Can GM and Chrysler escape bankruptcy?

General Motors (GM) and Chrysler LLC are struggling mightily to stay out of bankruptcy court. With roughly $20 billion in loans from the U.S. and some very tight deadlines, they're scrambling to settle their broken promises to unions and bondholders before a bankruptcy judge does it for them. But their broken promises to customers and shareholders are the biggest threat to their long-term survival.

General Motors -- which just got $500 million more of our money on April 24th -- now has $15.4 billion in loans from the U.S.. It just announced that will kill the Pontiac brand by 2010 and will keep only Chevrolet, Buick, GMC and Cadillac. And it now wants $11.6 billion more in U.S. loans. While its February viability plan forecast 11.5 million to 12 million vehicles sold in the U.S. for 2009, it's now claiming that cutting Pontiac will let it break even on 10 million units.

Meanwhile, GM is trying to get the United Auto Workers (UAW)'s health care trust to accept half its $20 billion health care trust obligation in GM stock. But GM bondholders -- who hold $27.5 billion in obligations -- appear reluctant to accept 225 shares in GM stock, worth $414 as of Friday, for every $1,000 worth of debt. GM has until June 1st to bring the bondholders in line. This would leave Treasury and the UAW with 89 percent of GM shares -- sticking bondholders with at most 10 percent and 1 percent for current shareholders.

GM also announced plans to cut 42 percent of its 6,200 dealer locations down to 3,600 sites. Its U.S. union workforce will fall 36 percent to 40,000 by the end of 2010 from 62,000 in 2008. And it has already announced a plan to idle 13 U.S. assembly plants and one in Mexico, eliminating 190,000 vehicles from its production from mid-May into July.

Chrysler -- which has $4 billion in U.S. loans and expects another $500 million -- has until this Thursday to close a deal with Fiat. Chrysler appears to have persuaded the UAW and Canadian Auto Workers (CAW) to accept half of their health care trust's $10.6 billion in obligations in Chrysler stock.

Still, like GM, Chrysler is having trouble convincing its debt holders -- with $6.9 billion in obligations -- to accept the terms being offered. The White House wants the banks to take 22 cents on the dollar for a five to 10 percent equity stake, while the banks want 65 cents on the dollar and a 40 percent stake. So this should be a busy week.

Lost in all these maneuverings, though, are the broken promises to the the other stakeholders in this tragedy. GM once controlled 50 percent of the North American auto market -- in 2008, that figure had dropped to 19 percent. At the same time, GM has lost $74 billion since 2004 and its stock price is down 98 percent since its former CEO, Rick Wagoner, took over in 2000.

If GM can't build vehicles that give consumers more for their money than the competition, then it will just continue to throw more and more unprofitable product lines overboard as it tries unsuccessfully to cut its way to success. GM simply cannot survive if it can't design, build, and service vehicles that can take market share away from the best that Asia has to offer.

And unless it overcomes that challenge, workers who accept half their health care obligations in stock are going to find themselves depending on a trust which holds a huge chunk of worthless paper to pay for their health care.

Of course, unless deals can be worked out with bondholders -- and soon -- GM and Chrysler will both end up in bankruptcy court, anyway.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned.

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