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Obama: Automakers need ‘drastic changes’

President Obama said his administration will help Detroit's automakers only if the companies and their stakeholders make "pretty drastic changes" to reshape their industry.
/ Source: The Associated Press

President Barack Obama said Thursday his administration will help Detroit's struggling automakers only if the companies and their stakeholders make "pretty drastic changes" to reshape their industry.

Obama, responding to a question during an online town hall meeting, said the current business model for U.S. carmakers was unsustainable and the Big Three would need to change their ways.

Ohio is the No. 2 state for vehicle production, after Michigan.

The president said he planned to announce decisions on the future of the industry in the coming days.

"We will provide them some help. 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 said.

"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," he said.

General Motors Corp. and Chrysler LLC have received $17.4 billion in federal loans since December and are seeking billions more to stay in business. An Obama task force has been meeting with industry officials and studying restructuring plans submitted by the companies in an attempt to put GM and Chrysler 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 the questioner — 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."

But 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 administration has not indicated plans to call back the loans on March 31, an option included in the Bush loan terms. Efraim Levy, an auto analyst with Standard & Poor's Equity Research, said the companies will likely 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 debtholders 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 United Auto Workers union 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 carry strict conditions.

"This is a work in progress," said Rep. Gary Peters, D-Mich.

The president said the industry had been hamstrung 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 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."

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."