% of the EIB loan is better than nothing but well short of the 75% I was expecting.

Indeed, Tata had originally asked for loan guarantees for commercial financing of around £500m and for a £340m European Investment Bank loan to help fund investments in greener vehicles (such as the LRX, which combines lightweight materials and a hybrid engine). The EIB loan has already been forthcoming from Europe.

Tata acquired JLR from Ford for $2.3 billion in a deal completed last year, and since buying JLR it has put in over £1bn into the firm. Tata support has been crucial during this double whammy of recession and credit crunch. Remember that Saab has been offloaded by GM and Ford is trying to sell off Volvo. If a private equity firm had got its hands on JLR we would have seen significant job losses (many more than the 2,200 we’ve seen under Tata) and plant closures already. The fact that we haven’t is testimony to Tata’s commitment.

Behind the results, Jaguar as a brand is doing pretty well in a tough market, and with a cracking line up of XK, XF and (new) XJ models, is well positioned for when demand does pick up. Land Rover, meanwhile, has been badly affected by the credit crunch and the shift away from 4×4 cars with the recent oil price spike. It ideally needs models like the LRX on sale right now. This makes the lengthy haggling over a loan guarantee even more of an issue as LRX development work needs to be speeded up.

Last week, it seemed that a loan guarantee was finally within reach. Hopes subsided, though, after a letter from Lord Mandelson to Tata was leaked to the press, and Mandelson made TV appearances apparently giving a ‘take it or leave it’ impression to Tata.

I’m not party to discussions, so can only guess why Mandelson’s team thought it was appropriate to leak the letter, which called for immediate “face to face” negotiations. Maybe it was intended to shift attention to Tata after some stinging criticism by the Business Select Committee of the government for its failure to arrange a loan (MPs on the Committee said they were ‘astounded’ it had not been sorted out sooner).

If so, it backfired. Last week another group of MPs, in the form of the West Midlands Select Committee, said it was “dismayed’ no money had been forthcoming for West Midlands’ producers. It called for an acceleration of applications to the government’s Automotive Assistance Package, including that by JLR.

And the leak didn’t go down very well with Tata either, unsurprisingly. The slow pace of agreeing suitable access to finance is the responsibility of the government, not Tata. JLR has maintained a diplomatic silence in public throughout the whole loan guarantee negotiations. It would be helpful if our politicians did the same.

Indeed, I hope politicians can step back for a moment and consider what’s going on. Given where the industry and JLR are right now, Halewood’s fate hangs in the balance. It really is that serious. The longer the loan negotiations drag on, the more vulnerable Halewood becomes.

This may be what Tata’s vice-chairman Ravi Kant meant recently by his comment that “plant shutdowns” could not be ruled out. OK, he could have meant temporary shutdowns, as Halewood will face in September. Yet without LRX production, I can’t see how Halewood can be kept open in the medium term.

I should stress that JLR will get through this recession. The questions are: In what shape? With how much R&D? With how many plants open? And with how many workers employed?

JLR is not asking for a bail out but rather help in accessing commercial finance at commercial rates. It’s not too much to ask the government to assist when so much is riding on the firm in terms of R&D, jobs, the supply chain, and the revenue the firm raises for the government in income tax, National Insurance and VAT.

- Professor David Bailey works at the Coventry University Business School. The opinions expressed are his own. -

General Motors announced its exit from Chapter 11 bankruptcy protection on Friday, and pretty speedy it was, too. The firm has quickly transferred its good assets to a new carmaker (”new GM”) which is majority owned by the U.S. government, and the whole bankruptcy process has taken just 40 days.

It used to be said that “whatever’s good for GM is good for the U.S. economy”. While GM is no longer the world’s biggest automaker, by some estimates it still accounted for 1 percent of the U.S. economy before going into bankruptcy. The latter has been not only hugely symbolic of the fate of the ailing U.S. car industry, but has also been of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.

The “new GM” that has emerged from Chapter 11 last week is a much smaller and leaner firm which has shed tens of thousands of workers, closed factories, cut loose hundreds of dealerships (further reductions will be needed), ditched several brands, and – with union agreement – changed employment contracts so as to cut costs.

Under bankruptcy protection, GM has shed over $120 billion in liabilities. Its work force will also shrink dramatically, from around 90,000 at the start of this year to around 64,000 by the end of 2009.

