General Motors: 60 Days to Show Results

President Barack Obama has a clear message for General Motors (GM) and Chrysler: Come back with a better plan or the taxpayer funds are cut off.

Senior Administration officials said on Sunday, Mar. 29, that after reviewing the plans submitted by GM and Chrysler, the President and his top advisers have determined that not only did the companies not finish the restructuring moves required of them to get more funding, but they need to go further than the Bush Administration originally demanded.

But the Obama Administration won't cut the two carmakers off, either. The Treasury Dept. will give GM 60 days to negotiate further cuts from the UAW, reduce its unsecured debt, and show a plan that works, according to senior Administration officials. The President's auto industry task force also decided that, contrary to Chrysler CEO Robert Nardelli's claims that the company can stand alone, it needs a merger partner. The government has given Chrysler 30 days to seal its deal to give a minority stake to Fiat (FIA.MI) or it will be cut off.

The government's intent is clear: President Obama won't throw money at two companies that have been lurching from crisis to crisis and losing ground to the Japanese and Koreans for years. They have to cut deep and show that they will be able to thrive. "It sounds like they figured it out," says Maryann N. Keller, a longtime industry analyst who now sits on the board of Dollar Thrifty Automotive Group (DTG). "They won't just put a feeding tube in these companies."

GM's Viability Plan Too Rosy for Treasury

In GM's case, the government wants a clean slate before it gives the company a substantially larger loan package. President Obama forced the resignation of GM Chairman and CEO G. Richard Wagoner Jr., giving his handpicked successor Frederick "Fritz" Henderson the CEO job. GM director and former Northrop Grumman (NOC) CEO Kent Kresa will become chairman of the board. GM will also have to replace more than half of its board, Treasury officials said. Picking Kresa, and not GM's current lead director and Wagoner supporter George M.C. Fisher, is a clear sign that the Administration wants change.

It won't stop there. Treasury officials say that GM's updated viability plan, which was submitted on Feb. 17, had rosy projections for market share and pricing. GM said it could hold 19% share in the U.S. by 2014, but its market share is under 19% in the last two months. Every lost point of market share means $2 billion in lost cash flow.

GM's plan also relies on improved pricing on its cars, but Treasury officials think that will be tough to get given the economy.

Then there is GM's huge debt burden. GM owes the United Auto Workers $20 billion to start a union-led trust fund that will pay for retiree health-care benefits. The Bush Administration wanted the UAW to take $10 billion in cash and the rest in stock. That may still happen, but Treasury officials think GM needs to reduce its retiree costs. GM and the Treasury Dept. are negotiating deeper concessions from the UAW on retiree benefits.

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