GM plans North American-built subcompact

OTTAWA and TORONTO -- General Motors Corp. GM-N has committed to build a new subcompact car in North America, as it prepares to announce a restructuring plan Monday that would include massive loans from Canadian and U.S. governments and a filing for bankruptcy protection.

GM said yesterday it intends to keep key plants operating during the two to three months that it takes to complete the court-supervised restructuring, in contrast to Chrysler LLC, which shut down production when it entered bankruptcy protection a month ago.

General Motors of Canada Ltd. appears determined to keep its Oshawa, Ont., assembly plant running as a result of strong sales for the Camaro and Impala models that are built there, but union officials worry that a disruption in parts supplies caused by the bankruptcy filing could force it to close down.

The struggling company, until recently the world's top auto maker, has long been criticized for its reliance on gas-guzzling trucks and SUVs. GM chief executive officer Fritz Henderson said yesterday that the company's new cost-cutting agreement with the United Auto Workers will allow it to profitably produce a small vehicle at one of its idled U.S. plants, complementing the U.S.-built Volt hybrid.

Mr. Henderson will hold a news conference in New York on Monday to announce details of the company's new restructuring plan, the company said yesterday. The U.S. and Canadian governments rejected an earlier plan as insufficient to put the firm on a competitive footing, and gave GM until June 1 to produce a new one in order to qualify for more than $50-billion (U.S.) in government loans. The Canadian and U.S. governments were to continue negotiations with GM and its bondholders through the weekend, sources said.

Under a deal negotiated between the U.S. and Canadian governments, the federal and Ontario governments will lend the company $10.8-billion (Canadian) - split two-thirds, one-third, respectively - in exchange for a pledge to maintain GM's current proportion of North American production in Canada and as much as 13 per cent of the company's shares. Together with the $3.8-billion lent to Chrysler a month ago, Canadian taxpayers will have lent more than $14-billion to the two struggling companies, though ministers insist the money will be repaid.

Still, critics are outraged at the ballooning size of the bailouts. Industry analyst Dennis DesRosiers suggested yesterday that it may be time to let GM and Chrysler die, at least in Canada, rather than provide $14-billion to keep them afloat with no assurances they will survive. "Governments have a dismal record when trying to pick winners and avoid losers," he said. "Surely their record will be even worse when they deliberately back companies that are in serious trouble with not a lot of prospect to be winners again."

Mr. DesRosiers suggested the money might be put to better use by putting it into an investment fund and inviting the global auto makers to build their next assembly plant in Canada.

Ontario Premier Dalton McGuinty insisted yesterday that taxpayers will end up owning shares in GM only for the short term. "We're not looking to be long-term shareholders of GM, but at some point in time when it's turned around we intend to divest ourselves of that interest and return those monies into the treasury," Mr. McGuinty said in Ottawa. "If there's any money advanced, of course we want to see it repaid."

Federal Industry Minister Tony Clement said Ottawa expects to earn a return on its equity stake in GM and to have it loans repaid. "We have an exit strategy," Mr. Clement said in Hamilton. "Whenever we make an investment like this, we expect to realize on our equity, and we expect for any debt to be paid back in due course. That's our expectation."

Mr. Clement noted that the loss of GM Canada and Chrysler would not only cost 15,000 direct jobs, but also result in lost opportunities for the future, higher employment insurance bills and lower tax revenues.

While both Ottawa and Ontario say they expect repayment of the loans, they have set aside contingencies in the event of a default. Ontario set up a $3.2-billion operating contingency fund in this year's budget, while Ottawa says the auto loans will add $10-billion to this year's swelling deficit, now expected to hit $50-billion.

Meanwhile, Canadian parts suppliers are urging Ottawa to provide up to $2-billion in loans to firms that have been hammered by depressed auto sales and plants shutdowns in Canada and the United States. And they are counting on GM being able to keep its key plants operating during the prolonged restructuring process. In an effort to keep parts flowing, GM paid its U.S. and Canadian suppliers on Thursday, just days before its expected bankruptcy filing, said Gerry Fedchun, president of the Automotive Parts Manufacturers' Association.

With files from reporter Greg Keenan in Toronto