UAW-Big Three: The Showdown Begins
July 20, 2007

By Joseph Szczesny

A showdown gets under way in Detroit today as domestic carmakers open contract negotiations with the United Auto Workers (UAW) union, contract talks that are more critical for both sides than any in recent memory with not only jobs but also the very survival of the automakers at stake.

Negotiations for a new contract to replace the one that expires in September begin today at Chrysler with the ceremonial handshake; talks at General Motors and Ford officially start on Monday.

The UAW enters negotiations with its influence greatly reduced. And GM, Ford and Chrysler are in a weakened condition. The Big Three can ill-afford the sort of winner-take-all confrontations that could produce the sweeping changes some analysts think are necessary to reshape Detroit's creaky business model.

"Everybody's scared," said one veteran UAW representative. "Nobody really knows what's going to happen.”

Indeed, nobody knows what’s going to happen, but the critical issues on the table are crystal clear. And the critical nature of these talks can’t be denied. The very existence of American automakers is on the line.

Today they precariously cling to only about half of the U.S. car market, having lost the other half to Asian and European brands. In June, Edmunds.com calculated their combined market share dropped to 50.3 percent; this year, it could dip beneath the 50-percent mark.

"Incremental change isn't enough," said David Cole, director for the Center for Automotive Research in Ann Arbor, Michigan, Cole insists a transformational change is required as at least two of the Detroit companies, Ford and Chrysler, are in danger of disappearing.

Chrysler CEO Tom LaSorda echoed Cole's remarks this morning, during the ceremonial handshake with Chrysler's union leaders. Noting the dramatic changes in the auto industry since the last contract was negotiated four years ago, LaSorda said: "Today, the domestic auto industry faces unprecedented challenges, and we can no longer afford to conduct business as usual. Our circumstances demand that we rethink our approach to our business and achieve true change. In short, never has there been a better time to reexamine every part of our business model...including our relationship with labor."

University of California-Berkeley labor expert Harley Shaiken agrees the survival of the Big Three are at stake, but not all of the onus is on the union. "For the Detroit Three to survive, they first of all have to design a product people want to buy. Then they have to build it with great quality and productivity. For the latter two things, they need the union's help, and I think the executives in Detroit know that," Shaiken said. 

The Big Three can't afford a strike, Shaiken adds. "A confrontation with the union just becomes an advertisement for Toyota and Honda." 

Topping the To-Do List: Health Care

Both sides seem moving toward an accommodation on health care that would relieve some of the pressure by both preserving many of the benefits of union members and retirees, while creating a new mechanism for financing them.

The likely solution is the establishment of a Voluntary Employees’ Beneficiary Association (VEBA), a tax-exempt trust authorized by federal tax code. The Big Three would contribute money to the trust, which would operate it for the benefit of union members. The trust would reduce each company fixed costs.

The UAW recently agreed to a similar arrangement with auto supplier Dana Corp. The creation of similar trust also helped end a bitter strike last December at the Goodyear Tire & Rubber Co. of Akron, Ohio.

From the UAW's perspective, a deal on retiree health care removes a volatile issue from the table. However, it also leaves dozens of other contentious issues unresolved at the end of the day.

The Wage Gap

Ford officials have said privately the wage gap between the domestic companies and the Asian transplants operating in the U.S. is too large to ignore. Somehow negotiators have to find a way to reduce labor costs by as much as $30 per hour, they said.

Only part of the gap can be addressed by fixing the health-care problem, Ford officials say. That puts not only wages, but also work rules, squarely on the bargaining table.

The current contract includes provisions that need to be rewritten to make domestic automakers more competitive, they say.

Since 1997, Ford said its total average hourly cost-per-hour worked increased 62 percent, from $43.55 to $70.51. In comparison, total labor costs per hour worked for the U.S. across all manufacturing increased 37 percent for the same period, Ford officials have noted in materials prepared for the negotiations.

