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On December 3, UAW leaders and Ford officials met to sign the new four-year contract incorporating the automaker’s VEBA agreement. Under the terms of the VEBA, the UAW will be responsible for a $61.9 billion trust fund set up to provide health care benefits to over 600,000 retired auto workers and dependents. The deal, ratified by union members on November 14, is expected to help Ford’s cash flow to the tune of $1 billion a year while reducing the automaker’s health care costs by roughly $2 billion. * * * On Saturday, Nov. 3, Ford and the UAW worked out a tentative new four-year contract without a strike. Over the following two weeks, union rank-and-file members will vote on whether to ratify the contract. The deal includes a union-managed VEBA trust fund very similar to the ones given to Chrysler and GM union members. At least a dozen plants will be closed. The deal also establishes a two-tiered wage system, which will lower the pay of future employees. About 14,000 workers will be offered early retirement packages. Ford, the second largest car maker, is widely seen to be in worse shape than the other two of the Detroit Big Three, having lost $12.6 billion in 2006. The company is in the midst of a restructuring which is intended to eliminate over 40,000 jobs and close several unprofitable plants across the U.S. by 2012. * * * Tentative agreement was reached early Wednesday morning, September 26, between the UAW and GM after largely secret negotiations punctuated by a brief strike in the closing days. Assuming the agreement is accepted by union members after precise terms are made known, Detroit will never be the same. Both sides are spinning the outcomes, the UAW to its current workers and retirees, GM to investors and analysts who will soon be pouring over the details to assess the impact on one of America’s most basic labor/management battlefields. GM will stay in business, at least, having purchased new maneuverability very dearly with what is essentially a massive a lump-sum payout to the labor union coupled with assurances that union interests – primarily those of current workers and retirees – will be protected in specific areas of wages and job security.
Fundamentally, current workers will maintain their jobs with the possibility of additional individual payments from the company as an incentive to cash out and leave GM. More importantly, from now on it will be the union, not GM, which will be responsible for maintaining benefits, having “inherited,” so to speak, cash and securities said to be in the neighborhood of $35 billion from the beleaguered company.
From now on, GM can move, in a range of carefully limited areas, to construct a two-tier wage and benefit system. Older, senior employees will “get theirs” with little change, but new workers coming into the auto industry will more often than not be offered a far leaner wage/benefit package.
Another big unknown is how or whether the union’s administration of this huge health and benefits windfall will be transparent to workers and retirees. Tens of billions will have to be invested and administered by the union. Will union leaders be accountable? Will the books be open? Will the government, the company, or the workers themselves have access to fund records compiled according to high accounting standards? The union becomes is a new intermediary and a new bureaucracy. Will it play favorites with investments and loans, or move to set up its own health care outlets to cut costs and limit benefits?
The new contract sits on the table. But the real battle, for both GM and the UAW is just beginning. * * * On Aug. 23, a Federal bankruptcy court judge is scheduled to rule in New York on a new labor contract between GM and Delphi. His ruling will be dependent on workers at bankrupt Delphi accepting the agreement with voting set to occur over the coming weekend at multiple Delphi plants. Workers are wary of rejecting the proposal, which would cut back wages to $16.50 and $26 an hour for current employees, down from $27 and $33. New hires would come in at only $10.50 or $11 per hour. If they turn the plan down, bankruptcy rules could allow GM to impose terms that were even harsher. GM is to guarantee health care and pensions for retirees through 2011. * * *
On June 22, the UAW and Delphi Corp. came to a tentative labor agreement. The deal may end a two-year standoff between management and labor over wage and benefit cuts. If adopted by the rank and file, the pact would allow Delphi to emerge from bankruptcy towards the end of this year. Neither party made terms of the proposed deal public, but union insiders say Delphi would agree to make lump sum cash payments to long-term workers at its plants in exchange for significant ongoing hourly wage cuts. Companies prefer lump sum payouts to wage increases because higher wages drive up long-term pension costs. Some 17,000 workers as well as the US Bankruptcy Court would have to approve the agreement. * * *
