4 ways to fix Detroit - but none is easy

GM's future looks bleak

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NEW YORK (CNNMoney.com) -- The Obama administration may quickly find there is no easy fix for Detroit's many woes.

Saving General Motors (GM, Fortune 500), Chrysler LLC and the auto suppliers and dealers that depend on them could easily cost $130 billion or more.

But letting GM and Chrysler file for bankruptcy or go out of business could end up costing even more. Millions of jobs would be lost if the companies closed up shop, along with hundreds of billions in federal, state and local tax revenue.

So the challenge for Obama's auto industry task force will be to sort out the realities of the market place and the companies' own financial situations and come up with the least damaging course of action.

Experts say they are basically four options:

Give the automakers whatever it takes to survive. This is clearly what the automakers and their politically powerful ally, the United Auto Workers union, would prefer.

GM and Chrysler argued in their viability plans to the government that if they receive an additional $21.6 billion in loans, they can survive the current downturn thanks to cost cuts they have already made and plans for further reductions in staff and production.

No one can dispute the automakers have made significant cuts. The question is whether GM or Chrysler can turn a profit -- even with more cost cuts -- as long as auto sales remain this weak.

"At current demand, no one can make [money] on that volume," said Erich Merkle, independent auto analyst and consultant. "The only way to fix the problem is to jump start car sales. It's tough to know when that will happen."

Force a merger between GM and Chrysler. Both companies have acknowledged that they held talks about a possible deal last fall. But discussions broke off due to a lack of cash needed to pull off such a complicated combination.

Chrysler raised the option of a deal with GM in its plan last week and company executives acknowledge that a merger would provide Chrysler with the greatest cash savings. GM said in its plan that it's willing to explore such a deal if that's the desire of federal officials.

Merkle said that the argument for the government forcing a merger is the belief that Chrysler is not strong enough to make it as an independent company, even if it forms an alliance with Italian automaker Fiat or some other overseas partner. He added that a deal would let GM "cherry pick the best plants and products" from Chrysler.

But Bill Diehl, president and CEO of consultant BBK, said it wasn't just the lack of cash that scuttled merger talks last fall, it was the difficulty involved in joining two such troubled companies.

"You're going to have to integrate systems, purchasing, HR, you name it," he said. "I think you're biting off more than you can chew."

GM and Chrysler reorganize under bankruptcy. Some industry observers believe this is the best course, and they think that this option is gaining more credence within the Obama administration. President Obama said in Canada last week that the industry was in need of "significant restructuring."

Bankruptcy courts have tremendous power to void labor contracts, dealership agreements and debt that the companies can no longer afford. But this could end up being one of the most costly outcomes for taxpayers.

Companies that reorganize in bankruptcy generally need additional loans to fund their operations during that period. GM estimates it could need up to $100 billion and Chrysler estimates it could need as much as $25 billion.

The Wall Street Journal reported Monday that the Obama administration is trying to arrange for $40 billion in such financing, by offering potential lenders loan guarantees. But experts said $40 billion is far too low to meet the automakers' funding needs.

Diehl, whose firm has worked on many auto supplier bankruptcies, said GM and Chrysler would need to help their dealerships and suppliers stay in business since it would even be harder for them to get credit. And the interest rate involved with bankruptcy loans would be far higher than the low rates on the current federal loans.

"I don't see how $40 billion is enough money to make it work," he said.

Allow Chrysler to die. Removing Chrysler and the nearly 1 million vehicles of capacity it now operates may be the quickest way to help the overall industry adjust for a prolonged period of lower sales.

Chrysler is already down to about 40,000 workers, plus another 140,000 at its dealerships. Shutting down Chrysler would be a painful hit to the already struggling economy, but not nearly as great as would a failure of GM.

GM has more than twice as many U.S. employees as Chrysler. Simply put, Chrysler, now the No. 5 U.S. automaker, may no longer be too big to fail.

Diehl said he's not advocating that course, but he thinks it's something that federal officials will have to consider as they weigh the options before them.

"The issue is whether [Chrysler is] able to survive, either as a standalone or through a merger," he said. "And in a market that has gone from 16 million vehicles a year to 10 million, is Chrysler's capacity the volume the market can best do without?"

Diehl said the task force will also have to decide how much an orderly shutdown of Chrysler would cost taxpayers. The government would have to provide health care for employees and retirees who were counting on coverage coming from Chrysler.

There also would be widespread bankruptcies in Chrysler's supplier base. Chrysler currently owes its suppliers $7 billion. A wave of bankruptcies could hit production by all automakers, even Ford Motor (F, Fortune 500), which has so far shunned federal help.

"Given the state of the supply base, I think it's questionable how many suppliers can make it even if all three [U.S. automakers] survive," he said. "Suppliers can't survive a bankruptcy the size of Chrysler right now."