GM, Ford, and Chrysler could create a workers' health-care fund in a cost-saving move—and the UAW may well go along
Detroit is at a crossroads. The Big Three carmakers and the United Auto Workers can bargain this summer for a new, four-year labor deal that gives the 100-year-old U.S. auto business a shot at being competitive, or they can walk away with an incremental deal that ensures years more of struggle until one of the companies goes under.
The word is that this time around, the UAW has some willingness to negotiate some real changes. Two sources close to UAW leadership say that the union is willing to negotiate a deal at least on health care that would greatly reduce the $1,500 to $1,800 per car disadvantage in health-care costs that General Motors (GM), Ford Motor F, and Chrysler Group (DCX) each suffer.
"A Transformational Agreement"
Big Three executives have not yet made a proposal on a deal. But there are high-level talks in progress between top brass and UAW leaders seeking a pact that would split out the health-care plan into a fund that is managed by the union.
Executives at all three companies also want to put some kind of limit on the paid-layoff clause for workers (known as the JOBS bank), they may ask for more job cuts, and they may seek a 401(k)-style retirement plan for new hires. "We're looking for a transformational agreement," says Sean McAlinden, chief economist for the Center for Automotive Research in Ann Arbor, Mich.
Detroit's negotiators are pushing for it already. "The Big Three have come to the UAW," says one source familiar with labor negotiations. "The message is clear. They all want a separate health-care fund."
Protecting Medical Benefits
Here's how it would work. GM, Ford, and Chrysler would each give the union billions in cash, stock, and convertible debt equal to some portion of the total liability. Analysts say 60% to 80% of total health-care liabilities would make it work. Depending on the deal, this could be either a one-time payment or amortized over time. Since the Big Three combined have roughly $100 billion in health-care liabilities, they would collectively have to set up a fund with at least $60 billion.
In GM's case, the company would give the union at least $36 billion to start the fund, 60% of the $60 billion health-care liability.
The union must then manage the fund and invest the proceeds to offset health-care inflation and grow the assets so that workers and retirees have guaranteed medical benefits. But the UAW would evade the risk that its workers might lose medical benefits should one of the companies end up in bankruptcy court.
Executives at each of the Big Three agree that a separate health-care fund is a top agenda item, says one source close to the talks. That's an important accord because the UAW tends to negotiate a deal with one of the companies and use it as a template for the other two. In some years, the lead company has cut a deal that met addressed own concerns but didn't meet the needs of its rivals.
GM: Cash-Flow Boost?
On the health-care issue, the carmakers are on the same page. They may even set up one giant fund and turn the assets over to the UAW. They would require the union's consent, but there are signs the union may be willing. In 2005, when the UAW gave GM health-care concessions as part of the auto giant's restructuring, the union brought up the possibility of a health-care fund.
But they wanted cash and assets valued at more than 100% of the liability. GM thought that was far too rich and getting a deal done would have taken too much time. GM Chairman and Chief Executive G. Richard Wagoner Jr. was under immense pressure to get union concessions, so GM accepted a deal that cut its health-care cash outlays by $1 billion a year instead.
GM has the biggest health-care tab, paying $4.8 billion a year in cash. If the company can cut a deal that hands the union management of medical plans in exchange for assets valued at 60% of the liability, GM's cash flow would increase by $1.4 billion next year and grow over time, says JPMorgan Chase (JPM) analyst Himanshu Patel.
The union won't just lay down on the health-care issue, though. Its negotiators may demand more money than the automakers want to give. If that's the case, it may be a difficult deal to pull off. GM has about $18 billion in funds set aside for health-care costs and another $20 billion in cash. But the more the union asks for, the more of its cash it drains. All three companies may need to take on debt to do the deal.
Negotiating Job Cuts
The union would likely demand that the rest of the contract remain largely unchanged. UAW President Ron Gettelfinger would probably try to hold the line on further job cuts. Already, buyouts and early retirement deals will reduce his membership by 80,000 workers just at the Big Three.
But management has other big items on its wish list, too. The companies want to get rid of the JOBS bank, a paid layoff clause that pays workers most of their wage when they are furloughed. GM may limit the benefit to six months or so, then offer workers a chance to take a buyout or a new job at a different plant.
There is already a precedent for such an arrangement. GM has almost 500 workers in factories in Flint, Mich. and Lansing, Mich. in the JOBS bank. Many are skilled tradesmen such as electricians, tool makers, and plumbers, some of whom have been on furlough for as long as 10 years. The union agreed to let GM offer the workers new jobs at other plants, even if the positions were in general assembly and not for skilled trades. If the workers refused a new assignment and didn't take a buyout, they could be laid off. Despite the fact that GM has been downsizing, openings exist in some factories around the U.S., says GM spokesman Dan Flores.
New Retirement Plans
The Big Three may also ask for a 401(k)-style retirement plan, called defined contribution, for new hires. The concept of new hires may seem like a joke in Detroit, but even after taking out 34,500 workers with buyouts, GM has another 16,000 who are eligible to retire. The company may be hiring as its older workforce continues to have more attrition. Says McAlinden: "If GM doesn't get a defined contribution plan, they won't hire new people and they will move production offshore."
That possibility could sway Gettelfinger into a creative labor deal. If Detroit's carmakers and Gettelfinger's union can't come up with a creative way to get healthy, management may seek a cure overseas.