“New GM” will include the firm’s best models and R&D and will have scrapped brands like Pontiac, Hummer and Saturn. By 2012, the new GM will comprise the Chevvy, Cadillac and Buick brands, plus its GMC truck brand. Of particular importance, its forthcoming electric Chevvy Volt car will be part of the new firm

The U.S. government will take a 61 percent stake in the new GM, along with the Canadian government (12 percent), and the United Auto Workers’ retiree healthcare trust fund (17 percent). Creditors to the “old GM” will get just a 10 percent stake.

The Obama government has stressed that it does not aim to maintain a long term stake, and may look to sell off its shareholding as early as 2010, or as soon as the firm is ready list on the stock market.

A key goal for GM is to stabilise things by being able to make money even if U.S. car sales remain depressed at 10 million to 10.5 million vehicles a year. And it urgently has to get new technologies and cars to market quickly, staring with its electric Volt car in 2010. If it can do that successfully, it still has a chance, as long as it can repair its battered brand image.

In essence, the future of GM now depends on its ability to actually produce fuel-efficient cars that people want to buy and which match or exceed Japanese standards for quality. It still faces a massive challenge.

GM will never be the biggest manufacturer again. However, Chapter 11 was anyway about restructuring the firm, wiping clear most of the debts, cutting costs and reorientating the firm towards more environmentally friendly cars. A viable car company may yet emerge from the ashes of the old GM, thanks to an interventionist U.S. government which is investing heavily in new green technologies.

Just before GM entered Chapter 11, GM Europe was split off from its U.S. parent and placed in a trust fund. GM Europe employs around 55,000 workers across Europe, with some 25,000 based in Germany, and 5,500 at Vauxhall in the UK.

The Canadian car parts firm Magna International has emerged as the preferred bidder to acquire GM Europe, although GM has confirmed that it is still talking to other bidders. The German government has promised GM Europe substantial financial support; it has very much called the shots in Magna becoming the preferred bidder, and wants to defend jobs in Germany.

That still leaves some major question marks over Vauxhall in the UK. Concerns remain that UK workers will suffer job cuts if a Magna deal goes ahead, in part because of the financial support coming from Germany to protect jobs there, and also because it is easier to lay off workers in the UK than on the continent. Magna has said it will look for up to 9,000 redundancies in Europe.

Earlier this week GM confirmed a rival bid from Chinese firm Beijing Automotive Industries (BAIC). Whilst Magna has a head start in acquiring GM Europe and is still very much the favourite to acquire the firm, unless a deal is sealed within the next few weeks, BAIC may yet be in with a chance.

It’s not such a daft idea, especially for British workers. BAIC is thought to be looking to cut capacity in higher cost Belgium and Germany rather than in the UK, and to produce GM models in large numbers in China. The Chinese market is growing rapidly and probably offers more opportunity than the Russian market that Magna is thought to be targeting. A BAIC deal would also offer GM more upside benefit with a bigger stake in a new GM Europe.

These developments have added pressure on the UK government to intervene to support Vauxhall production. The government announced a 2.3 billion pound auto support package back in January, yet not a single penny of this money has yet to reach any car producer in the UK, although applications for support are thought to be at an advanced stage now. The government needs to speed this up and get the money flowing soon.

- Professor David Bailey works at the Coventry University Business School and has written extensively on globalisation, economic restructuring and industrial policy, with particular reference to the auto industry. The opinions expressed are his own. -

Despite a run down in heavy commercial vehicle production in the UK in recent years, light commercial vehicles are still made in Britain in quite significant numbers.

However, this could easily change over the next few years unless something is done. The seismic changes that have unfolded in the world’s auto markets now threaten to eliminate mass van production in the UK, leaving just small niche production.

Today there are three main producers in the UK: Ford at Southampton, a GM/Renault joint venture at Luton, and LDV in Birmingham. The latter stopped production back in December when the double whammy of credit crunch and recession impacted.

On current trends, Ford, GM and LDV could be gone by 2012, with mass van demand then having to be fulfilled by imports. Jobs, capacity and R&D could be lost forever.

So, the question for the UK government is whether it actually wants van production in the UK. If it does, it needs to step in with an industrial policy to support production, starting with LDV.