In a speech last week to the Detroit Economic Club, Democratic Presidential candidate Sen. Barack Obama said the U.S. auto industry has to take the lead in making more fuel efficient cars. He also said he would set up a federal assistance program to finance 10 percent of the industry’s overhanging health care costs to a maximum of $7 billion by the year 2017. That sum is only a fraction of what automakers face in legacy outlays, and critics immediately responded that Obama displayed an ignorance of what the auto industry has done so far in competing with fuel efficient models. Other candidates will be laying out positions vis-a vis the auto industry in coming weeks. * * * The biggest news this past week was Kirk Kerkorian’s $4.5 billion dollar bid to acquire Chrysler. The bid was made by Tracinda, Mr. Kerkorian’s California-based investment vehicle. The former chief financial officer of Chrysler, Jerry York, is reputed to be playing a big part in the move. Chrysler is “in talks” with several other potential buyers, but Kerkorian’s bid was the first to be made publicly. The Tracinda bid made assurances that Kerkorian has no intention to “strip and flip” the company but wants to “build and strengthen” the ailing unit of Daimler-Chrysler over the long term. He offered both Daimler-Chrysler and its trade unions the opportunity to become equity partners in the deal. So far, UAW’s reception to Kerkorian’s bid has been markedly chilly. Besides Kerkorian, the Blackstone Group, Ripplewood Holdings and Cerberus Capital Management are now clearly in the running, as well as Canadian auto-parts supplier Magna International Inc. Billions in looming pension and health care liabilities hang over negotiations and the unions, both in the U.S. and with Chrysler’s parent in Europe, have a potential to block any up-front “cash” payout that doesn’t protect their job security and pension interests. * * * Analysts are abuzz with estimates of what Chrysler might be worth to a potential buyer. The company, after running up a $1.5 billion loss in 2006, cannot be expected to bring anything near the $38 billion Daimler paid for it back in 1998. The consensus seems to be coming in at roughly $5 to $7 billion, including the costs of health care obligations to Chrysler workers and retirees.
Meanwhile General Motors posted a surprising 3.7% jump in U.S. vehicle sales for February. The company said it would postpone filing its 2006 financial results for several weeks. Ford’s sales were down for the same period based on poor fleet sales, as were Chrysler’s. * * * The Chrysler Group’s fate seemed up for grabs last week when CEO Dieter Zetsche said “all options are on the table” with the clear message that the company’s German owners might put Chrysler up for sale. Rumors have been swirling that GM was involved in talks about an acquisition. Renault and Nissan, both of which have stated that they would like to have a strategic partner in North America, said they had no interest in deeply troubled Chrysler. DaimlerChrysler was created back in 1998, when Daimler was eager to become a bigger player in world markets. But Chrysler losses have been pulling down Daimler’s profitability since roughly 2000. Chrysler’s high manufacturing costs continue to eat into Daimler’s bottom line. Zetsche’s remark came as Chrysler is poised to go into critical negotiations with the UAW over a new contract. The Chrysler Group at the same time announced a restructuring plan that would cut some 13,000 jobs by the close of 2009. Insiders meanwhile question who would buy Chrysler if the company isn’t “fixed” first. * * * Delphi Corp. may have a new source of funds. The company has been approached by two hedge funds that may have a plan to make money on the nation's largest auto parts supplier as it emerges from bankruptcy. Highland Capital Management LP proposed up to $4.7 billion in refinancing in a letter to Delphi's board of directors. This comes on the heels of a proposal from another private investor group to spend up to $3.4 billion to help the battered company make the transition from bankruptcy. Observers think such private investment deals would seek to bring the company back to some kind of financial stability and then take a quick profit by flipping it over and selling it to investors in an IPO. Meanwhile labor and management are beginning to position themselves for what are certain to be contentious new contract negotiations set officially for September 2007 between the Big Three auto companies and the UAW. Due to the current financial and operating stress at Ford and GM, management is likely to view the upcoming talks as a timely and imperative occasion to seek reductions in wage and benefit levels. How the pro-labor Democrats will use their new majority in Congress during the “first 100 days” of taking power is still a wildcard. Committee chairmanships will likely give signals on how the Democrats expect to move. * * * On Nov. 30, billionaire Kirk Kerkorian abruptly unloaded his entire stake in General Motors Corp., walking away with a modest profit but essentially conceding defeat in his aggressive 20-month effort to reshape the world's largest auto maker. The move ups the ante for GM Chairman