The outlook for the domestic auto industry just became a bit brighter. Chrysler, after weeks of deadlock with bondholders and union members, has patched through a deal which may save the company from bankruptcy.
In February, Chrysler's proposal for additional bailout funds was rejected by the U.S. government which was concerned about the company's viability. Seeing that Chrysler had already developed a close relationship with Fiat, the feds decided to order Chrysler to merge with the Italian automaker, hoping that Fiat's learned lessons from its own turnaround could help Chrysler in its struggles.
The merger proposal was fraught with difficulty, though. Fiat refused to merge without concessions from the Canadian Auto Workers and United Auto Workers unions, and a settlement between Chrysler and its bondholders (mostly large banks). The unions showed a great deal of resistance to the deal and even walked out of talks, prompting Fiat to threaten to walk. The U.S. government grimly ordered Chrysler to prepare a bankruptcy filing, which was expected to possibly be filed this week.
However in the eleventh hour a deal was cut with both the unions and the bondholders. The unions agreed to pay and benefit cuts. Meanwhile, the bondholders, faced with being wiped out by a bankruptcy, agreed to cut Chrysler's loans of $6.9B USD to $2B USD in exchange for equity in the company, according to The Washington Post.
The move clears the way for Chrysler to escape bankruptcy. States an official inside President Obama's administration, "The agreement from Chrysler's principal banks is an exceptional accomplishment in line with the President's firm commitment that all stakeholders sacrifice to make this deal succeed."
The union deal has to be approved by a vote on Wednesday, but it’s expected to sail through smoothly. Looking to the future, like GM, Chrysler still has dire concerns. With sales at all time lows, it’s still burning through a lot of cash and will need more to keep up with high-tech developments like direct injection and electric vehicle technology.
Chrysler, unlike GM, has little flexibility to cut brands as it only has 3 -- Dodge, Chrysler, and Jeep. Nameplate cuts are likely, though, until a turnaround. With help from the government, and an infusion of Fiat's cheap small vehicles, there's still hope for Chrysler and its dealers.
Another bright spot will be the release of its electric roadster and other electric vehicles, the first of which (the roadster) land in 2010.