Ford assembles vans at its transit van plant in Swaythling (Southampton). The firm has laid off staff at Southamptom and Ford itself has stated that it only plans to continue making the Transit panel van at the plant until 2011; after that the site will make only the chassis cab version of the model.

By 2011, production will be halved to 35,000 units a year. Volumes beyond 2011 are uncertain and are likely to be limited. Meanwhile, Ford has invested heavily in Transit van production abroad, and the firm is shifting mass production of the Transit (the “backbone of Britain” according to Ford) to Turkey.

Meanwhile, GM’s problems have led to a potential sale of its European arm to the Canadian supplier Magna, with financial backing from Russia via a government-owned bank and Gaz. The German government has offered almost 5 billion euros in short term financing and loan guarantees to effectively safeguard production in Germany.

Magna has openly discussed cutting some 9000 jobs in Europe and this leaves Vauxhall vulnerable as it is easier and cheaper to lay off UK workers. Current van production at Luton is scheduled to run to 2012. After 2012, the Luton plant faces a very uncertain future as Magna wants to expand into the Russian market and Gaz has capacity there it can use.

Last but not least, LDV is now on the edge.

Having offered a critical 5 million pound bridging loan to enable the Malaysian firm Westar to complete a takeover of LDV, the government’s Department of Business Enterprise and Regulatory Reform (BERR) pulled the plug last week when it saw that Westar had not raised the external finance needed to complement its own resources.

Yet this is an odd tautological logic. Even Tata, a huge conglomerate, has struggled to raise finance on the international markets because of the global credit crunch. So it seems that the government won’t intervene because the market won’t provide the finance – yet if the market did provide the finance the government wouldn’t need to intervene in the first place.

With no Westar takeover, LDV will go into administration on Monday. This opens up the possibility of another “lift and shift” of production, jobs and R&D out to an emerging economy like India, Russia or China.

This would mean an end of van production here in Birmingham, with a possible knock on effect on some suppliers who may well decide to pull out of the UK as well.

There are a number of things the government could actually do here.

It could take an equity stake in LDV (indeed, if Obama can nationalise GM, why can’t Brown think about equity stakes in UK firms?). An equity stake with Westar or another investor would also mean that it would have a say in keeping production in the UK.

Other key stakeholders could then take stakes. LDV’s major customer, The Royal Mail, might take a stake, and secure the supply of electric vans. Birmingham City Council might do the same. Such backing could then bring in private investors.

Alternatively, the government could provide a loan guarantee to Westar for the investment. This latter option – providing a loan guarantee for Westar to access the finance - would be the least risky and speediest option given where LDV is right now.

Such interventions have been seen in other countries and there is a case to be made for intervention here. Yet BERR has repeated the point that LDV hasn’t made a profit in several years.

This ignores the rather misses the fact that over the last few years some £600m has been invested in the award winning Maxus van range which could provide an ideal platform for the proposed switch into environmentally friendly green electric vans.

This electric can market is growing rapidly, especially in the depot-to-depot market in urban areas. Overseas this has been supported by tax breaks – something the government here could do to help LDV and Modec in Coventry. The electric Maxus is already developed and ready to roll, and LDV owns the intellectual property rights to the electric version.

As battery life improves and the recharging infrastructure in urban areas develops, this market will grow. LDV could be at the forefront of the proposed ‘green new deal’.

Put simply, there is a new market unfolding here, and LDV are effectively saying to the government: “put your money where your mouth is” when you talk about a low carbon future.

In support of LDV, a number of other points need stressing.

Firstly, the more than 25 percent depreciation of sterling improves LDV’s position regarding export markets.

Secondly, the firm is self-contained, owing the intellectual property rights and production facilities for the Maxus van in diesel and electric form.

Thirdly, LDV contributed around 7 million pounds in 2008 (not exactly a great year for the firm, remember) in PAYE and National Insurance to the government coffers. You could treble that by adding in the supply chain and dealer network. Of course, some of those firms and people might get other jobs and hence still pay NI and PAYE if LDV does close, but even a conservative estimate suggests that the government picks up a useful more than 15 million pounds a year from LDV’s operations. Add in more than 50 million pounds in purchasing and more than 50 million pounds in exports and you can start to see the value of LDV to the economy and the government.

