Marchionne said he’s aiming for Chrysler’s U.S. and Canada labor costs to match those of plants in Japan and Germany. Otherwise, he is prepared to scrap the deal, a move that would likely send Chrysler into bankruptcy court.

“Absolutely we are prepared to walk. There is no doubt in my mind,” he in an interview. “We cannot commit to this organization unless we see light at the end of the tunnel.”

Marchionne gave 50-50 odds that a merger will be formed, and spoke strongly about the reality Chrysler faces if its unions – the Canadian Auto Workers (CAW) and United Auto Workers (UAW) – don’t “change the framework of the discussion.”

“We are not anti-organized labor. No one wants to remove the UAW or the CAW from the table. But it will happen if a bankruptcy process drags on,” he said, adding that the negotiations with the CAW are especially lacking progress.

Privately owned Chrysler has been survived only by taking on $4 billion in emergency government loans, and the Obama administration has given the car company until the end of April to produce a viable business model. If Chrysler succeeds, the administration will provide another $6 billion loan.

“What we’re asking for is difficult,” President Obama said. “It will require hard choices by companies. It will require unions and workers who have already made extraordinarily painful concessions to do more. It’ll require creditors to recognize that they can’t hold out for the prospect of endless government bailouts.”

The first stipulation for Chrysler is that the company alters its partnership with Fiat, which agreed in January to take a 35% stake in Chrysler.

Under new terms, Fiat would take a 20% stake in Chrysler with the White House’s backing. And as Chrysler reaches certain milestones, Fiat would gradually increase its ownership to 49% in 5% increments. The Fiat stake would only rise above 49% after Chrysler repaid all money owed to the U.S. Treasury.

Chrysler is currently 80% owned by Cerberus Capital Management LP and 20% owned by Daimler AG of Germany, owner of Mercedes-Benz.

Chrysler creditors are also planning to make a counteroffer to the U.S. Treasury this week – possibly asking for equity in a firm combining Chrysler and Fiat S.p.A. (ADR: FIATY), The Wall Street Journal reported.

The lenders, which include JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), were in talks with the government to reduce Chrysler’s debt by swapping some of it out for equity, new debt or a lesser amount in cash.

Source: Fiat CEO Gives 50% Chance of Chrysler Merger, Demands More Labor Cost Cuts