The Ford Deal Won't Throw Gm Into A SkidDavid Woodruff
When Ford and the United Auto Workers agreed to a new contract on Sept. 15, pundits predicted the deal would cripple rival GM. Reeling from a three-year, $17 billion loss in North America, the argument went, General Motors Corp. would need major concessions in health care and other areas to help it climb out of the ditch. In fact, predicted doomsayers, the new contract would actually boost FordMotor Co.'s cost advantage over itsarchrival.
True, the terms of the new three-year pact would hit GM harder than Ford. The deal provides healthy pay hikes, fatter pensions, and the same generous income-security provisions that cost Ford $558 million and GM nearly $3.35 billion over the past three years (table). These provisions would jack up GM's hourly labor costs by nearly 4% a year, to $48.90 an hour by 1996, figures J. Gerard Paul, an analyst with Sanford C. Bernstein & Co. By contrast, costs at Ford will only rise 3.3%, to $44.55, primarily because it plans to hire aggressively and the deal allows it to hire new workers at 70% of full pay.
CARBON COPY. But none of this will kill GM. More than anything, the new contract is a carbon copy of the one GM negotiated in 1990. Moreover, the entire auto industry is pulling out of the recession that hammered profits in recent years. GM has cut more than 62,000 union workers since 1990 and is slashing materials costs by $4 billion annually. While UAW bargainers have done little to help President Jack Smith reach his goal of breaking even in U.S. auto operations, neither have they significantly added to his woes. "GM can cope," says Morgan Stanley & Co. analyst Scott Merlis.
The ongoing sales recovery will certainly help. Carmakers will sell roughly 13.8 million vehicles this year vs. 12.3 million in 1991. And analysts believe sales could hit 16 million by 1996 as old clunkers conk out and need to be replaced. Even if GM's market share slips slightly from the current 33.8%, every sales increase of 1 million units will boost GM's volume by roughly 300,000. That will help keep factories humming and UAW workers out of the company's expensive safety net.
Even so, GM and union officials know that the company must shed workers to match rivals' productivity. Insiders say GM's goal is 220,000 hourly workers by 1996, down from 267,000 now. Normal attrition, which union leaders say runs at roughly 9,000 workers annually, will take care of some 27,000 jobs. And a Ford-type deal would allow GM to buy out the other 20,000 with early-retirement packages such as the one that attracted 16,500 UAW members in March. Stephen P. Yokich, the combative vice-president in charge of GM for the UAW, has repeatedly endorsed that approach.Coaxing workers into retirement helps cut GM's costs. Each retiree costs GM roughly $28,000 a year vs. about $46,000 for a worker on long-term layoff, says Daniel D. Luria, a labor specialist at the Industrial Technology Institute in Ann Arbor, Mich. That means even a generous severance package pays for itself in a year or two. And the more workers GM buys out, the less it will have to tap its income security fund.
Of course, adding retirees strains GM's pension fund, which is already about $19 billion underfunded. But even that problem has been exaggerated. If overall U.S. sales hit 16 million units by 1996, GM's cash flow would probably be healthy enough to take care of the debt, says Prudential Securities Inc. analyst Philip K. Fricke. Meanwhile, GM plans to ease credit-rating agency fears by using proceeds from a planned stock offering to pay down the shortfall in the next year or two. "If the auto cycle does what I think, the pension liability takes care of itself," says Fricke.
WILLING TO BEND. GM will likely face off with the UAW by mid-October, after the union wraps up talks with Chrysler Corp. Union President Owen F. Bieber says he wants GM to follow the pattern set at Ford and Chrysler. But he has also signaled a willingness to bend the pact slightly in GM's favor. GM will likely ask for provisions such as the freedom to move laid-off workers to any GM plant. Now, workers can turn down jobs more than 50 miles from home.
No matter how tough the talks get, no one expects a big strike at GM. Neither side can afford a prolonged standoff, with Japanese rivals poised to grab market share. The company's activist directors, although concerned about GM's labor costs, have agreed not to meddle in labor relations, says a source close to the board. They're "taking a hands-off attitude." Besides, Smith has spent the past year trying to mend fences with the union, shifting production of some Chevy Cavaliers from Mexico to the U.S. and saving a Livonia (Mich.) parts plant from the ax. In a few weeks, he likely will grit his teeth and make nice across the bargaining table.
THE FORD MODEL The UAW's new contract with Ford, which will serve as a model for GM and Chrysler, will raise auto makers' costs by some 4% a year. Here's what the pact includes: -- A 3% wage hike, followed by 3% bonuses -- An additional cost-of-living adjustment to wages (equal to about 90% of the inflation rate) -- Diversion of $147 quarterly from wage increases to help pay for health care -- A pledge of $1.2 billion to compensate laid-off workers -- Reduction of starting pay for new hires to 70% of base pay, from 85% DATA: BUSINESS WEEK
To continue reading this article you must be a Bloomberg Professional Service Subscriber.
If you believe that you may have received this message in error please let us know.