GM, Delphi at Crossroads After Cost Cuts
Moving to slash tens of thousands of workers from their payrolls, two troubled giants of the American auto industry found themselves taking a major but uncertain step Wednesday in what they hope will be a successful turnaround.
Buyout and retirement offers to more than 125,000 General Motors Corp. and Delphi Corp. hourly workers will pay those who qualify as much as $140,000 apiece to walk away from their jobs. GM, the main customer and former parent of parts maker Delphi, agreed to foot most of the bill -- estimated by some analysts at as much as $5 billion.
GM, whose North American operations have been bleeding cash at the rate of nearly $25 million a day, hopes to trade a huge initial cost in return for long-term savings in payroll and retirement benefits. These latter expenses have helped put the Detroit automaker at a disadvantage with hard-charging rivals such as Toyota Motor Corp. of Japan.
For the United Auto Workers union, which signed off on the landmark deal despite the disapproval of some workers, the agreements underscore that the days of lifetime employment and lucrative benefits are over -- and that its ranks at GM, Delphi and other American auto companies will continue to shrink by the tens of thousands in the next few years.
On Wednesday, GM declined to say how many workers would be allowed to accept the offers, but has said for months now that it wants to slash its North American payroll by as many as 30,000 jobs.
Labor scholars said the number of workers involved made the buyout effort one of the largest.
“It is historic because it is such an organized effort to manage a large downsizing,” said Harley Shaiken, a UC Berkeley professor and labor specialist. “The alternatives could have been serious conflict at Delphi and a lot of damage at GM.”
GM still makes more vehicles than any other automaker but has been steadily losing market share in the U.S. to Asian and European rivals.
GM began attempting to deal with its deteriorating financial situation a year ago but accelerated recovery plans after billionaire Los Angeles investor Kirk Kerkorian began amassing GM stock last May.
Kerkorian, investing through his Tracinda Corp. holding company, is now GM’s largest individual shareholder with 56 million shares representing a 9.9% stake. Kerkorian’s chief advisor, former IBM Corp. and Chrysler Corp. financial executive Jerome York, in January called for GM to cut its stock dividend, slash executive pay, shed some operations including its money-losing Saab unit and to cut costs faster. In February, Kerkorian gained more clout when York was elected to GM’s board. The same day, the board cut GM’s dividend by half to $1 per share a year and announced pay cuts for top managers.
Wednesday’s retirement and buyout plans represent a big step in GM’s turnaround, said auto industry analyst David Healy of Burnham Securities Inc.
“It might be what gets them to their goal of cutting 30,000 jobs,” Healy said.
The pacts also signal a new willingness by the auto workers union to work with the companies and could foreshadow an agreement between the union and Delphi on a wage cut proposal that now threatens to cause a strike.
“I don’t think they could have been locked in a room 24/7 over the past week and come up with this retirement agreement without coming closer to an understanding on the Delphi wage situation,” Healy said.
Important as they might be, the agreements don’t resolve all the problems the two companies face.
Delphi, which sought bankruptcy protection in October, has said that if it cannot get a union agreement by March 30 on wage cuts and reductions in health benefits, it would ask the U.S. Bankruptcy Court to void its union contracts. Delphi wants to cut its hourly payroll to 11,000 from 34,000 and to reduce hourly workers’ pay to as little as $12.50 an hour from the current average of $27.
The union said it would launch a strike if the company took unilateral action on the wage issue.
If a strike occurred, GM would lose its major source for parts and be forced to shut down production in the U.S. A prolonged strike against Delphi could cost GM about $5 billion a month in lost sales and in wages paid to idled workers, analysts said.
Some analysts have suggested that the additional pressure of a Delphi strike could push GM itself into filing for bankruptcy protection.
The deal with the union is only temporary relief. GM faces a new battle with workers next year. Many analysts expect the automaker to seek sweeping union concessions on wages, job security issues and health and retirement benefits as it negotiates a new multiyear contract.
Wednesday’s buyout plan “is good, but it doesn’t go far enough in making the cuts GM needs so it can figure out how to make a profit making its cars,” said Sean Egan, a corporate credit analyst with Egan-Jones Ratings Co. in Philadelphia.
Some analysts also have questioned whether GM will really save much if the offer results in more retirements than buyouts. Most workers who retire will get full benefits, which won’t reduce GM’s sizable pension obligations, Goldman Sachs analyst Robert Barry said in a note to investors Wednesday.
GM lost $10.6 billion last year as sales slumped. In November the company said it would trim its U.S. payroll by 30,000 jobs, “but they need to cut it by 50,000,” Egan said.