Fourthly, we know from our research on the collapse of MG Rover that quality jobs matter and that three years on workers were earning 5,600 pounds a year less in real terms than when they were at MG Rover. The Rover Task Force cost the government 150 million pounds in picking up the pieces. And in this case, the LDV plant is in one of the most deprived areas of Birmingham. Many workers will struggle to move on, especially in the current downturn.

Fifthly, the government might be concerned that Westar would shift production overseas. In that case the loan guarantee could be converted to an equity stake with a golden share that would prevent this happening.

Sixthly, LDV management state that they have restructured and have cut costs and have brought down the output level where it can break even. The government needs to scrutinise this and if costs can be covered at around 10,000 units this remains a viable firm.

It really is time for BERR and the government to think creatively, both in terms of where the market is going, and how LDV – and indeed the UK van industry - can get there. LDV can still be saved and has some great R&D and products as well as a skilled and committed workforce. It can still be saved.

- Professor David Bailey works at the Coventry University Business School and has written extensively on globalisation, economic restructuring and industrial policy, with particular reference to the auto industry. The opinions expressed are his own. -

GM declared itself bankrupt on Monday in one of the largest bankruptcies in U.S. history, in an attempt to seek protection from creditors.

The firm has stacked up over $80 billion of losses in the last four years, also swallowing some $20 billion in cash from the Obama administration. It is likely to need another $30 billion before emerging from Chapter 11 substantially slimmed down and free of debts.

A bankruptcy judge will decide who gets what assets. It’s not clear whether during Chapter 11 the firm will continue to function and assemble cars.

It used to be said that “whatever’s good for GM is good for the U.S. economy”. Whilst GM is no longer the world’s biggest carmaker, by some estimates it still accounts for 1 percent of the U.S. economy. The bankruptcy is not only hugely symbolic of the fate of the ailing U.S. car industry, but is of huge importance for all the workers, suppliers, dealers and creditors caught up in its travails.

Republicans have begun to criticise the U.S. president’s handling of the GM affair, but it is difficult to see what else the U.S. president could have done.

Obama had to give GM time to come up with a credible plan, and I have always thought that the firm would need up to $50 billion of government support to get through the downturn and restructuring.

Under the proposed plan, the U.S. government would get a stake of over 70 percent in GM in return for another $30 billion of state cash, with the United Auto Workers union taking 17.5 percent initially, with the union accepting shares in GM instead of cash owed by the firm for retired employees healthcare cover.

A majority of GM’s bondholders have accepted the offer to swap their $27 billion in debt for an initial stake of 10 percent with the option of buying 15 percent more later. Their agreement to do this should help in speeding GM’s progress through Chapter 11 and avoid expensive legal battles.

Whilst a minority group of bondholders are holding out for a better deal, in reality this restructuring is the only game in town.

Hopefully, the new GM that emerges from Chapter 11 will be leaner, fitter and free of debts. It will include the firm’s best models and R&D and will scrap brands like Pontiac, Hummer and Saturn.

By 2012, the new GM will comprise the Chevrolet, Cadillac and Buick brands, plus its GMC truck brand. Of particular importance, its forthcoming electric Chevvy Volt car will be part of the new firm.

“GM-Lite” will cut the number of assembly sites across North America, including Canada, to 33 within three years, from 47 at the end of last year.

Eventually, the goal is to float the new firm on the New York Stock Exchange. It will shed some 20,000 or more workers in the U.S., and has also told over a thousand dealers in the U.S. that they are at risk of losing their franchise. GM plans to lose 2,300 from its 6,000-strong network.

In a deal with the UAW which saves the firm $1 billion a year, rules on breaks, vacation and overtime have been changed, retiree benefits have been cut, and the UAW has agreed not to strike until September 2015 at the earliest.

GM will never be the biggest manufacturer again, but Chapter 11 is anyway about restructuring the firm, erasing the debts, cutting costs and reorienting the firm towards more environmentally friendly cars.

A viable car company may yet emerge from the ashes of the old GM, thanks to an interventionist U.S. government which is investing heavily in new green technologies.

The situation here in the UK is rather different. An efficient and world class car industry is struggling given the impact of recession and credit crunch, and the British government has largely been a spectator as GM Europe has been sold off.

