Maybe Gm Didn't Get Such A Bad Deal

In 1990, Robert C. Stempel gambled $3.35 billion that General Motors Corp. could shrink itself down to an efficient size without mass layoffs of factory workers. The former GM CEO pledged that amount in jobless benefits in the company's last United Auto Workers (UAW) contract, only to watch GM drive into a brutal recession that burned up the whole pot--costing Stempel his job. Now his successor, Jack Smith, has made an even bigger jobless bet of $3.9 billion as part of an expensive new UAW contract he O.K.'d on Oct. 24. All told, the pact will raise GM's blue-collar payroll costs by 16% over three years.

Will history repeat itself? Smith could drive off a cliff, too, but he has a much greater chance than Stempel of coming up a winner. The new contract gives him the freedom to slash some 65,000 blue-collar jobs by 1996, cutting GM's total union work force to 200,000. If Smith follows through on the cuts, GM's productivity could jump by nearly a third, analysts say, because the company would have fewer workers making the same number of vehicles--assuming, of course, that its sales won't tank, as they did in the recent recession. That would be enough to close the company's yawning $800-a-car labor cost gap with Ford Motor Co. "They'd be dead on [with Ford] in productivity," says Wertheim Schroeder analyst John Casesa.

RETIREMENT HIT. If the fledgling North American sales recovery stumbles, though, all bets are off. After the deal was struck, Standard & Poor's Corp. switched its credit outlook from neutral to negative, signaling the possibility of a credit downgrade in the next year or two if the economy turns sour. The rating agency worries about "turmoil in the industry similar to what we have just been through," says Scott Sprinzen, S&P's director of corporate finance.

There's no question that GM's new labor pact will be costly. The deal, which closely tracks the ones just signed by Ford and Chrysler, will lift GM's wage-and-benefit costs to about $52.50 an hour by 1996, according to estimates by Paine Webber Inc. (chart). Much of the increase will go into higher retirement benefits, pushing up the company's unfunded pension liability from $19 billion to about $24 billion.

Bad news, to be sure, considering GM had hoped to cut its labor costs. But the company clearly has the wherewithal to absorb the hike. Take its pension problems. GM figures investment income will be enough to make up most of the shortfall in its plan. Under the old pact, it had to ante up about $8 billion in new funds by the end of the decade. The new contract will add a bit to that burden by raising GM's payments 13% over the life of the contract, to $2,030 a month per worker, or about another $2 billion by 2000. But GM should have cash to foot the bill. Casesa says GM will have $18 billion in free cash flow over the next three years--even after capital spending outlays of $7 billion a year. Such calculations are one reason Wall Street, which knocked down GM's stock by 1.25, to 44.75 a share right after the deal, has reconsidered. GM's share price bounced back to about 47 as analysts ran more numbers on the agreement.

Other elements of the contract may not be as onerous as they seem, either. For instance, GM may never have to spend all of the $3.9 billion it pledged to pay the wages and benefits of workers idled during the next three years. Indeed, Sean McAlinden, a University of Michigan economist, figures the final payout will be more like $2 billion. That's because GM may well be able to keep the tab down with early retirement packages, such as the one taken by 16,500 UAW members in March.

OFF TO BUFFALO. New flexibility GM won to require laid-off workers to relocate will help to control costs, too. UAW members will have to accept work in plants 100 miles or more away from their former jobs or risk losing their jobless benefits. Before, workers could turn down posts more than 50 miles away and still draw up to 100% of their pay. GM already has moved 188 people from a Syracuse (N.Y.) parts plant to a Buffalo engine factory under a pilot program. An additional 112 people refused jobs and will drop out of GM's expensive safety net. "Are you going to drive 200 miles each day to get to and from work?" asks John Ferretti, 51, a repair worker at GM's Poletown plant in Detroit, which builds Cadillacs.

Not a happy prospect. But given the depth of GM's troubles, it's the kind of sacrifice more GMers may have to swallow. And making them now may be the only way for GM to weather the next industry downturn.