and CEO Rick Wagoner. Mr. Kerkorian's presence had helped to buoy GM's shares as Mr. Wagoner struggled to engineer a turnaround in GM's core North American operations. Many observers say the sale amounts to a public vote of no confidence in Mr. Wagoner's restructuring plan. * * * On Nov. 29 Ford Motor Co. announced that about 38,000 of its hourly production workers have accepted buyouts or early retirement offers. Faced with lower demand for its products, Ford had hoped to reduce manufacturing capacity to better match demand. A 38,000-worker reduction would amount to nearly 46 percent of the 83,000 unionized employees that Ford had at the start of the year. Those who accepted the buyout packages will begin to leave the company starting in January. Meanwhile, UAW President Ron Gettelfinger announced that thousands of temporary workers at auto-parts maker Delphi would become permanent under a deal between Delphi and the UAW. He also said that retirees from General Motors and Delphi can be assured of the safety of their pensions, and that the union was committed to preserving the controversial jobs bank, which guarantees pay and benefits for laid-off workers. Delphi is operating under Chapter 11 bankruptcy protection and has asked a court for permission to void its labor contracts. Negotiations continue. The UAW master contract with Ford, GM and DaimlerChrysler expires Sept. 14, 2007. * * * On the government front, insiders maintain that Detroit would like to see some form of government-funded health care. Although Detroit executives are loath to say so publicly, they would welcome a government program that would help with catastrophic health-care costs. Such a plan would bring a measure of relief to struggling auto companies, which have hundreds of thousands of retirees reaching the age when they need costly care. GM says 1% of patients account for 30% of the cost of its healthcare benefit program. * * * On November 14, the leaders of the nation’s Big Three auto makers -- GM's Rick Wagoner; Ford's Alan Mulally and Chrysler's Tom LaSorda -- came to the White House for a long-delayed meeting with President Bush. Wagoner, Mulally and LaSorda stressed that despite huge losses, their companies were not looking for loan guarantees or a federal bailout. But they did want help on health care policy, energy and other areas that could be costly for the federal government. Ford and other U.S. auto makers are scheduled to negotiate a new master contract with the UAW next year and the Big 3 auto group is looking for a 25% decrease in health care payments, severe pay cuts for new hires and rolling pensions into 401K plans. This year, the three expect to pay more than $12 billion to cover medical expenses of more than 2 million employees, retirees and their dependents. In the past, President Bush has favored a “hands off” approach to industry problems. And the Democratic takeover of Congress seems unlikely to bring any kind of immediate aid. Buyout and healthcare savings have helped stem some auto losses, but new accounting rules will sock GM, for instance, with a hit on its book equity of between $18 billion and $25 billion at the end of this fiscal year. Investors are not pleased and, around the periphery of the industry, hedge funds are snapping up bankrupt suppliers. The United Auto Workers calls them them "bankruptcy vultures" but there isn't anyone else interested in buying these “wrecks.” Automakers are also seeking federal incentives for cars and trucks that use a fuel mixture that is 85 percent ethanol and 15 percent gasoline, called E85. But critics say E85 isn't truly fuel efficient, only getting 10 miles to the gallon in a Chevrolet Tahoe, according to last month's Consumer Reports magazine. * * * In recent weeks, the big three carmaker’s stock prices and bond ratings have continued to slide as investors and creditors raise doubts about the companies’ strategies to restructure and restore profitability. General Motors Corp., Ford Motor Co. and DaimlerChrysler's Chrysler Group have all seen their credit ratings sharply reduced; GM and Ford are rated as speculative or junk status. As a result the companies are forced to pay much higher prices for capital just when they need additional cash to execute restructuring plans. The U.S. government’s Pension Benefit Guarantee Corporation (PBGC) is jittery that it might eventually have to take over parts of auto industry pension plans if restructuring is not successful. PBGC is already heavily in the red so such a “pension bailout” would ultimately have to come from taxpayers. When the PBGC steps in, promised pension benefits are often reduced -- as they have been for airline workers. Republican Congressman from Michigan Mike Rogers is introducing legislation he says isn’t a “bailout.” The bill would create a "$20 billion green technology incentive program" that would grant the U.S. Energy Department the authority to approve loan guarantees to automakers for specific “new energy” projects. That would make cheap capital available to auto companies during this crucial period so long as they use it on innovation. But