Ford's gross average hourly earnings -- the money that actually shows up in the pay envelope -- have risen from $22.95 in 1997 to $32.38 in 2006 -- an increase of 41 percent. By comparison, all manufacturing average hourly earnings increased 31 percent.

Eliminating the gap is critical. "Time is not our friend," Mark Fields, Ford president of the America, noted recently.

Too Many Workers?

John Hoffecker, a managing director of Alix Partners, a turnaround consultancy in Southfield, Michigan, that has advised ailing auto suppliers, has estimated GM, Ford and Chrysler have about 8,000 extra employees on their payrolls whose jobs could be eliminated by changing work rules and tightening up provisions for time off.

For the union, the blue-collar workforce at all three companies already has shrunk dramatically in the past couple of years. That’s also dramatically decreased the union’s membership, giving it diminishing clout.

GM's active hourly payroll is hovering around 80,000, which is a quarter of its size in the early 1990s when the company had more than 320,000 employees. Ford's has also been cut in half over the past decade and only this week Chrysler announced that more than 6,000 hourly workers had accepted early retirement and buyout packages.

However, Ron Harbour of Harbour Consulting in Troy, Michigan, which has studied productivity in the U.S. auto plants for two decades and shown dramatic gains by the Big Three, said the additional cost of work rules is relatively small now -- only about $150 per vehicle.

New agreements negotiated at Ford have already called for the outsourcing of housekeeping and maintenance jobs once traditionally done by union members. That’s a sea change for the union, which has always zealously guarded its shop floor prerogatives, noted Shaiken.

New Twists, New Players

These contract talks are historic in another way -- new players are involved. Namely, the private equity firm Cerberus Capital Management that bought Chrysler.

Some analysts believe Cerberus could serve as a battering ram that could force the union into making more concessions by threatening to send more jobs abroad to Mexico and China.

Cerberus chairman John Snow, in Detroit last week to give a speech to the Detroit Economic Club, said Cerberus decided to acquire Chrysler because it believed the acquisition represented a good opportunity. He claimed Cerberus planned to leave the negotiations to the experts at Chrysler. He would only say: "Labor negotiations are very complex,"

Nevertheless, many Chrysler employees are wary of Cerberus. "These private equity firms are like modern-day robber barons. People are feeling betrayed by the management," notes one Chrysler worker from the company's Warren Truck plant outside Detroit. He said workers have been restless ever since Chrysler was put up for sale back in February.

On the other hand, Cerberus and other private equity funds have come under intense scrutiny in Washington of late. Consequently, Cerberus may not consider it in its best long-term interest to pick a fight now with the UAW, which still has plenty of friends on Capitol Hill in the Democratic majority, noted Greg Gardner of Harbour Consulting Inc.

The Likelihood of a Strike?

The question everyone asks is will there be a strike against one of the Big Three. No one knows the answer, for sure.

Fitch Ratings, one of the nation's major ratings services, removed GM from its negative watch after the UAW finally settled a new contract with ailing auto supplier Delphi Corp., which included major concessions and eliminated the threat of a strike.

"The ratification reduces the risk of any production disruption from a Delphi work stoppage that could have resulted in rapid and widespread production shutdowns at GM,'' Fitch noted .

Preventing a strike came at a high cost to GM, however, Fitch noted. The rating service pointed out GM's financial support of Delphi will continue to burden the automaker and slow its ability to reduce supplier costs. Contract talks of its own with the UAW this summer also could weigh on GM's profitability, Fitch said.

While the union has been conciliatory on health care, GM, Ford and Chrysler also have made friendly overtures to the UAW in recent months by announcing a string of new investments, totaling several billion dollars in new equipment. In Chrysler's case, the investments for new engine and axle capacity total more than $3 billion.

The union hailed the new investments, which it acknowledged are needed to protect employment opportunities for union members in the future.

GM’s contract with Delphi may well hint at what may occur this fall –- protracted negotiations with a settlement that avoids a strike but at a high cost to the automakers.

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