That in turn could have a very significant impact on jobs at Vauxhall here in the UK.

– Paul Taylor is a Reuters columnist. The opinions expressed are his own –

Mon Dieu! Are the Germans starting to behave like the French?

Berlin’s efforts to salvage carmaker Opel from the wreckage of U.S. auto giant General Motors pose as big a challenge to Europe’s single market as French attempts earlier this year to tie loans to its carmakers to keeping jobs and factories in France.

The European Commission, which enforces EU competition rules, made President Nicolas Sarkozy drop any formal condition on the aid to Renault and Peugeot. But it seems ill-placed politically to stop the German juggernaut, even though the deal seems to be pegged to keeping German factories open and making any job cuts and closures elsewhere.

Facing a general election in September, Chancellor Angela Merkel wants to save Opel by providing 1.5 billion euros in bridging finance until it can be taken over by private investors backed by several billion more euros in state loan guarantees.

Federal and state leaders have pushed the suitors into a bidding war to preserve Opel’s 25,000 jobs and four production sites in Germany in preference to other GM plants in Britain, Belgium, Spain and Poland.

That amounts to using German taxpayers’ superior financial muscle to skew Europe’s level playing field. It is not only unfair to European neighbours but also to other German and European car manufacturers, under market pressure to reduce huge overcapacity in the sector.

A similar problem arises when governments tell banks receiving public capital injections or state guarantees that they are expected to lend at home rather than abroad. But while rescuing banks may be necessary to prevent a financial system collapse, rescuing Germany’s number four car maker is largely about saving jobs and votes rather than the economy.

European Commission President Jose Manuel Barroso, seeking reappointment by EU leaders on June 18, has for months deflected calls for an EU-wide car industry recovery plan opposed by Berlin. That has left member states to take measures compatible with EU rules such as scrappage premiums and loans to develop clean engine technology.

The commissioners for competition, enterprise and employment warned jointly on May 12 that state aid to GM Europe “cannot be subject to additional non-commercial conditions concerning the location of investments and/or the geographic distribution of restructuring measures.”

But the EU executive has kept a low profile in the Opel affair and only called emergency talks for Friday with ministers from member states concerned after Belgium wrote to Merkel and Barroso urging a European solution to avoid beggar-thy-neighbour policies. With GM hurtling towards a June 1 U.S. deadline for bankruptcy, the meeting seems to be a damage limitation exercise and comes too late to change Berlin’s approach.

Barroso has tried with some success to hold the line against protectionism and subsidy races in Europe since the financial crisis began. But he has not yet shown a way out of the contradiction between governments using taxpayers’ money in the national interest and the preservation of fair competition within a single market. State-aided deals forged in the furnace of the crisis will prove difficult to unpick and the distortion they wreak on competition can grow over time.

Yet applying EU rules strictly by forcing banks or car companies that receive rescue aid to restructure and cut back activity after six months is politically impossible in such an economic emergency. Competition Commissioner Neelie Kroes was slapped down after she threatened to let banks go bust if they failed to provide satisfactory restructuring plans on time.

But the EU badly needs a strategy to get the toothpaste back into the tube once the crisis eases. A reappointed Barroso will have to get tougher after the German election.

(Editing by David Evans)

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

Could Italy's cash-strapped Fiat, Europe's sixth auto maker, build a workable alliance with Chrysler and Opel to become be a profitable global player? Or would it be a marriage of losers, doomed to fail?

Fiat CEO Sergio Marchionne has made clear that his interest in Opel, the European arm of ailing General Motors, is more than just a well-timed tactic to get better terms in the alliance he is negotiating with troubled U.S. number three Chrysler. Chrysler faces likely bankruptcy if a deal is not clinched by April 30.

The troubleshooter who turned around the Italian group seems to want both deals. "It is quite possible for Fiat to engage in both of those transactions and to execute them properly," he said on Thursday. Marchionne sees a wave of consolidation coming in the automobile sector and is determined to gain critical mass to survive. But his strategy looks over-ambitious.

Fiat has little cash and 4.8 billion euros in debt to repay this year, so Marchionne needs deals that cost little or nothing. That means he has to target companies in a weaker position than his.

