NEWS ANALYSIS : The UAW Pact: Cost Cutting Just Got Tougher at GM
Why would an industrial giant that has lost $17 billion in North America over the last three years, and still faces a wrenching restructuring, agree to a labor contract that will increase its costs and make it less competitive?
General Motors Corp. had no other viable option.
Its strongest competitor, Ford Motor Co., set the bargaining pattern with the United Auto Workers union. And while the UAW knew GM was hurting, union members--who remembered Chrysler Corp. begging for concessions in 1990 only to subsequently turn big profits--believed the No. 1 auto maker was crying wolf.
With GM’s market share slipping and inventories unusually low because of production problems, a strike was unthinkable.
“GM didn’t have a choice,” said George Magliano, an analyst with WEFA Group, a consulting company that follows the auto industry. “They couldn’t afford a strike, and they were boxed in by Ford and Chrysler.”
Investors took a sour view of the contract agreement, which guarantees 265,000 workers full medical coverage and increased pension benefits. GM’s stock fell $1.25 to $44.75 on Monday on the New York Stock Exchange.
“The contract is a disappointment,” said David Healy, analyst for S.G. Warburg, a New York brokerage. “There was hope GM would get better control of its costs.”
GM revealed some of those higher costs late Monday, when it announced it will take a $950-million, pretax charge against third-quarter earnings to pay the wages of laid-off employees.
The negotiations began and ended amiably, but lasted longer than usual. For the first time, a settlement was reached without the UAW declaring a strike deadline. Whether these gestures mean a new era of labor-management cooperation will become evident in the next three years.
Clearly, GM needs the UAW’s help to restructure itself. But analysts say the new contract--tentatively approved Sunday and to be voted on by rank and file next month--makes the task more difficult because it is largely a carbon copy of a 1990 agreement that exacerbated the company’s problems.
“This contract leaves GM’s balance sheet in a less competitive position,” said David Garrity, an analyst with McDonald & Co.
GM’s fate was sealed early in September when Ford, the healthiest of the Big Three, became the union’s first negotiating target.
The result is a contract that plays to Ford’s strengths and GM’s weaknesses. It provides for modest wage increases and lowers starting wages for new hires. But it sweetens pensions, maintains job security funds that provide laid-off workers nearly full pay and continues medical benefits with no co-payments.
Since Ford is hiring, the contract will lower its cost structure. The new workers will start at 70% of full pay and reach parity with long-term employees in three years.
But GM--which wants to cut as many as 65,000 jobs by 1996--is unlikely to take on new workers anytime soon. Instead, it will face higher pension and job security costs as it lays off employees.
John F. Smith, GM’s chief executive, was under pressure from the board’s outside directors to break away from costly provisions of the pattern agreement. The directors particularly objected to the job security fund, which has cost GM $3.35 billion since 1990.
While the company pushed for relaxation of that provision, the union held firm, and GM agreed to set aside another $4 billion for the fund.
GM did win one important concession. Under the current contract, laid-off workers can refuse jobs requiring transfer more than 50 miles from home. The new pact allows GM to transfer workers as far as 75 miles away and to offer incentives to move even farther.
That change could give GM a boost if, as expected, it offers an early-retirement program soon: It will be easier to move laid-off workers into vacated jobs.
The union also agreed to require workers to take a week’s vacation during the annual two-week shutdown in July for model changes, a concession that could save the company $200 million.
Already saddled with $14 billion in unfunded pension liability--a figure expected to hit $19 billion by year’s end, due to lower interest rates--GM took a hard line on improving benefits. But it ended up swallowing the pattern agreement, which provides for a 13% increase in monthly pension payments to workers who retire after 30 years. That could expand GM’s unfunded liability to more than $25 billion.
Credit rating agencies are watching the issue closely. Should they downgrade GM’s debt, GM’s borrowing costs would increase.
GM’s failure to break the pattern on key fronts reflected a weak negotiating position. As the talks began in September, GM’s share of the U.S auto market slipped to the lowest level in 30 years. Meanwhile, third-quarter production fell 70,000 units below projections because of problems with critical parts.
So even if GM had wanted to go to the mat with the UAW and invite a strike, it would have ended up ceding crucial market share.
GM’s bargaining position was further eroded by steadily rising sales and industry profits throughout 1993. Though it is expected to show a loss for the third quarter, GM earned $1.4 billion worldwide in the first half of the year.
The union acknowledged that the company had big problems, but it did not buy GM’s warnings that it was sliding toward bankruptcy.
With an accord in hand, GM can get on with the difficult task of closing unneeded plants and shedding workers. But GM has tied its recovery to the nation’s; if the economy heads south, all bets are off. “GM is counting on the recovery continuing,” said Magliano. “If things slow down, it will be between a rock and a hard place.”
* NEW CAR SEASON: A recent jump in U.S. auto sales indicates strong demand for ’94 models. D2.
