GM Workers Walk Off the Job

Management and United Auto Workers could not reach an agreement in time to stave off a strike. Wages and retiree medical care are major issues

It's a walkout. Union workers at General Motors (GM) left the assembly lines at 11 a.m. EDT today after management and United Auto Workers leaders could not come to terms on a new four-year labor pact.

The national strike—GM's first since 1970—comes nine days after the last labor contract expired. The two sides held late-night bargaining session on most nights, trying to hammer out a deal that would set up a huge, union-led health-care trust to assume retiree medical benefits and address a slew of other economic issues.

Even after the two sides came to basic terms late last week on the biggest item on GM's wish list—the health-care trust—talks broke down on other demands from both sides. UAW President Ronald Gettelfinger and Vice-President Cal Rapson issued a bulletin at 1:41 a.m. saying that there would be a strike on Sept. 24 if a deal wasn't reached.

How Much is Show?

The walkout underscores the challenges for both sides. GM Chairman and Chief Executive G. Richard Wagoner Jr. is under pressure to get the company back to real profitability. Even after an agreement two years ago to eliminate 30,000 jobs—and reaping big health-care concessions—GM is running about break-even in North America. Only its foreign operations are solidly in the black.

For his part, Gettelfinger needs a deal he can sell to his members, and there may be some Vaudeville in the walkout. Gettelfinger must show he isn't caving in. But the union president also wants to safeguard the livelihood of his members while helping the carmaker compete. The UAW wants to know that GM will invest in North America.

"This is our reward: a complete failure by GM to address the reasonable needs and concerns of our members," Rapson, director of the union's GM department, said in the note to workers that warned of the strike deadline. "Instead, in 2007, company executives continued to award themselves bonuses while demanding that our members accept a reduced standard of living."

Landmark Contract

Union local leaders say talks broke down over economic issues like pay, pension payouts, job security guarantees, and cost-of-living adjustments. "It's economic issues," says Jeff Manning, president of UAW Local 31 in Fairfax, Kan. "I'm hearing that they don't want to allocate future products in the U.S."

Whatever the specifics of a deal look like, it will be a landmark contract for both sides. GM, whose profits have been hammered in recent years by rising retiree health-care costs, has wanted to hand the union responsibility of managing $52 billion in long-term medical liabilities in exchange for cash and assets equaling 50% to 60% of the liability.

The union wanted a trust fund, called a Voluntary Employee Beneficiary Association, or VEBA, with at least 70%. Most analyst assume the two sides would end up in the middle at 65%, which forces GM to raise $35 billion for the trust. Sources say the two sides came to a general agreement on the parameters of the fund.

No Danger to Credit Rating

GM pays $3.3 billion a year in union retiree medical costs. JPMorgan (JPM) analyst Himanshu Patel estimates GM would save $1.6 billion in cash expenses with a VEBA deal funded at 60% of the liabilities. The health-care trust would also wipe $52 billion in liabilities from GM's books. Assuming Ford Motor (F) and Chrysler get similar contracts, the UAW would become a huge provider of health-care benefits to some 1.5 million people.

Some see the walkout as a necessary step to negotiate a favorable pact. Standard & Poor's says the strike won't immediately affect GM's credit rating and believes a new deal will help the automaker's overall financial health.

S&P, which like BusinessWeek is a unit of The McGraw-Hill Companies (MHP), estimates that GM has $32 billion in cash and can access another $7.6 billion in credit lines.

GM wants more concessions beyond the VEBA, and getting union leaders to accept that concession with a slew of others will be tough not only for UAW negotiators but also for the 73,000 workers who must ratify the new deal. "The right kind of VEBA might have sold," says Sean McAlinden, chief economist at the Center for Automotive Research. "But not with all of these other concessions."

Job Preservation?

No one on either side is saying which concessionary demands finally led to the strike. GM has wanted to cut the paid-layoff benefit workers that get, slash cost-of-living increases that cost the company more than $300 million last year, use more temporary workers for non-assembly jobs like maintenance, and offer no pay raises. The company has, at various points, also wanted a cheaper compensation package for new hires.

When GM signed its last labor contract, the company's cost penalty vs. Toyota was $2,500 a vehicle, according to McAlinden. Concessions from the union helped drop that to $1,300 a vehicle. "This final $1,300 a vehicle would bring real profit in North America," he says. "I think this agreement was meant to knock $1,000 a car off GM's cost."

There is little doubt that GM will get a big chunk of that. It simply can't compete against a rival with the brand image of Toyota with such a cost disadvantage.

But the carmaker may have to promise Gettelfinger that union concessions will result in a healthier GM, and one that can preserve factory jobs in America. "The question being asked on the factory floor is, 'Will I have a job?'" says Harley Shaiken, labor economics professor at University of California at Berkeley. "Without investment guarantees from GM, the contract is a hard sell."

In other words, Gettelfinger will need more than a little play-acting to sell a concessionary deal.

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