After struggle, Chrysler succumbs to bankruptcy

Source: Agencies  |   2009-5-1  |     ONLINE EDITION

AFTER months of living on government loans, Chrysler finally succumbed to bankruptcy yesterday, pinning its future on a top-to-bottom reorganization and plans to build cleaner cars through an alliance with Italian automaker Fiat.

The nation's third-largest car manufacturer filed for Chapter 11 bankruptcy protection in New York after a group of creditors defied government pressure to wipe out Chrysler's debt. The company plans to emerge in as little as 30 days as a leaner, more nimble company, with Fiat potentially becoming the majority owner in the future. In return, the federal government agreed to give Chrysler up to US$8 billion in additional aid and to back its warranties.

"It's a partnership that will give Chrysler a chance not only to survive, but to thrive in a global auto industry," President Barack Obama said from the White House.

Chrysler said it will close all its plants starting Monday and they will stay closed until the company comes out of bankruptcy. At least three Detroit-area factories sent workers home yesterday after suppliers stopped shipping parts over fears they would not be paid.

CEO Robert Nardelli announced he would step down when the bankruptcy is complete and take a post as an adviser with Cerberus Capital Management LP, which will give up its 80 percent ownership of Chrysler under the automaker's plan. Vice Chairman Tom LaSorda, who once ran the company when it was owned by the German automaker Daimler, said he would retire.

"A lot of us are scared," said Steve Grabowski, 33, who has worked at a parts stamping plant for seven years and was sent home Thursday. "We knew something like this was going to happen, but we didn't think it would be so soon."

Chrysler's bankruptcy filing is the latest step in a drastic reordering of the American auto industry, which has been crushed by higher fuel prices, the recession and customer tastes that are moving away from the gas-guzzling SUVs that were once big money makers.

Lee Iacocca, the retired chairman and CEO who led Chrysler through a government bailout in the late 1970s, said it was a sad day.

"It pains me to see my old company, which has meant so much to America, on the ropes," he said in a written statement. "But Chrysler has been in trouble before, and we got through it, and I believe they can do it again."

The government has sunk about $25 billion in aid into Chrysler and rival General Motors Corp.

GM faces its own day of reckoning on June 1, a date the administration has set for it to come up with its own restructuring plan. GM has announced thousands of job cuts, plans to idle factories for weeks this summer and has even offered the federal government a majority stake in the company as it races to meet the deadline.

Like at Chrysler, debt may be the stumbling block. GM has asked its unsecured bondholders to exchange $27 billion of debt for a 10 percent stake in the automaker. The creditors balked, saying that would leave them with just pennies on the dollar and they deserve a majority stake if they give up their claims.

When Chrysler emerges from bankruptcy, the United Auto Workers union will own 55 percent of the automaker and the US government will own 8 percent. The Canadian and Ontario governments, which are also contributing financing, would share a 2 percent stake.

Under the deal, Chrysler would gain access to Fiat's expertise in small, fuel-efficient vehicles. The US automaker eventually wants to build cars that could get up to 40 mpg, far more economical than its current fleet focused on minivans, Jeep SUVs and the Dodge Ram pickup.

In exchange, Fiat would initially get 20 percent of the company, but its share could rise to 35 percent if certain benchmarks are met, and Fiat said yesterday it could get an additional 16 percent by 2016 if Chrysler's US government loans are fully repaid. Fiat would also get access to the North American market through Chrysler factories and dealerships.