Given the deal the United Auto Workers (UAW) just cut with Visteon Corp. (VC), it may look as if the union is in a generous mood. Faced with the possibility that the auto-parts maker could fall into bankruptcy, the union agreed on May 24 to let Visteon hand 20 union factories back to Ford Motor Co. (F), its former parent. Even better, the UAW agreed to Ford's plan to buy out up to 5,000 Visteon workers and sell most of the plants to other partsmakers that will likely pay lower wages. "This agreement removes an untenable burden," says Visteon Chairman-elect and CEO Michael F. Johnston.
But don't expect the UAW to go easy on Ford and General Motors Corp. (GM), even though they have plenty of woes of their own. Under pressure for cuts, the union will give something, but only what it feels is absolutely necessary. The strategy aims to protect the interests of the union's aging members, though it's hardly cost-free: Given the carmakers' financial and competitive woes, it risks hastening the loss of competitiveness -- and ultimately jobs -- to rivals with lower costs. "We are in a global market for labor, so if they don't give, they'll find [the work] will go elsewhere," says Robert S. Miller Jr., nonexecutive chairman of partsmaker Federal Mogul Corp. and a candidate to head rival Delphi Corp.
HEALTH CARE HAS TO WAIT
Consider Ford's deal with Visteon. Workers in its U.S. plants make $60 an hour in wages and benefits -- twice what many other partsmakers pay. Ford CFO Donat R. Leclair says by 2010 the Visteon deal will help it save up to $700 million through lower parts costs. But first, Ford must pay at least $1.15 billion in restructuring charges this year and up to $475 million more by the end of 2006. Likewise, GM will probably not get the massive health-care concessions it wants. Instead, the union is likely to let it close plants -- but GM will have to pay up with similar buyout deals. "There are lots of ways to downsize, but the [union] won't touch health care at least until 2007, when its contract expires," says Sean P. McAlinden, a labor economist at the Center for Automotive Research (CAR) in Ann Arbor, Mich.
Without dramatic concessions, U.S. carmakers may find it tough to escape their financial woes. GM pays more than $5 billion a year in health care which dwarfs what the Japanese pay, since they have younger workers and few U.S. retirees. Absent a major sales rebound -- which few expect -- GM and Ford will struggle to rebuild profits and will keep spending cash that might otherwise go to building new models. If that continues for two more years, even some labor officials think the UAW will be forced to give ground on its gold-plated health care. "The next labor contract will be a departure from what we've seen," predicts David E. Cole, chairman of CAR.
Why doesn't the UAW give in now? Union leaders know GM and Ford keep losing market share -- and hence jobs -- to Asian rivals. But they think the solution is for Detroit to make cars Americans prefer. Since massive benefit cuts wouldn't change that, they're unwilling to bail out, with deep cuts, what they perceive as poor management choices. UAW President Ronald Gettelfinger is also in a squeeze with a majority of his members. He knows management is besieged by rapid health-care inflation and global competition. But Japanese carmakers in the U.S. match the UAW's pay -- and its benefits, too. The difficulty lies with the legion of retirees at the Big Three: GM alone has 430,000 to carry.
HUGE CASH HOARDS
Problem is, half of Gettelfinger's members at the Big Three, Delphi, and Visteon are eligible to retire by 2008. And with an average age of about 45, Detroit has few younger workers. So they're unlikely to vote for givebacks on post-employment benefits in the hope that it would strengthen the carmakers' ability to create new jobs in the future.
What's more, they say, execs aren't sharing the pain. When Chrysler wrung mid-contract cutbacks from the UAW in 1981, the company was strapped. Chrysler (DCX) canceled its dividend, top execs took a 10% pay cut, and then-Chairman Lee A. Iacocca worked for a dollar that year. Today, both GM and Ford still pay a dividend, and GM CEO G. Richard Wagoner Jr. got a $2.5 million bonus for 2004 -- on top of his $2.2 million in salary. Both companies also have huge cash hoards -- $20 billion at GM and $23 billion at Ford. Until the companies are close to bankruptcy, union leaders see no reason to give up benefits.
In the past, the UAW has made big mid-contract concessions only when a company is in dire straits. Visteon's deal is one example; the union also agreed to bigger co-pays on health-care premiums at equipment maker Caterpillar Inc. (CAT) this year. For all their current troubles, the Big Three aren't at that point today. So Gettelfinger would have a tough time offering more.
Unless U.S. auto makers and suppliers stage a miracle comeback over the next two years, the UAW is likely to find that its health and retiree costs are out of sync with global realities. The risk of waiting, says Cole, is that the companies may be even more desperate -- and need greater aid than they do now. If so, Gettelfinger may face the kind of crisis that warrants more drastic action.
By David Welch in Detroit