if automakers ultimately defaulted on these obligations, the U.S. Treasury would be on the hook for the $20 billion. Meanwhile Delphi is seeking permission from Bankruptcy Court to scrap labor contracts, and has been working to reduce the number of employees by offering buyout packages. Strikes continue at some Delphi plants, but the bankrupt company has kept up shipments to GM. * * * Delphi released increased buyout acceptance numbers this week, bringing to 20,100 the number of its production workers who have decided to leave this year either through buyouts or early retirement packages. The nation's largest auto parts supplier, Delphi filed for Chapter 11 bankruptcy protection in October. Delphi workers taking early retirement were offered a lump sum payment of $35,000, while others will be given buyout packages ranging from $40,000 to $140,000. Employees accepting buyouts would give up all benefits except for vested, accrued pensions. Meanwhile, other upstream suppliers are attempting to deal with labor overhead in a shrinking market. American Axle, based in Detroit, has offered union workers at five auto parts plants up to $100,000 to leave the company because of declining demand from automakers. The company gets 77 percent of its sales from General Motors. American Axle builds almost all of the axles for GM’s light trucks and its sales in that category have declined 13 percent this year. Goodyear Tire and Rubber faces a potential strike as 14,000 union workers resist pension and health care cuts. * * * On September 15, one day before Ford Motor Co. was expected to make public an accelerated restructuring plan that will likely include additional plant closures and massive job cuts, the nation’s second-biggest automaker announced it will offer buyout and early-retirement plans to all of its hourly U.S. employees. That covers more than 75,000 Ford employees. At the end of last year, the company employed about 82,000 hourly workers, but some 6,500 have already taken previous buyout and early-retirement offers. The buybacks are aimed at helping Ford cut costs as company sales continue to be impacted by fierce competition from Asian automakers. Following up, the UAW said the offers are available to all active Ford workers represented by the union. * * * Detroit's automakers have been intensifying their efforts to eliminate ineligibles from their health plan benefit rolls. Audits by Ford Motor Co. and DaimlerChrysler AG's Chrysler Group have already stopped payments to more than 86,000 individuals whom the companies have determined are ineligible, and General Motors is undertaking a similar audit program. Most of those removed appear to be former dependents and spouses of employees or retirees who had been collecting benefits they were not entitled to. In some cases, individuals have been forced to reimburse plans. Companies say such moves are necessary to protect those who are legitimately entitled to coverage. * * * On Thursday, Aug. 17, President Bush signed into law the Pension Protection Act of 2006, which he called the "most sweeping reform" of US pension law since the enactment of the Employee Retirement Income Security Act (ERISA) in 1974. The compromise measure will have broad impact on the way future pension plans are structured and funded. It will affect pension outcomes, not only for tens of thousands of employees whose plans are currently hanging on the contents of the bill, but for millions of Americans who do not follow pension issues closely. Affected groups everywhere are weighing in with commentary. With some 44 million Americans covered by private pension plans, bipartisan support for private sector reform was made possible by not stirring up a hornet’s nest of debate about stricter funding guidelines for public employee defined-benefit plans, which remain generous and are woefully underfunded. In any case, the bill may well signal the end of the era private defined-benefit pension plans. As recently as 25 years ago, more than 80 percent of large and medium-sized companies offered such plans. Today, fewer than a third do. * * * Late in the day on August 3, the Senate approved a compromise Pension Reform Bill and sent it on to the White House. It tightens rules for employers with defined-benefit pension plans – 21% of all workers-- and clamps down on companies that have fallen in arrears in meeting their funding obligations. Half the workers in private industry who have no pensions are not covered by the legislation, nor are government workers who have generous publicly funded pension plans. With underfunding of DB plans now estimated at $450 billion, the bill requires companies to bring such plans to 100 percent funding within seven years, although certain major airlines are given a longer period. Plans that are seriously underfunded face restrictions, such as a ban on increasing benefits, and must make accelerated catch-up contributions. President Bush, who has taken a tough stance on forcing full funding of company promises, is expected to sign the legislation shortly.
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