Apart from Kerkorian, GM also has been pressed for speedier action by a legion of stock and corporate credit analysts who have downgraded the company’s bonds to junk investments and have watched its stock price fall by 38% in the last year. More pressure was applied last week when GM restated its 2005 financial results, boosting its annual loss by almost $2 billion. It has acknowledged that its accounting methods are being examined by federal regulators.
GM’s chief executive, Rick Wagoner, has said repeatedly that a bankruptcy filing is not an option, but he also has said that settling the Delphi situation was a major priority.
In a statement Wednesday he said the new deal “will enhance the prospects” of a successful Delphi restructuring.
Workers’ reaction to the plan was mixed.
It is “the best deal GM has ever given our employees, said Art Baker, chairman of UAW Local 652 at the Lansing, Mich., Cadillac plant, in an interview with Bloomberg News.
But Donald Gale, an electrician at a Delphi plant in Coopersville, Mich., told The Times that he didn’t know whether “this is going to be good news for me.”
Gale is 47 but has worked for GM and Delphi for nearly 30 years and is “counting the days until I retire.”
“It’s great that I could get a chunk of money now,” he said. “But I could live for another 30, 40 years, and I’ll be surprised if my pension will be there 10 years from now. I’m applying for a second job. I can’t afford to stop working.”
The plans don’t require a vote by union members, but the portions applying to Delphi must be approved by the U.S. Bankruptcy Court.
Although GM’s stock rose as much as 68 cents Wednesday, investors apparently decided that the plan didn’t solve much: The automaker’s shares ended the day at $22.01, up a penny.
As it pursues its turnaround, GM plans to close 12 assembly and parts plants and other facilities in the U.S. and Canada by 2008.
Wednesday’s agreement is another step in that downshifting, albeit at an initial cost estimated by analysts at $3 billion to $5 billion, depending on how many workers participate.
GM said it would offer a $35,000 payment plus full pension benefits to workers at its own factories and those at Delphi who are eligible to retire after 30 years of service. The automaker also said it would make one-time payments of $70,000 to $140,000 to GM workers not eligible for retirement who would agree to quit and renounce future health and pension benefits. Workers with less than 10 years on the job would be eligible for the smaller payment.
The buyout offer was made to all 113,000 of GM’s hourly workers in the U.S. About 13,000 of Delphi’s UAW workers were offered the chance to retire. As many as 5,000 Delphi workers could transfer to GM’s payroll.
The automaker said it would use a seniority system to decide who could participate if the programs became oversubscribed.
The agreements were hashed out in talks in Detroit in the last few months -- including marathon day-and-night sessions during the last week. The plans include an early retirement incentive program in lieu of an outright buyout for 27,000 workers at GM and 5,000 at Delphi who are within three years of the 30 years required for regular retirement.
Analysts say GM, which just raised $2 billion from the sale of its 20% stake in Japan’s Suzuki Motor Corp. and has $19 billion more available, would have no problem handling the payments.
Times staff writer P.J. Huffstutter in Grand Rapids, Mich., contributed to this report.
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(BEGIN TEXT OF INFOBOX)
Terms of the deal
Key points of the buyouts and retirement incentives that General Motors Corp. and Delphi Corp. are offering to an eligible 113,000 hourly GM workers and 13,000 hourly Delphi workers:
GM buyouts
* Employees with 10 or more years of service can get a one-time payment of $140,000.
* Employees with less than 10 years of service would get $70,000.
* Anyone taking this option would keep vested pension benefits but give up healthcare and other post-retirement benefits.
Retirement from GM or Delphi
* Anybody taking a normal or early retirement gets $35,000, retroactive to Oct. 1, 2005. Usually, employees can retire at age 65 or with 30 years of service.
* Employees who are at least 50 years old and have worked at least 10 years can retire with full benefits.
* Employees with at least 27 years of service but less than 30 can take a special “pre-retirement” option, under which they would receive slightly less than their full wages until they reach 30 years, at which point they can retire with full benefits.
Returning to GM
* GM will take back as many as 5,000 Delphi employees.
Time frame
* GM said once employees were notified of their options, they would be given 45 days to decide, with an additional seven days to change their minds. Delphi said similar deadlines were likely for its workers.
* GM said it expected retirements to begin June 1. Delphi said it was still working with the UAW on a timeframe.
* The target date for GM to take back Delphi employees is Sept. 1, 2007.
Sources: Associated Press; UAW-GM-Delphi Special Attrition Program Framework Agreement; Delphi, GM spokesmen
