GM Holding Line on Labor Costs Fails to Persuade Skeptics

General Motors Co. (GM) kept labor costs in check in a new pact with the United Auto Workers, a deal that may fail to sway investors even as it protects profit.

GM held the union to a $5,000 bonus per person for agreeing to the four-year contract, less than the $8,000 to $10,000 sought, according to two people familiar with the agreement, which is being kept private as the union presents details to members for a vote. GM will increase entry-level pay by $2 to $3 an hour, the people said. The contract ties more pay to GM’s earnings and makes some wages variable, the union said.

“It does look like they held the line” on labor costs, said Brian Johnson, an analyst for Barclays Capital, who has an “overweight” rating on GM stock. “For current investors, that’s a victory because it’s what they expected. To sway the naysayers, there would have to have been a more substantial closing of the labor-cost gap.”

GM, which has reported six straight quarterly profits and regained the title of world’s biggest automaker in the first half of this year, has been paying its union workers 47 percent more than Volkswagen AG (VOW) and Hyundai Motor Co. (005380) pay their U.S. staff, according to estimates by Barclays and the Center for Automotive Research. The gap probably isn’t closing much under the new agreement, Johnson said.

GM rose 44 cents to $23.05 at 4:03 p.m. in New York Stock Exchange composite trading. The shares are down 30 percent from the November initial public offering price.

Share Price

Chief Executive Officer Dan Akerson has been unable to reverse the declining stock price as analysts lower expectations for U.S. auto sales and consumers’ confidence wanes.

“If we saw more progress with their costs, most notably their labor, that could convince us to participate,” Jack Ablin, chief investment officer at Harris Private Bank in Chicago, said in a phone interview. The $55 billion portfolio he oversees doesn’t include GM or Ford Motor Co. (F)

Labor costs “continue to be a problem that puts our domestic auto manufacturers at a relative disadvantage,” Ablin said.

“GM since its IPO is really a beleaguered stock, and it trades cheap,” said Josef Schuster, a Chicago-based fund manager and founder of IPOX Schuster LLC, which invests in initial public offerings. “To remove this overhang should help. The conditions seem to be quite fair.”

Cost Offsets

Still unclear is whether the UAW agreed to raise the percentage of workers earning the entry-level wages, or if Detroit-based GM won cost offsets elsewhere, Johnson said. Such savings may not be known until after the contract is ratified, he said. The automaker expects the union to hold ratification votes within 10 days, according to a Sept. 17 statement.

The automaker agreed to reopen a former Saturn assembly plant in Spring Hill, Tennessee, said the people familiar with the accord. The UAW signaled earlier this year it was open to arrangements where the union would surrender lower wages in exchange for product commitments and new jobs.

Starting pay will increase to about $16 an hour from $14 and rise to about $19 an hour from a previous maximum of $16, said the people familiar with the agreement, who asked not to be identified disclosing details before the ratification vote by members.

The raises may bring GM’s all-in costs for those workers including benefits to $33 an hour, from $30 before, Johnson said.

Older Workforce

While below the $38 an hour he estimates rivals Volkswagen and Hyundai pay their U.S. workers, it may not make much of a difference because GM still employs more senior workers paid about twice as much as entry-level workers.

GM’s labor costs, including benefits, average $56 an hour for its entire U.S. hourly workforce, according to the Center for Automotive Research in Ann Arbor, Michigan.

The time frame for GM to transition to lower labor rates is a “long haul” because of how many senior workers GM still employs, Johnson said. Fewer than 3 percent of GM’s workers are paid the entry-level wage.

Investors and analysts look at the issue of labor costs too narrowly, said Harley Shaiken, labor professor at the University of California at Berkeley. GM’s success will ultimately be determined by its cars and trucks, he said.

‘Competitive Agreement’

“This is a very competitive agreement,” Shaiken said in a phone interview. “This contract encourages productivity and quality while keeping fixed costs stable and predictable. The secret to American competitiveness is the best products and the strongest innovation. Not the lowest labor costs.”

UAW President Bob King had said boosting entry-level pay so that those workers can live a middle-class lifestyle was his highest priority. In addition to the raise, GM will pay a record $5,000 signing bonus if a majority of the 48,500 hourly workers vote to ratify the accord, the people familiar with the tentative agreement said. That would cost about $242.5 million.

The signing bonuses may secure votes in favor of the tentative accord from UAW members that King has estimated each gave $7,000 to $30,000 in concessions since 2005. The odds of ratification are high, Himanshu Patel, a New York-based analyst for JPMorgan Chase & Co., wrote today in a research note.

The terms of GM’s new agreement appear less expensive than investors expected, said Colin Langan, an analyst at UBS Securities LLC. The deal is unlikely to affect the stock because labor rates are a small portion of total costs and investors are more worried about a potential downturn in the global economy that would hurt auto sales, he said.

No ‘Game Changer’

“It doesn’t seem like the contract is a game changer,” Langan said in phone interview. “The terms don’t seem too surprising. From an investor standpoint, they will be much more focused on the situation in Europe and the economy.”

GM’s profit-sharing plan becomes more generous and transparent, the UAW said in a Sept. 16 statement. The company will give workers a schedule that bases bonuses on GM’s profit in North America, people familiar with the agreement said. The plan requires a minimum profit to produce a payout and includes caps on such distributions, they said.

GM must make at least $1 billion in North America to pay a UAW bonus, one of the people said. Last year, members would have received about $5,000 on average instead of $4,300, the person said. The profit-sharing checks would roughly equal $1,000 per $1 billion in North American profit, one of the people said.

Unchanged Breakeven

While the profit sharing may “modestly” reduce the earnings contribution GM gets from auto-sales gains, its break-even point is “largely unchanged,” JPMorgan’s Patel said.

“This agreement should not have a material impact on GM’s UAW labor cost structure, preserving the leverage that we see to an eventual demand recovery,” Rod Lache, an analyst for Deutsche Bank AG in New York, said today in a research note.

The UAW typically uses its first accord with GM, Ford or Chrysler Group LLC to set a pattern for pay and benefits at the other two. Union negotiators will seek a deal with Chrysler next and then go to Dearborn, Michigan-based Ford, three people familiar with the talks have said.

The UAW’s King and Joe Ashton, vice president of the union’s GM department, will release details of the tentative agreement to reporters tomorrow, Shelly Restivo, a union spokeswoman, said in an e-mailed statement.

Organizing Push

King, 65, has pledged to organize a foreign automaker this year to expand the UAW’s bargaining power beyond GM, Ford and Chrysler. He said the union has “recommitted to that goal.”

“As long as unionized workers are being forced to compete with nonunion workers who in most cases receive lower pay and benefits -- many in temporary jobs -- there will continue to be a downward pressure on the wages and benefits of all autoworkers,” he said in the statement.

Contracts covering 113,000 workers at GM, Ford and Fiat SpA-controlled Chrysler were set to expire Sept. 14 before being extended.

UAW members agreed to a no-strike pledge at GM and Auburn Hills, Michigan-based Chrysler as part of their U.S.-backed bankruptcies in 2009. Unsettled disputes at the automakers are to be decided through binding arbitration. Ford didn’t receive a U.S. bailout and UAW members there went against the wishes of union leaders and rejected a strike ban and arbitration.

To contact the reporters on this story: Craig Trudell in Southfield, Michigan at ctrudell1@bloomberg.net; Keith Naughton in Southfield, Michigan at knaughton3@bloomberg.net; David Welch in Southfield, Michigan at dwelch12@bloomberg.net

To contact the editor responsible for this story: Jamie Butters at jbutters@bloomberg.net

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