Fiat would not take on any of Chrysler's debts, and GM seems willing to give away a 51 percent stake in Opel free to anyone who will invest in it as a going concern, with the U.S. auto maker keeping a minority holding. GM needs Opel's technology to produce the smaller, greener cars which are the condition for a U.S. government lifeline.

But even if the financials were to add up, which is a big "if", the challenge for Fiat of turning such an alliance into a viable, profitable group looks daunting.

Germany's richer, fitter Daimler bought Chrysler in better times and failed to turn the Detroit dinosaur around despite sending in its best managers and engineers, which also had the effect of causing Mercedes' quality to decline at home.

Marchionne has made clear Fiat would need German state aid to restructure Opel. Since the two firms have lots of overlap in small and mid-range cars, it would have to close plants and lay off thousands of workers, with pain in both Germany and Italy. But Berlin would want guarantees on jobs and production sites in return for its aid, crimping Fiat's room to make synergies.

Making all this work is a tall order, even for a turnaround maestro like Marchionne, and could be a dangerous distraction from Fiat's own recovery, as Daimler found with Chrysler. Fiat's controlling Agnelli family, which brought him in in 2004 to rescue Fiat, should be having an anxiety attack at his strategy.

(Editing David Evans)

-- Peter Morici is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission. The views expressed are his own. --

General Motors and Chrysler are on the anvil of history. United Auto Workers President Ron Gettelfinger holds the hammer and will determine whether they emerge more competitive or shattered in pieces and sold to foreign investors.

In December, George W. Bush granted $17.4 billion in temporary loans on the condition those firms convert two-thirds of their debt into equity. Another condition was to persuade the UAW to accept stock for one half of what these companies owe to fund retiree health care and align wages, benefits and work rules with those of the Japanese automakers operating in the United States.

GM and Chrysler must complete these negotiations by March 31 or repay the money and face bankruptcy.

At U.S.-based Toyota factories, workers receive about $25 dollars an hour and good health care benefits. But they don't retire at 50 after 30 years or get as much time off and huge severance packages. Toyota does not endure the medieval work rules and job classifications imposed by UAW contracts.

Most other Americans would be happy to get Toyota pay, benefits and working conditions. If Gettelfinger continues stubborn resistance to a better package than most Americans enjoy, then Detroit automakers will continue to require government subsidies or not have enough profits to invest and compete in hybrid and other new technologies that will transform personal transportation over the next decade.

Eventually, Washington will tire of their begging, they will march through bankruptcy, and their factories will be sold off to Japanese, Korean, European and Chinese automakers.

If Gettelfinger takes the Toyota package, then Washington should take a hard look at policies that can promote U.S. automaking as effectively as do industrial policies abroad.

This would include addressing undervalued currencies in Asia — currencies kept cheap in foreign exchange markets by government intervention in Japan, China and elsewhere.

Over the last two decades, Japan has kept the yen at least 30 percent undervalued against the dollar, and this provided Toyota with an average subsidy of at least $2,000 on every car it sold in the United States.

Through 2004, the Bank of Japan directly purchased dollars in currency markets to keep the yen undervalued, and since, it accomplished the same by keeping Japanese interest rates very low. This encouraged the so-called "carry trade," where private investors borrow yen, use those to purchase dollars and then invest in short-term U.S. securities to exploit higher U.S. interest rates.

Now, the Federal Reserve has dramatically reduced U.S. interest rates, and the yen has risen closer to its true market value against the dollar. Japanese officials appear poised to again intervene directly in currency markets to restore Toyota's unfair advantage, and Washington should take whatever steps are necessary to head off such Japanese protectionism.

In addition, Washington should take assertive steps to encourage production of fuel-efficient vehicles in the U.S. and create a strong export industry.

Washington could offer incentives to car buyers to trade in gas guzzlers for more fuel-efficient vehicles — the newer and the bigger the clunker and the more fuel-efficient the replacement, the more dollars the car buyer would receive if the guzzler is destroyed. This would raise the price carmakers receive from selling more fuel-efficient vehicles and boost car sales.

Washington could provide substantial product development assistance to U.S.-based automakers and suppliers. The latter include Toyota, Nissan and Honda, as well as the Detroit Three, battery makers and other suppliers to accelerate the production of innovative, high-mileage cars.

