US auto industry's future hangs in the balance

THE US automobile industry faces a day of reckoning on tomorrow, with the looming bankruptcy of General Motors and an expected court ruling on the sale of Chrysler to a group led by Italy's Fiat.

The once mighty US auto industry is reeling, prompting massive intervention by President Barack Obama's administration to prevent total collapse and a new body blow to a national economy already in recession.

The Government's rescue plan for GM could put as much as 72.5 per cent of the country's biggest automaker under state ownership, according to documents filed by GM on Thursday.

Government-backed restructuring in bankruptcy court for GM, once the world's largest automaker, appeared all but certain ahead of a Monday deadline imposed by the Obama administration on the company to submit a viable restructuring plan or file for bankruptcy.

Meanwhile, a US bankruptcy court judge in New York is widely expected to approve a deal between Chrysler and Fiat on Monday. The third biggest US automaker has declared bankruptcy and is seeking a tie-up with Fiat in a plan presented as the only way to save the company from liquidation.

Developments at Chrysler could provide a valuable example for GM in its retructuring.

The United Auto Workers (UAW) union said on Friday its members ratified a deal to allow GM to radically cut costs and its debt load, clearing the way for a quick exit from an expected bankruptcy filing.

The deal, which will cut GM's labour costs by between $US1 billion ($1.28 billion) and $US2 billion ($2.55 billion) a year, is one of the final pieces of what is expected to be a massive pre-packaged bankruptcy plan for the number one US automaker.

The troubled automaker also announced plans to retool an idled US plant to build small cars it had originally planned to import, and two more US assembly plants could potentially be saved.

Union leaders said they would be pressing Ford and Chrysler to also build small cars in the United States.

The bankruptcy filing could also be sped up by a deal struck in the early hours of Saturday that sees Canadian parts maker Magna and its Russian backers taking over GM's Opel.

The deal for GM's European operations, which came after marathon talks and was brokered by the German government, amounted to a major development in the global rearranging of the auto industry.

GM employs about 50,000 people throughout Europe and Magna plans to cut about a fifth. But while Magna is likely to slash around 2500 jobs at its four plants around Germany, government sources stressed that all four factories in the country will remain open, a pledge repeated by Magna bosses after the talks.

In testimony on Thursday, Chrysler chief executive Robert Nardelli said US regulatory approval for the partnership with Fiat was "well on its way". He had predicted it could take place as early as Friday, but by yesterday no deal had yet materialised.

The Government says a new Chrysler company could be born within days of approval for the bankruptcy.

If presiding judge Arthur Gonzalez rules against Chrysler it faces a grim future, with a worst-case scenario being Fiat abandoning the tie-up and the US automaker going into liquidation, with massive job losses.

Legal appeals are expected if Mr Gonzalez rules in favor, meaning possible new delays. Fiat has said it might back out if the transaction is not completed by June 15.

A White House spokesman said on Friday that "Chrysler is a hopeful example for GM".

But analysts warned that the implications of the fallout of GM's bankruptcy restructuring on the fragile economy are unclear.

"The GM bankruptcy filing is now viewed as inevitable on June 1, and this process will probably raise more questions than it answers," said Brian Bethune at IHS Global Insight.

"Which plants will be shut down, what brands will survive, which dealers will have to fold up operations, and what will be the impact on the supplier base - which is already reeling from recessionary conditions in the industry?"