The condition for assistance would be that beneficiaries do their R&D and first large production runs in the United States, and share their patents at a reasonable cost with other companies manufacturing in the United States. The huge U.S. market would help attract producers from around the world and rejuvenate the U.S. auto supply chain.

Such smart industrial policies would contribute to national efforts to reduce CO2 emissions and reduce oil imports.

Finally, individual Americans should open their minds. Many are considering trading in trucks and SUVs for sedans and are naturally attracted to the Toyota Camry and similar import brands. Visit a Ford or Chevy showroom and test drive a Fusion or Malibu and be pleasantly surprised. Those are high-quality, affordable and reliable vehicles.

Washington is giving Detroit a second chance, and Americans should give its cars a second look.

-- Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.  The opinions expressed are his own. --

President Bush has agreed to lend GM and Chrysler $17.4 billion on the condition these firms complete a plan to accomplish financial viability.

The agreements set goals for automakers: converting two-thirds of their debt into equity; paying company stock to fund one half of the Voluntary Employee Benefits Associations, which fund retiree health care benefits and remove these costs from future liabilities; aligning wages, benefits and work rules with U.S. Nissan, Toyota or Honda operations.

These goals are generally consistent with the conditions I outlined as necessary for the Detroit Three to achieve viability when I testified before the Senate Banking Committee on November 18. For example, laid off workers could no longer sit in the Jobs Banks collecting 90 percent of pay and benefits indefinitely and engaging in productive activities like pinochle.

Financial viability requires projecting a positive net present value, taking into account all current and future costs. It does not require a positive cash flow by March 31. In fact, wage and benefit cuts only need be accomplished by December 31, 2009.

Given the depressed auto market, a positive cash flow cannot be accomplished soon, and GM and Chrysler will be asking for more federal loans when they table their plans by March 31. If the auto market stays depressed into 2010, Ford will likely seek assistance. Given the likely duration of the recession, loans of well over $100 billion will be needed. Much of those could prove gifts, with the loans never truly repaid.

Unless the automakers significantly reduce their debt, jettison retiree legacy liabilities, and align wages, benefits, work rules with those of Japanese transplants, they simply cannot hope to be consistently profitable.

Yet, the agreement permits the automakers to vary from those conditions if they can still demonstrate a net positive present value. Enter the accounting magicians.

UAW contracts are exceedingly complex. GM and UAW leaders have mastered obfuscating the consequences of their pay structure and work rules. Calculations of net present value will importantly hinge on forecasts of future car sales and wages paid by Toyota, Nissan and Honda. A few quick pen strokes and a lousy business plan can be made a winner, with costs to taxpayers in unpaid loans only becoming apparent years later.

Barack Obama owes organized labor a huge debt for his November victory. UAW President Ron Gettelfinger can be expected to try to sell Obama labor agreements that appear to create more concessions than are real and leave the Detroit Three in the red going forward.

Fooling Obama would create loans the Detroit Three never can really repay.  The government could force payment at the expense of the next creditors in line—the large U.S. banks—but the federal government is already subsidizing their losses.

One way or the other ordinary citizens who don’t earn nearly the pay and benefits autoworkers receive would be paying taxes to subsidize their rather generous lifestyles, much as taxpayers are financing the bloated bonuses at large New York banks requiring federal dole to stay afloat.

President Bush has punted the auto mess to his successor, and one of three outcomes is possible:

1. President Obama can require the automakers and UAW to come up with a contract ordinary mortals can understand, eliminate all the foolish job classifications and work rules, and establish pay rates that make the Detroit Three competitive.

2. Obama can push the automakers into a prepackaged Chapter 11, perhaps by providing some financing to ensure suppliers are paid and companies can continue to operate, and let a bankruptcy judge impose the essential conditions of the Bush agreement.

3. He can let the Detroit Three continue their profligate behavior, providing subsidies masquerading as loans.

Obama faces the same kind of tough choice Bush did when he lavished generous subsidies on agriculture at the beginning of his presidency. If Obama caves to union pressures and chooses to subsidize the automakers, other unionized industries will line up. Market discipline will not apply to the eight percent of private workforce represented by unions, and damn the majority that really elected him.

For full coverage of the auto industry, click here.

For previous debate entries by Peter Morici, click here.